Estate Planning

IRA Charitable Rollover Provision Set to Expire 12/31/2011

IRA Charitable Rollover Provision Set to Expire 12/31/2011

Individuals 70 ½ or older are eligible to make a tax-free transfer from their Individual Retirement Account (IRA) to a qualified charity, but this opportunity is set to expire 12/31/2011.  The maximum amount which may be transferred is $100,000. Distributions must be made directly to the charity through the plan administrator and not to a philanthropic fund, split interest trust, charitable gift annuity or a supporting foundation.

Illinois And Civil Unions

Illinois And Civil Unions

Effective June 1, 2011, pursuant to P.A. 96-1513, Illinois will join several other states that permit registration of a civil union between two consenting adults of the same gender.   The law specifically states that a party to a civil union shall be included in any definition of the term “spouse”, “family”, “immediate family”, “dependent” and the like that denote a spousal relationship.    In addition, Illinois will recognize as civil unions similar relationships entered in other jurisdictions (other than common law marriage).  For example, some states recognize “same sex” marriage” or “domestic partnerships.”

From an estate planning perspective, partners in a civil union will receive the same protection as a spouse under the Illinois Probate Act, meaning that a partner will have priority to act as in matters related to intestate death administrations, the same rights as a surviving spouse to inherit intestate property and to claim against the will.

Tax issues will remain in flux.  The Illinois Civil Union Act stands in contrast to the 1996 federal Defense of Marriage Act.  For the time being, there will be continuing issues in connection with the different tax treatment afforded spouses at the federal level than will be available to partners in a civil union registered under Illinois law.



On April 4, HUD published Mortgagee Letter 2011-16 which reinstates its original non-recourse policy for the Home Equity Conversion Mortgage (HECM) reverse mortgage program. Now the HECM borrower, as well as the Estate of a deceased borrower, are protected by the non-recourse provision of the program no matter who purchases the home at the time of repayment, even if that homebuyer is a surviving spouse, family member or relative. This is a very important change.     Non-recourse means that the lender cannot seek a deficiency judgment against the borrower, his or her estate, or a family member who might purchase the home from the estate. Mortgagee Letter 2008-38 (issued in 2008) limited this non-recourse feature to arms-length purchases.

Temporary Estate, Gift and Generation Skipping Tax Relief

Temporary Estate, Gift and Generation Skipping Tax Relief

As you may know, President Obama has signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, P.L. 111-312 (“2010 Tax Act”).  The 2010 Tax Act contains numerous significant changes that affect estate planning and taxes.   Some key elements are:

Temporary estate, gift and generation skipping transfer tax relief.

The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) phased-out the estate and generation skipping transfer taxes so that they were fully repealed in 2010, reduced the gift tax rate to 35%, and increased the gift tax exemption to $1 million for 2010.   The 2010 Tax Act reinstates the federal estate tax for 2011 and 2012 with a top rate of 35%.  The exemption will be $5 million per person in 2011.  The exemption amount is indexed for inflation beginning in 2012. 

Portability of unused exemption.

The $5 million exemption will be portable.  For estates of decedents dying after December 31, 2010, an Executor will be allowed to transfer any unused exemption to the surviving spouse.

Reinstatement of Stepped Up Basis

For a decedent dying in 2010, the decedent’s income tax basis in his property was “carried over” to his heirs, subject to a limited basis adjustment.  The 2010 Tax Act reinstates “stepped up” basis; for a decedent dying after December 31, 2010, the basis in his capital assets are stepped up to date of death value. Executors of decedents who died in 2010 can elect to use carry over basis under the 2010 rules or the stepped up basis under the 2011 rules.


Prior to EGTRRA, the estate and gift taxes were unified, meaning that the exemption could be used for lifetime gifts and/or bequests at death.  EGTRRA decoupled these systems.   The 2010 Tax Act reunifies the estate and gift tax. After December 31, 2010, the $5 million exemption may be used for lifetime gifts or gifts at death.  The annual exclusion for gifts made in 2011 remains at $13,000.

Generation skipping trust (GST) exemption

The 2010 Tax Act sets a $5 million generation-skipping exemption for decedents dying after 2010.

These temporary fixes compel you to undertake a review of your current estate plan to ascertain whether there are any changes that should be considered at this time.  For many clients, there may be no issues, but for others, there may be planning opportunities.    As mentioned at the outset, these new tax law provisions sunset on December 31, 2012.

