Client Update - September 28, 2022
2021/2022 Legislative Updates and How They May Impact Your Estate Plan
As published in: Steve Leimberg's Estate Planning Email Newsletter, Archive Message #2984, 09-29-22.
In this letter to our clients, we discuss a number of legislative developments relating to estate planning and asset protection. Although some of the legislative developments went into effect in 2021, we believe they warrant the consideration of our clients. This letter focuses on the items that we believe are most relevant to our clients.
Projected Increases in Estate, Gift, and GST Exemptions and Exclusions for 2023
Thomson-Reuters Checkpoint issued a newsletter in which it estimated, based upon the Consumer Price Index published for August 2022, how inflation will impact the existing exemptions and exclusions for estate, gift, and GST tax as follows:
The estate and gift exemption amount (currently $12.06 million) will increase to $12.92 million for 2023. The GST exemption will likewise increase by the same amount.
The annual gift tax exclusion will increase from the current $16,000 up to $17,000 in 2023.
The gift tax exclusion amount that can be given annually to a non-citizen spouse is increasing from $164,000 up to $175,000 next year.
It is important to note that in its newsletter, Thomson-Reuters Checkpoint provides that “The IRS has not officially issued these figures, but generally speaking, these estimates are fairly accurate.”
As of July 2, 2021, Florida Residents Can Transfer Homestead to their Revocable Trust and Benefit from Both Asset Protection and Probate Avoidance Upon their Death
In the past, we advised our unmarried clients to retain title to their personal residence (homestead) in their individual names and not title their homestead in the name of their Revocable Trust due to asset protection concerns. Other than our married clients who may consider a Community Property Trust, as described in the next section below, we believe our married clients who own their Florida homestead jointly with their spouse, as tenants by the entirety, or in the name of both spouses should generally retain such title until the death of the first spouse. As a result of the statutory change described in the following paragraph, we now encourage unmarried clients or clients who prefer to hold title to their homestead in only their name (such as those in second marriages with prenuptial agreements where their spouse waived homestead) to convey their Florida homestead to their Revocable Trust to avoid any probate court pleadings upon death.
In 2021 Florida Statute Section 736.1109 was enacted (effective July 1, 2021), which allows for one’s homestead to be transferred to the owner’s Revocable Trust and maintain homestead status as well as asset protection. Florida Statute Section 736.1109 is “intended to clarify existing law and applies to the administration of trusts and estates of decedents who die before, on, or after July 1, 2021.”
Clients who transfer their homestead to their Revocable Trust must reapply for homestead the year following the transfer (i.e., if a client transfers their homestead to their Revocable Trust in 2022, such client must reapply for homestead before March 1, 2023) or the client risks losing their homestead exemption and the Save Our Homes tax benefit that is likely to be very significant. Clients must carefully review these issues with their real estate attorney before taking any action to retitle their homestead and advise their insurance company of the transfer to maintain insurance coverage. Furthermore, with mortgage rates increasing significantly in 2022 it is important to confirm with your advisors that proposed transfers to your Revocable Trust will not accelerate existing mortgage debt on homesteads.
Married Clients Should Consider Community Property Trust for Homestead
A new Florida law may provide an option for ownership of Florida homestead that could provide an income tax benefit upon the death of the first spouse. However, the law is not clear and the IRS could argue the income tax benefit is not available.
Chapter 736, Part XV, the “Community Property Trust Act,” (effective July 1, 2021), allows the creation of a trust, referred to as a “Community Property Trust”, which may result in the property held in such trust receiving a full step up in income tax basis upon the death of the first spouse rather than a 50% step up in income tax basis for most property owned jointly by Florida resident spouses. The benefit of receiving such full step up in income tax basis to fair market value at the date of the first spouse’s death is that the surviving spouse can then sell such asset without incurring capital gains tax on the entire appreciation that occurred prior to the deceased spouse’s death (as compared to only one-half (1/2) of such appreciation that occurred prior to the deceased spouse’s death under the tax law where a property is owned jointly between spouses).
