Does a last in time divorce decree or a beneficiary designation made at the time of the application years ago prevail when it comes time to make a claim?  A wife had her estranged husband, sign a separation and property-settlement agreement to release him from any claims to her estate or property.  When the wife passed away, her former husband sought the life insurance proceeds, as did her mother and son.  The answer is set forth in a cautionary tale of beneficiary designations told in a recent 4^th circuit case.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of beneficiary designations in Advisor’s Journal, see The Effect of Divorce on Life Insurance Beneficiary Designations (CC 10-39) & Don’t Overlook Beneficiary Designations and Settlement Options (CC 09-28).

For in-depth analysis of beneficiaries and settlement options, see Advisor’s Main Library: D – Problems In Beneficiary Designations.

Why is this Topic Important to Wealth Managers? This blogticle concludes our weeklong series on the unified estate and gift tax as well as the portability of the spousal credit. This week we discussed the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

How the DSUEA will be treated after 2012 is uncertain, but wealth managers should consider the possible ramifications of the returning sunset and how it may affect your clients’ estate planning. As we have seen Congress may extend the sunset date, revert the rules to a prior act in time, or treat the DSUEA as if it never existed.  Not surprisingly because there are currently no provisions to address the consequences if the law is not renewed in 2013, long term planning uncertainty still exists in the gift and estate tax area.

On the one hand, if Congress extends the DSUEA, then bypass trusts will likely remain unnecessary for estate tax purposes. Spouses will have the continued opportunity to utilize the DSUEA and take advantage of its many benefits, such as making gift transfers to heirs or establishing trusts that take full advantage of the increased exemptions.

On the other hand, if Congress does not take action by 2013, the Bush tax cuts – and the modifications made by the Tax Relief Act of 2010 – will be treated as if they had never been enacted. Under the latter scenario, the estate tax would revert back to the 2001 level which amounts up to a $1 million exemption, with a maximum rate of 55%. Additionally, if no further action is taken before the end of 2013, the portability feature would no longer be available at that time. Thus, if the DSUEA ceases to exist after December 31, 2012, the bypass trust will likely once again become an integral part of the estate planning process.  In light of the new DSUEA concept, existing bypass trusts should be examined to determine whether the benefits of a bypass trust outweigh the loss of step-up basis that results from their use.

Series Summary

The increased estate and gift tax exemptions along with unification of the gift and estate tax created changes to the treatment of estate and gift taxes generally. The new law reinstated the estate tax but provides for an exemption of $5 million with a top tax rate of 35%. Moreover, the new DSUEA created an even higher combined exemption amount for some spouses. Thus, the provisions in the TRA of 2010 provide one planning route that may be examined as the optimal path for some married couples. As always with tax law, what is appropriate for each client should be determined on a case-by-case basis.

For more information on the implications of the new estate and gift tax in particular client situations please feel free to contact our panel of experts.

Next week’s blogticles will again address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Last month Advanced Market expert Barry Flagg talked about the relevance of policy cash values to the overall suitability of a permanent life insurance policy. This month he addresses how cash value is generally influenced by the number of cash value investment options, the historical performance of such cash value investment options, and the cost-effectiveness of the various cash value allocation options.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of valuation in Advisor’s Journal, see Life Insurance Valuation (CC 10-09).

Why is this Topic Important to Wealth Managers? This blogticle represents part four of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

Generally the purpose of a bypass trust is to fully utilize a deceased spouse’s exclusion amount which is now also accomplished by the statutory DSUEA. Thus, there is no need to preserve the first spouse’s exclusion amount since the surviving spouse’s estate will be able to utilize the first spouse’s exclusion amount without use of a trust. In short, the bypass trust is no longer usually necessary for estate tax purposes.

Both the DSUEA and bypass trust will fully utilize the first-spouse-to-die’s exclusion amount, so why not use an A-B trust arrangement? After all, Congress could eliminate the DSUEA in 2012 as easily as it introduced it in 2010. The A-B trusts are the marital deduction trust (A), and the credit shelter trust (B).

Yet there is a very good reason to think twice before using a bypass trust in 2011 and 2012 (and in later years if the DSUEA concept sticks around). Assets of the first spouse to die that are placed in a bypass trust do not receive a step-up in basis at the death of the second spouse; however, assets that pass untaxed in the second spouse’s estate due to the first spouse’s DSUEA will receive a step-up in basis, which can result in a very significant income tax savings when beneficiaries of the surviving spouse’s estate sell property received from that estate.

Although use of a bypass trust in 2011 and 2012 is unnecessary—and even counterproductive— for estate tax purposes, existing bypass trusts do not necessarily need to be eliminated from the estate plan. Estate tax “certainty” extends only through 2012, and the DSUEA may disappear when the next Congress takes its turn with the estate tax. If the DSUEA is eliminated, the bypass trust will again become an important tool for estate planning.