 Estate tax or not, you still need a plan. Estate planning is much more than tax planning.  Planning is still required to assure the appropriate distribution of your assets at your death, and since those assets may be considerably larger now that fewer estates will be subject to the federal estate tax, rethinking how and when beneficiaries should receive significant assets should become a priority.  Planning to avoid the unnecessary costs of probate, especially during lifetime (i.e. guardianship of a disabled adult), planning to limit claims of creditors, and planning to minimize disputes among family members continue to warrant careful consideration.

Retirement plans are still “tax cursed.”  When distributed to a beneficiary at death, the monies received will still be subject to income tax.  The Treasury has revised the method for calculating required minimum distributions from IRAs during lifetime, and provided some tax-advantaged options for certain designated beneficiaries after death.  These rules do greatly simplify planning and individuals with retirement accounts should take this time to review their plans to see if they should rethink their designated beneficiaries.

There is good news for those with charitable intentions and retirement plans.  The 2010 Tax Act extends for one more year the $100,000 “charitable rollover” of IRA distributions for anyone older than 70 ½.  A taxpayer can direct up to $100,000 from an IRA to a charity and not have the amount included in his gross income.   Charitable rollovers made in January 2011 can be treated as if they were made in 2010.

New Tax Law Extends or Reinstates Certain Tax Provisions

New Tax Law Extends or Reinstates Certain Tax Provisions

President Obama has signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  Among the significant provisions are:

 Two-year extension of all 2001 and 2003 tax cuts

 Two-year adjustment of the estate tax with a $5 million individual exemption.   For a decedent dying in 2010, the Executor may elect carryover basis or utilization of the $5 million exemption.

 Two-year retroactive extension of the IRA Charitable Rollover.  This provision allows any eligible gifts made by January 31, 2011 to be treated as a 2010 donation and be used to satisfy the taxpayer’s minimum distribution requirement for 2010.  The new expiration date for the Charitable Rollover is December 31, 2011.

 A detailed summary of the new law can be found at

$250,000 FDIC Insurance Now Permanent

$250,000 FDIC Insurance Now Permanent

On July 21, 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the current maximum FDIC deposit insurance amount was permanently raised to $250,000.   FDIC insurance covers all deposit accounts at insured banks and savings associations up to the insurance limit.  The FDIC does not insure money invested in stocks, bonds, annuities, and the like, even if purchased from an insured bank or savings association.

A depositor can have more than $250,000 at one insured bank or savings association and still be fully insured provided that the depositor owns accounts in different ownership categories.  Most common account ownership categories include single accounts, joint accounts, revocable trust accounts and certain retirement accounts.

Our estate planning clients may re-register an existing bank account or open a new account at a bank as follows:  “Client’s name, as Trustee of the Client’s Trust dated _________, 20__.”   The level of FDIC insurance coverage depends on the number of beneficiaries.  If five or fewer beneficiaries, each owner’s share of the revocable trust deposit is insured up to $250,000 for each beneficiary (i.e. $250,000 x the number of different beneficiaries), regardless of the actual interest provided to the beneficiaries.  When the trust has six or more beneficiaries, each owner’s share of the revocable trust deposits is insured for the greater of either (1) coverage based on each beneficiary’s actual interest in the revocable trust deposits, with no beneficiary’s interest to be insured for more than $250,000, or (2) $1,250,000.

To illustrate, husband and wife have a joint revocable living trust leaving all assets equally to their three children upon the death of the surviving spouse.  All deposits held in the name of the trust at one FDIC-insured bank would be covered up to $1,500,000  Each owner receives $750,000 of FDIC insurance coverage because they each have three beneficiaries who will receive the trust deposits when both owners have died.

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Pay Attention to Beneficiary Designations on Retirement Accounts

Pay Attention to Beneficiary Designations on Retirement Accounts

A client who is going through a divorce cannot rely on the trial court or property settlement agreement waiving the ex-spouse’s rights to retirement account assets.  The Supreme Court of the United States in a case decided on January 20, 2009, confirms that the beneficiary designation under an ERISA plan (Employee Retirement Income Security Act of 1974) trumps any contrary provision in a divorce or settlement agreement.

 In Kennedy v Plan Administrator for DuPont Savings and Investment Plan et al.  U.S. Supreme Court, No. 07-636, the divorced spouse never updated his beneficiary designation to remove his ex-wife as the primary beneficiary under his retirement plan.  Upon his death, the Court found that DuPont acted properly in paying the account balance to the ex-wife despite her having signed a waiver to the plan benefits as part of the divorce.

