Wednesday, June 27, 2012

As discussed previously on this blog, the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (the “2010 Act”), signed into law on December 17, 2010, authorized portability of a married decedent’s unused estate tax exclusion to the decedent’s surviving spouse. The Treasury issued proposed and temporary regulations providing guidance on the requirements for electing portability and on the applicable rules for a surviving spouse’s use of the deceased spousal unused exclusion amount (“DSUE amount”) on Friday, June 15, 2012. (This date of issuance is relevant, as June 15, 2012 marked the latest possible date on which Treasury could file these temporary regulations so that they would apply retroactively to estates of decedents who died before they were issued.) What follows is a brief summary (in question and answer format) of some of the guidance provided by these new regulations.

When and how is the election made? Every estate electing portability (regardless of the size of the estate) must do so by filing an estate tax return (Form 706) within 9 months of the decedent’s death (or later, if an extension for filing has been granted). The Internal Revenue Code (“Code”) does not specify a filing due date for estates below the filing threshold. But the regulations conclude that a uniform filing requirement for all estates is appropriate, for purposes of making the portability election. This is regarded as consistent with legislative intent and beneficial for the IRS and taxpayers alike, because the records required to compute and support the DSUE amount are more likely to be available at the death of the predeceased spouse whose estate is making the election than when the surviving spouse makes a gift or dies. The portability election only becomes irrevocable, however, on the due date of the estate tax return, as extended. Thus, before that due date, an electing executor may supersede a previously-filed portability election on a subsequent, timely-filed estate tax return.

This is consistent with IRS Notice 2011-82 issued in September, 2011, with instructions for making the portability election.

Who is responsible for making the election? The deceased spouse’s executor, not the surviving spouse, is responsible for making the election. If no executor is appointed, then any person in “actual or constructive possession” of the decedent’s property (a “non-appointed” section 2203 executor, which might be the decedent’s surviving spouse) may file an estate tax return to elect portability. (more…)

Monday, June 25, 2012

In French v. Wachovia Bank, N.A., 2011 WL 2649985 (E.D. Wis., July 6, 2011), the court issued an order granting Wachovia Bank’s (“Wachovia”) motion for summary judgment in an action by the beneficiaries of the French Trusts for breach of fiduciary duty. Wachovia was the successor trustee of the French Trusts that owned two whole life policies as well as significant other assets having a total value of about $30 million. Wachovia was appointed as such successor trustee in conjunction with its review of the policies and its recommendation to replace the whole life policies with a no-lapse John Hancock policy. The settlor (“French”) had his attorneys review the recommendation and provide him an analysis of the proposed exchange.

After an extensive year-long analysis of the advantages and disadvantages of the proposed policy exchange, including multiple detailed memoranda from his attorneys and discussions of the transaction with his attorneys and Wachovia, French completed the application for the exchange, which was then placed through an affiliate of Wachovia. The extensive discussion prior to the exchange included Wachovia’s conflict of interest in using an affiliate for the exchange, waivers of the conflict of interest by the beneficiaries, negotiations with Wachovia concerning a fee credit for the amount of the commission to be earned by Wachovia’s affiliate, the diminishing amount of cash value of the no-lapse policy, that such a policy was inappropriate if the policy would be cashed in prior to maturity, and that this policy provided a guaranteed death benefit and certainty as to performance that other trust investments lacked. However, Wachovia had not disclosed the amount of the commission ($512,000). (more…)

Friday, June 22, 2012

The year was 1963, the restaurant Portofino – an eclectic restaurant in Greenwich Village, a part of New York City known as one of the centers of the gay and lesbian liberal movement. It was this night that Edie Windsor met Thea Spyer. “We immediately just fit,” said Thea, in the award-winning 2009 documentary film, Edie and Thea: A Very Long Engagement by Susan Muska and Greta Olafsdotir. After sharing their lives together as a couple in New York City for 44 years, the two women wed in Canada, where same-sex marriage was legal. Two years later, Thea died of complications of multiple sclerosis. At that time the Defense of Marriage Act (“DOMA”), a 1996 federal statute, took effect, transforming Edie’s story from a personal tragedy to a public trial.

Section 3 of DOMA recognizes marriage as “only a legal union between one man and one woman.” “Spouse” means only a person of the opposite sex who is a husband or a wife. Ordinarily, whether a couple is married for federal purposes depends solely on whether they are considered married in their state. New York recognizes same-sex marriages, but because of DOMA, same-sex couples like Edie and Thea are not treated the same as other married couples.

Married couples, according to Section 2056 of the Internal Revenue Code, can transfer an unlimited amount of money or property from spouse to spouse upon death without triggering estate taxes (the “marital deduction”). However, due to DOMA, same-sex couples have no such rights, even if their marriage is recognized by their home state. Because Section 3 of DOMA prohibited the federal government from recognizing Edie and Thea’s marriage, Edie was not able to claim the marital deduction and was assessed a tax of over $363,000 on her inheritance from Thea. (more…)

Thursday, June 21, 2012

The 7520 rate for July 2012 stayed steady at 1.2%.

The July 2012 Applicable Federal Rates can be found here.

Tuesday, June 19, 2012


Some personal representatives take the position that they’ll either distribute all or none of the estate. Other personal representatives are willing to make a partial distribution of estate assets only if each beneficiary gets an equal partial distribution. Both situations can be maddening to a beneficiary who just wants to receive something from an estate rather than watch it sit in probate for years until there’s some liquidity.