Rather than remove the bypass trust from the will, the trust can be dealt with if the testator dies in 2011 or 2012 through the use of disclaimers. If the standard A-B trust arrangement is kept in place while the DSUEA is in effect, and the surviving spouse is named as residual beneficiary of the trust, the gift to the bypass trust can be disclaimed and the surviving spouse will take the property. Then, at the surviving spouse’s death, the DSUEA component of the last-to-die spouse’s exclusion amount will capture the first-to-die spouse’s unused exclusion amount.

Importantly, beneficiaries will receive property covered by the DSUEA with a stepped-up basis, unlike property received from a bypass trust. [1]

Under the new estate tax regime, the estate’s applicable exclusion amount is equal to the basic exclusion amount plus the DSUEA.[2] More specifically, the Tax Relief Act of 2010 sets the DSUEA for a surviving spouse of a deceased spouse dying after December 31, 2010, as the lesser of: (A) the basic exclusion amount, or (B) the excess of – (i) the basic exclusion amount of the last such deceased spouse of such surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under IRC Section 2001(b)(1) on the estate such deceased spouse.[3]

In sum, the DSUEA is “portable” in nature, meaning that it allows a surviving spouse to utilize his or her deceased spouse’s applicable unused exclusion amount.[4] It is also important to note that the portability feature does is not apply to the unused GST tax exemptions of a pre-deceased spouse.[5]

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Robert Bloink, Esq., LLM & Professor William H. Byrnes, Esq., LL.M., CWM, Selected Provisions and Analysis of the Tax Relief Act of 2010, 8, The National Underwriter Company (2011).

[2] IRC Sec. 2010(c).

[3] TRA of 2010 § 303(a)(4). See also IRC Sec. 2010(c)(4).

[4] TRA 2011 §303(a).

[5] U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in the 111th Congress, 554 (JCS-2-11). Text from: Committee Reports. Available at: http://www.jct.gov/publications.html?func=showdown&id=3777 (last accessed April 6, 2011).

Why is this Topic Important to Wealth Managers? This blogticle represents part three of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

The Marital Deduction

A 100-percent marital deduction generally is permitted for estate and gift tax purposes for the value of property transferred between spouses.[1] Transfers of ‘‘qualified terminable interest property’’ are eligible for the marital deduction. ‘‘Qualified terminable interest property’’ is property: (1) that passes from the decedent; (2) in which the surviving spouse has a ‘‘qualifying income interest for life’’[2]; and (3) to which an election applies. [3]

In other words, the marital deduction allows spouses to deduct unlimited amounts for property that passes from a decedent to his or her surviving spouse. [4]

Portability of the DSUEA

Fittingly, as Benjamin Franklin notes there are two certainties in life; death and taxes.[5] Eventually the surviving spouse too will die and a tax on the combined estate will be imposed. Nevertheless, the Tax Relief Act of 2010 introduces a new estate tax concept for 2011 and 2012—the deceased spouse unused exclusion amount (DSUEA). Essentially, the DSUEA allows a surviving spouse to utilize the unused exclusion amount of the first spouse to die.

Under the provision, any applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 (the ‘‘deceased spousal unused exclusion amount’’), generally is available for use by the surviving spouse, as an addition to such surviving spouse’s applicable exclusion amount.[6]

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by such surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last such deceased spouse. A surviving spouse may use the predeceased spousal carryover amount in addition to such surviving spouse’s own $5 million exclusion for taxable transfers made during life or at death.

A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse on which such amount is computed, regardless of whether the estate of the predeceased spouse otherwise is required to file an estate tax return.

The applicable exclusion amount is the sum of two components: the basic exclusion amount and the DSUEA. The basic exclusion amount for estates of decedents dying in 2011 and 2012 is $5 million. The second part of the equation, the DSUEA, is the amount of the first-to-die spouse’s exclusion amount that is not used by that spouse’s estate. Note that a surviving spouse’s DSUEA is equal to the unused exclusion amount of the surviving spouse’s last deceased spouse.

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] IRC Secs. 2056 & 2523.

[2] A ‘qualifying income interest for life’’ exists if: (1) the surviving spouse is entitled to all the income from the property (payable annually or at more frequent intervals) or has the right to use the property during the spouse’s life; and (2) no person has the power to appoint any part of the property to any person other than the surviving spouse.

[3] See generally IRC Secs. 2056 & 2523.

[4] IRC Secs. 2056 & 2523.; AMAFX-AUS Main Library. The Federal Estate Tax.

[5] Benjamin Franklin. Letter to Jean Baptiste La Roy 1789. “But in this world nothing can said to be certain except death and taxes.’