 The Court reasoned that giving the Plan participant clear rules for updating beneficiary designations relieves the Plan administrator from having to examine numerous external documents purporting to be waivers.  The onus is on the Plan participant to make sure his or her beneficiary designations reflect the participant’s current intentions.

This is in stark contrast to the situation where a decedent’s ex-spouse is still named as beneficiary on a life insurance policy. In that case, state law, not Federal law, will control.  Richard v. Martindale, No. 09 CV 4159 (ND Ill, June 14, 2010) confirms Illinois’ current law that when there is a divorce decree waiving a spouse’s interest to a life insurance policy, the waiver will operate to correct a beneficiary designation when the decedent neglected to remove ex-spouse as the primary beneficiary. 


Potential Adverse Tax Consequences when Trust is the Beneficiary of an IRA

Potential Adverse Tax Consequences when Trust is the Beneficiary of an IRA

A parent may want to require that assets be retained in a single trust for their children or separate trusts, one for each child.  While a trust for a child can be designated as a beneficiary of an IRA, special care must be taken to assure that the trust will be able to utilize the child’s life expectancy when determining required minimum distributions under the inherited IRA rules. 

A recent private letter ruling, PLR 201020138, discussed the consequences when a charity is named as a remainder beneficiary of a trust. Upon the death of the parent, assets were required to be retained in trust for the benefit of the children.  The Trustee had discretion to pay income and principal for the benefit of the children and to accumulate income not paid.  Upon the trust termination, the trustee was directed to distribute the balance to descendants of the children as well as charities.

A trust must have a “designated beneficiary” in order to take advantage of the inherited IRA rules.   If the trust has a “designated beneficiary”, the trustee will be permitted to take required minimum distributions over the actuarial age of the oldest trust beneficiary. 

Under the trust in question, there was no requirement that the IRA distributions be paid to the children.  Accordingly, the IRS rules require that the remainder beneficiaries be considered in determining whether the IRA has a “designated beneficiary.”   Code Section 401(a)(9)(E) defines a designated beneficiary  as any ”individual” as long as the individual is identifiable.  If a charity is named as a beneficiary, the IRA is treated as having no beneficiary even if individuals are also named as trust beneficiaries.  

In determining designated beneficiaries under a trust, the IRS does not look at “successor beneficiaries”, those who could become a successor to the interest on the beneficiary’s death, but this exception does not apply to “contingent beneficiaries.”

 In a trust that allows the Trustee to accumulate income and principal, the IRS states that the remainder beneficiaries must be considered “contingent beneficiaries, rather than successor beneficiaries for purposes of determining who is the designated beneficiary.  Since charities were contingent beneficiaries, the trust was deemed not to have a designated beneficiary as of the decedent’s date of death.  A court order reforming the trust was ineffective to correct this problem.  Accordingly, the trust was unable to use the more favorable measuring life for determining future required minimum distributions, (the actuarial age of the oldest trust beneficiary).  In this case, the Trustee was required to use the IRA owner’s remaining life expectancy at the time of death reduced by one each year for determining future required minimum distributions.   

 With the advent of the inherited IRA rules, it is incumbent upon clients to review their trusts to make sure that their beneficiaries will be able to take advantage of the tax favored treatment available the inherited IRA rules.

 This is particularly relevant in supplemental needs trust planning when the parents have significant IRA assets.   Some parents may want to benefit the non-profit agency that provided services to their child and desire to name that organization as the remainder beneficiary or among the remainder beneficiaries when the child with disabilities passes away.    In those cases, perhaps a different strategy will need to be considered in order to preserve the better tax-favored treatment accorded to trusts that have a “designated beneficiary.” 

New Tax Planning Option if in the Market for Long Term Care Insurance

Two important changes regarding Long Term Care Insurance have come into effect. Starting January 1, 2010: (a) Distributions from non-qualified annuities and life insurance which have a long-term care insurance rider are tax-free when used to pay long-term care costs; and (b) non-qualified annuities and life insurance can be exchanged tax-free via a so-called “1034 exchange” for a tax advantaged long-term care insurance policy.   There are a number of technical requirements that must be met to achieve the tax-free exchange status and as with any investment, exchanges may not be right for everyone.