It should be noted that some tax commentators have expressed concern as to whether a state statute that effectively allows property owners to “elect” community property status will be respected by the Internal Revenue Service (“IRS”). If the IRS takes the position that the full (“double”) step up in income tax basis upon the death of the first spouse is not permitted, the taxpayers should not be in any worse of a position, other than the transaction costs to create the Community Property Trust and potential audit costs, if the community property election and associated double step up in income tax basis upon the death of the first spouse is challenged, including possible interest as to the late payment of income tax when the property is sold and possible late payment penalties.
For clients with unencumbered homesteads, there are modest costs to create a Community Property Homestead Trust. If the homestead is subject to a mortgage, there is a possibility that documentary stamp taxes will be incurred when the homestead is conveyed to the Community Property Trust. As described in this section below, members of the Florida Bar committee that introduced the Florida Community Property Trusts have requested clarification on the documentary stamp tax from Florida state representatives. We believe that if the documentary tax issues are resolved favorably, the potential income tax savings of a Community Property Trust may be reason for many Florida homesteaders to make use of the new Florida Community Property Trusts.
SECURE Act Provisions
The SECURE Act of 2019 significantly changed the federal tax laws with respect to retirement plan assets. Some of the most important changes that tie into our clients’ estate planning are as follows:
The Required Minimum Distribution date (when the original account owner must begin to receive distributions) was raised from 70.5 years of age to 72 years of age effective December 31, 2019. The SECURE Act 2.0 currently being considered in Congress will raise the age to age 75 by 2032, if passed.
Limits the time during which beneficiaries, other than spouses, disabled beneficiaries, minors, and certain other exception beneficiaries, may withdraw the principal benefits inherited from qualified plans and IRAs from over the beneficiary’s lifetime to no greater than ten (10) years from the original account owner’s death. Annual required minimum distributions from such plans must be taken by beneficiaries if the original account owner had already started to take his or her required minimum distributions. If the original account owner had not yet begun to receive the required minimum distributions, then the beneficiary may elect to take the entire proceeds within five (5) years or elect to receive required minimum distributions based upon the beneficiary’s life expectancy; however, the entire principal must be taken by the tenth (10th) year (extending the required time to take the entire principal from five (5) years to ten (10) years. This change limits planning that can be implemented for a non-spouse beneficiary who is not disabled, a minor, and/or an exception beneficiary, as this rule also applies to trusts, which must be structured to qualify as a designated beneficiary to obtain the ten (10) year maximum payout period. Otherwise, qualified plans payments to trusts need to be distributed over five (5) years rather than ten (10) years. Because the additional five (5) years may not be significant and the income must be paid out to the beneficiary upon receipt by the trust, the benefits of using a trust for retirement plan benefits for beneficiaries, other than a spouse, a disabled person, a minor, or certain other permitted beneficiaries has been reduced.
Because spouses and disabled beneficiaries continue to benefit from the ability to receive retirement distributions over their lives (as compared to the shorter ten (10) year duration under the SECURE Act), retirement plan distributions should be reviewed and possibly reallocated amongst spouses and disabled beneficiaries with a corresponding reallocation of other non-retirement assets to the family members to maximize deferral of income tax on retirement plan assets.
Revised Florida Statute § 736.0505(3)(b)
Revised Florida Statute § 736.0505(3)(b) Allows Spousal Limited Access Trust (“SLAT”) Assets to Return to the Original Donor Spouse and Benefit from Asset Protection but there is Uncertainty Regarding Estate Tax Inclusion to the Original Donor Spouse if SLAT Assets Return to the Donor Spouse, whether Outright or in Trust upon the Death of the Original Beneficiary.