[6] See generally IRC Sec 2010(c)(4).

The IRS launched the Large Business and International Division’s high-wealth industry group (“HNW Initiative”) in October 2009 with the purpose of examining high-net worth individuals for income tax compliance. But the Service may be “using more rhetoric than resources,” according to Syracuse University’s Transactional Records Access Clearinghouse (TRAC). TRAC’s April 14 report, based on information compiled from public records, accuses the IRS of having “very skimpy” audit goals for the HNW initiative.

TRAC’s report indicates that the HNW initiative plans on auditing only 122 returns for the 2011 fiscal year and claims that it will fail to meet even this modest target. According to the report, the IRS will meet only 19% of its audit objectives for the first six months of 2011.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of Tax Court Rulings in Advisor’s Journal, see Tax Court Revives Partnership Self-Employment Tax Debate (CC 11-56), Tax Court Calculates FMV of Policies Distributed from Terminated 419 Plan (CC 11-35), and Tax Court Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan (CC 11-14).

For in-depth analysis on filing income tax returns, see Advisor’s Main Library: G – Income Tax Procedure.

Why is this Topic Important to Wealth Managers? This blogticle represents part two of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

The Tax Relief Act of 2010 first reinstates the estate taxes effective for decedents dying and transfers made after December 31, 2009. The estate tax applicable exclusion amount is $5 million under the provision and is indexed for inflation for decedents dying in calendar years after 2011, and the maximum estate tax rate is 35 percent. [1]

Additionally, for gifts made after December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35 percent.

Also, for transfers made at death after December 31, 2010, the new law generally provides for ‘stepped-up” basis in property passing from the decedent; the carryover basis rules for gifts is unaffected. Gain or loss, if any, on the disposition of property is measured by the taxpayer’s amount realized (i.e., gross proceeds received) on the disposition, less the taxpayer’s basis in such property.[2] Basis generally represents a taxpayer’s investment in property, with certain adjustments required after acquisition. For example, basis is increased by the cost of capital improvements made to the property and decreased by depreciation deductions taken with respect to the property.

Under the new law the basis of property passing from a decedent’s estate is given the fair market value on the date of the decedent’s death (or, if the alternate valuation date is elected, the earlier of six months after the decedent’s death or the date the property is sold or distributed by the estate). This step up in basis generally eliminates the recognition of income on any appreciation of the property that occurred prior to the decedent’s death. If the value of property on the date of the decedent’s death was less than its adjusted basis, the property takes a stepped-down basis when it passes from a decedent’s estate. This stepped-down basis eliminates the tax benefit from any unrealized loss. [3]

Under the modified carryover basis regime, recipients of property acquired by gift, bequest, devise, or inheritance receive an adjusted basis or the fair market value of the property. Thus, the character of gain on the sale of property received from a gift is carried over to the donee. For example, real estate that has been depreciated and would be subject to recapture if sold by the donor will be subject to recapture if sold by the donee. [4]

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] TRA of 2010 § 302(a).

[2] IRC Sec. 1001.

[3] There is an exception to the rule that assets subject to the Federal estate tax receive stepped-up basis in the case of ‘‘income in respect of a decedent.’’ See IRC Sec. 1014(c). The basis of assets that are ‘‘income in respect of a decedent’’ is a carryover basis (i.e., the basis of such assets to the estate or heir is the same as it was in the hands of the decedent) increased by estate tax paid on that asset. Income in respect of a decedent includes rights to income that has been earned, but not recognized, by the date of death (e.g., wages that were earned, but not paid, before death), individual retirement accounts (IRAs), and assets held in accounts governed by section 401(k).

[4] U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in the 111th Congress, 556 (JCS-2-11). Text from: Committee Reports. Available at: http://www.jct.gov/publications.html?func=showdown&id=3777 (last accessed April 6, 2011).

Why is this Topic Important to Wealth Managers? This blogticle represents part one of a five in a series on the estate and gift tax and portability of the spousal credit. Most wealth managers are cognizant of the new changes to the federal estate and gift tax structure with an increased exemption amount of five million dollars. This week we discuss the current estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

As most wealth managers are aware, extension of the Bush tax cuts created a number of changes related to the gift and estate tax. For a better understanding of the new federal gift and estate tax provisions, and how they relate to clients’ estate plans, the prior law will first be discussed.