Often, the personal representative’s justification for not making a partial distribution is illiquidity of estate assets. Where real property is involved, the current real estate market compounds the problem of illiquid estate assets. So, what’s a personal representative to do? A recent opinion out of Missouri gives personal representatives in that state some guidance.

In Estate of Sullivan, the Missouri appellate court had a number of issues before it on appeal. We’re focused on the partial distribution part of the decision. The quick overview of the factual background is that an heir had executed two promissory notes in favor of the decedent. After the decedent’s death, that heir sought to have the value of the notes subtracted from his distributed share upon final settlement of the decedent’s estate.

The probate court ordered that the outstanding balance on the notes be charged against the heir’s distributed share upon final settlement of the decedent’s estate. The personal representative claimed that the probate court shouldn’t have ordered the partial distribution because the other two estate heirs had to wait for the sale of the decedent’s farm to receive their share of the estate. The appellate court agreed with the probate court.

Under Missouri law, after a certain amount of time, a distributee can seek a partial distribution if the court believes that other distributees and claimants are not prejudiced thereby. In its judgment granting partial distribution, the probate court specifically noted that the size of the estate was such that the estate would not be prejudiced by the distribution of the notes.

At the time, the estate had only $23,000 in liquid assets, but the estimated value of the decedent’s real estate was $685,000. The outstanding notes amounted to $42,000. While the estate couldn’t make equal distributions to the other two heirs and these two heirs had to wait for some unspecified time until the farm was sold to recover their share of the estate, the size of the estate was sufficient enough to preclude harm from the non-cash partial distribution of the notes.

Monday, June 18, 2012


Bill and Vieve Gore founded a manufacturing company best known for its GORE-TEX fabric. Having become considerably wealthy with more wealth anticipated, they undertook efforts to transfer that wealth without incurring significant estate taxes. Through this process, they signed two separate trust instruments during 1972 – the “May Instrument” and the “October Instrument” – both purporting to transfer the same property into the “Pokeberry Trust.”

One of their daughters claimed that the early May instrument controlled, while the other four children claimed that Bill and Vieve never intended for the May Instrument to be final and enforceable. Litigation ensued . . . (more…)

Monday, June 18, 2012

Sometimes failing to read the fine print in the IRA Account Agreement can have disastrous results, since the terms contained in the fine print of such Agreements on some pretty important points can vary greatly. In Smith v. Marez, Case No. COA11-475, NC Ct. App. , December 6, 2011, the IRA owner, Leonard Smith, opened two IRAs with Pershing LLC, signing a Traditional IRA Adoption Agreement for one and a Rollover IRA Adoption Agreement for the other, in each case adopting the terms of the applicable Account Agreement governing the terms of the IRA and designating his children as the beneficiaries. A year and a half later, after having been diagnosed with cancer, he signed a new Will designating his children in different proportions and new beneficiary forms on which he stated that the IRAs are “to be distributed pursuant to my Last Will and Testament.” Two weeks later, Leonard married Suzanne, and died two months after the marriage.

Suzanne Smith, individually and as executrix of Leonard’s estate, filed a complaint against Leonard’s children, alleging that the IRAs were properly payable to her and not the children or the estate. (Interestingly, there is no discussion of her conflict of interest between her position in this case and her duties to the estate and the children as the beneficiaries of the estate, in her capacity as the executrix.) The children defended on the basis that they were the beneficiaries and should receive distribution based on the percentages set out in Leonard’s Will, or in the alternative, the IRAs should be distributed according to the provisions of the Beneficiary Designation signed by Leonard when he set up the IRAs. The trial court granted summary judgment to Suzanne, ruling that the IRAs belonged to her as Leonard’s surviving spouse. (more…)

Friday, June 15, 2012

The IRS is scheduled to publish new Regulations regarding “Portability of a Deceased Spousal Unused Exclusion Amount” on June 18.   On Monday, you will be able to view the published Regulations here.  If you’re eager to read them before Monday, a pre-publication PDF version is also available.

Tuesday, June 12, 2012

The 2010 Tax Relief Act has provided a great opportunity for lifetime gifts to family members with a temporary increased estate and gift tax exemption of $5.12 million making these gifts potentially free of ever incurring gift or estate tax. The exemption will return to $1 million on January 1, 2013 unless Congress acts, and although most commentators think a return to $1 million is unlikely, there is a good possibility the exemption will be reduced.

Despite this great gifting opportunity for wealthy individuals, many people are reluctant to make use of the exemption for many reasons. Some of the many reasons are:

(1) The economy. While the markets have improved since the lows of 2009, many people are worth less than before the market crash and they have less confidence in their holdings due to the volatility of the market. (more…)

Monday, June 11, 2012

Nyet, we don’t mean the vodka. In the life insurance world, STOLI stands for “stranger owned life insurance.”

In Pruco Life Ins. Co. v. Brasner, Case No. 10-80804,U.S. Dist. Ct S.D. Florida, November 14, 2011, the court once again found that an investor or stranger who owned a life insurance policy lacked an insurable interest. In this case, Arlene Berger was interested in obtaining the lucrative cash payment that was the pot at the end of the rainbow of this life insurance arrangement, but with a net worth of under $1 Million, she really had no need for the life insurance. Ms. Berger learned of the life insurance arrangement from a free seminar she and her husband had attended, and she was referred to Mr. Brasner, who was a life insurance agent for Pruco.

Ms. Berger, through the help of Mr. Brasner, applied for the life insurance, but had no intention of paying any premium, and she knew the policy would be owned by someone else. (more…)