In general, a gift tax is imposed on certain lifetime transfers and an estate tax is imposed on certain transfers at death;  the federal gift and estate tax are taxes on the right to transfer property; not a tax on the underlying property itself.[1] In 2001, the federal estate tax exemption was $675,000 with a top estate tax rate of 55%.[2] When the Bush administration passed its tax cut legislation, the federal estate tax exemption underwent a series of increases.  By 2009, the exemption escalated to $3.5 million with a top tax rate of 45%.[3] The federal estate tax exemption was repealed in 2010, and the Bush’s tax cuts sunset provisions were set to expire in 2011, which meant that the federal estate tax would have been $1 million with a top rate of 55%.[4]

Nevertheless, President Obama’s tax compromise – the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (Tax Relief Act of 2010 or TRA of 2010) – which came into effect on December 17, 2010, changed the direction of expiring provisions. [5] The Tax Relief Act of 2010 contains new sunset provisions which extend certain tax cuts and provides for gift and estate tax amendments.

Moreover, the Tax Relief Act of 2010 created a number of favorable conditions that may  be beneficial to your clients—but in order to fully take advantage of these changes  it will help to review the  Tax Relief Act of 2010  and how it directly relates to client planning.

As presented in the AMAFX Advisors Journal, whether or not to give substantial lifetime gifts in 2011 and 2012 is going to be a hot topic between now and the end of 2012. But deciding whether to take advantage of the record high ($5 million) gift, estate and GST tax exclusion amount and low (35%) transfer tax rate isn’t a trivial matter.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of the federal estate tax, the federal gift tax, and the GST tax, see AMAFX Advisor’s Main Library: A – Federal Estate Tax General, A – Nature and Background Of The Federal Gift Tax, and A – Generation Skipping Transfers Explained.

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] AMAFX-AUS Main Library. The Federal Estate Tax.  http://www.advisorfx.com/articles/f2_1_12_1090.aspx?action=13 (last accessed April 6, 2011).

[2] Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, The Estate Tax: Ninety Years and Counting, 122. Available at: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf (last accessed April 8, 2011).

[3] Jacobson, Raub, and Johnson, supra note 2, at 124.

[4] Id.

[5] Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010, P.L. 111-312; U.S. Congress. House of Representatives. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 24 (H.R. 4853). Available at:  http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf (last accessed April 6, 2011).

If you’re one of the two out of three financial professionals who are out of the social media loop, you could be missing opportunities to boost your advisory business. Although the SEC and FINRA are cracking down on firms for social media misuse there’s still a wealth of untapped marketing potential for advisors brave enough forge into this new territory.

Social media sites like Facebook, Twitter, and LinkedIn can be used to build opportunities – if you know how to use them to the best of your advantage.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of social media marketing in Advisor’s Journal, see Advisors’ Stairsteps of Influence (CC 11-49) & SEC Says “Not So Fast” to Advisor Social Media Marketing (CC-11-40).

For in-depth analysis of marketing and time management tips, see Advisor’s Advanced Markets: Soft Skills.

Why is this Topic Important to Wealth Managers? This blogticle is part of our casual Friday series that discusses topics relating to national, political, economic, global and other relevant issues. It is our intention to keep wealth managers well informed in areas affecting client planning.

The U.S. Department of the Treasury gladly welcomed S&Ps affirmation of its AAA rating and Moody’s view of recent fiscal announcements by both parties as a positive ‘turning point’ for the U.S. earlier this week.

The Treasury released the following statement earlier this week from Assistant Secretary for Financial Markets Mary Miller on the announcements by Standard and Poor’s and Moody’s:

“This morning, S&P affirmed the AAA rating of the U.S., but emphasized the importance of timely bipartisan cooperation and action on fiscal reform.  In addition, Moody’s commented today that ‘we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.”

“As the President said last week, addressing the current fiscal situation is well within our capacity as a country.  He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility.  The U.S. economy is strengthening as it emerges from the recent recession. Both political parties now agree that it is time to begin bringing down deficits as a share of GDP.”

“S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program – combined with meaningful steps toward implementation by 2013,’ but we believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”

Standard and Poor’s had the following to say regarding the characterization to a negative outlook for the U.S. Government: “Our negative outlook signals that we believe there is a likelihood of at least one-in-three of a downward rating adjustment within two years. Although we view the U.S. sovereign’s considerable strengths to largely outweigh material risks, primarily fiscal and external, we now believe these strengths might not be able to offset fully the continued credit impact from these weaknesses, during the coming two years, at the ‘AAA’ level.”

The question is can you blame the rating service? If you are to examine the 2012 Federal Budget it shows a projection over the next 10 years of a seven trillion dollar loss. The United States must take some serious strides to rectify the situation that has gotten out of control. A balanced budget is one critical area where lawmakers should focus and resolve our deficit and debt issues.

As S&P states, “The outlook reflects the possibility of a downgrade if political negotiations over when and how to address both medium- and long-term fiscal challenges persists beyond 2013.”  The rating agency stated that, “the lack of such an agreement by 2013, or a significant  further fiscal deterioration for any reason, could lead us to lower the rating.”

Next week’s blogticles will discuss planning concepts for wealth managers in 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.