In May 2022, Florida enacted revised Florida Statute § 736.0505(3) (effective July 1, 2022), which is similar, in part, to the Inter Vivos QTIP Trust legislation already enacted in eighteen (18) states, including Florida (originally enacted in 2010). Florida inter vivos QTIP Trust legislation provides that when the original donee spouse dies and assets revert to the original donor spouse, in trust (e.g., in a credit shelter trust or bypass type trust), such trust assets will be treated as having been created by the original donee spouse if a QTIP election was made on the original gift to the inter vivos QTIP Trust. As a result, such assets held in trust for the original donor (upon the death of the original donee spouse) can be designated to be protected from the original donor spouse’s creditors [because the inter vivos QTIP Trust held for the original donor spouse upon the death of the original donee spouse is considered a third party created trust (i.e., created by the original donee spouse and not created by the original donor spouse)]. If, upon the death of the original donee spouse, the trust created for the original donor spouse was considered a first party created trust (i.e., created by the original donor spouse for the original donor spouse’s benefit), then such trust would be considered a self-settled trust and would have no asset protection or estate tax saving benefits. Inter vivos QTIP Trust assets that revert, in trust, to the original donor spouse benefit from a federal tax regulation providing that such assets that are protected from the original donor spouse’s creditors will not be includible in the original donor spouse’s estate under Code Sections 2036, 2038, and 2041 assuming the original trust qualifies for the marital QTIP election and the trust held for the original donor spouse upon the death of the original donee spouse is effectively drafted.
Revised Florida Statute § 736.0505(3) provides that assets gifted to a trust that includes the original donor’s spouse as beneficiary, whether or not a QTIP election is made, as to the original trust gift, which return to the original donor spouse, in trust, upon the death of the original donee spouse, whether under the terms of the trust or as a result of the exercise of a power of appointment, will be considered to have been settled by the original donee spouse (not the original donor spouse) so that such assets would be significantly protected from creditors of the original donor spouse if the original donee spouse predeceases the original donor spouse.
Revised Florida Statute § 736.0505(3) provides clarity with respect to asset protection for gifts using a Spousal Limited Access Trust (commonly referred to as a “SLAT”) returning to the original donor spouse in trust upon the death of the original donee spouse but it does not control whether the IRS will attempt to include SLAT assets returning to the original donor spouse, which pass, in trust, to the original donor spouse upon the death of the original donee spouse, in the estate of the original donor spouse upon the original donor spouse’s death under Code Section 2036 and Code Section 2038. Florida Statute § 736.0505(3) does not control Federal tax law. There is a possibility that SLAT assets returning to the original donor spouse in a Credit Shelter or bypass type trust would be included in the original donor spouse’s estate under Code Sections 2036 or 2038 if the IRS can establish there was an implied or express agreement that the assets gifted by the original donor spouse would be held for the benefit of the original donor spouse upon the death of the original donee spouse and that distributions would be made from such trust to benefit the original donor.
Two Internal Revenue Service Private Letter Rulings provide support for the position that assets passing from a SLAT upon the death of the original donee spouse to the original donor spouse in a credit shelter or bypass trust not being included in the estate of the original donor spouse. Private Letter Ruling 9837007 held that contributions by an Alaska resident to an Alaska domestic asset protection trust were completed gifts and PLR 200944002 held that the assets of an Alaska domestic asset protection trust would not be includible in the Alaska settlor’s gross estate. Private Letter Ruling 9837007 states that the ruling is dependent upon there being no agreement, express or implied, between the original donor and the trustee as to how the trustee will exercise its sole and absolute discretion to pay income and principal among the beneficiaries which included the original donor. Until the potential adverse estate tax consequences of SLATs are clarified by cases, rulings, or statutes, care should be exercised when creating SLATs, even after the July 2022 revision to Florida Statute §736.0505(3) especially where there is an understanding that upon the death of the original donee spouse, assets will be held for and distributions paid to the original donor spouses during the original donor’s lifetime. We believe there will likely be a future Private Letter Ruling, Chief Counsel Memorandum, or court case that will provide guidance on whether and under what circumstance assets in a SLAT that return to the original donor spouse are includible in the original donor’s estate under Code Section 2036 or Code Section 2038. Until then, clients should be aware of the SLAT risks described above. We believe that many lawyers and advisors are unaware of this risk, in part because the “White Paper” provided during the legislative process to pass Florida Statute Section 736.0505(3)(b), appears to conclude that the new statute will provide estate tax benefits. We believe that Florida residents should be cautious and understand the estate tax risks of creating SLATs if the intent is that upon the death of the first spouse assets will be held in trust or paid outright to the initial donor spouse.
Until the Federal tax law is clarified as to the potential inclusion of SLAT assets reverting to the original donor spouse in the original donor spouse’s taxable estate, conservative clients will only create SLATs if they do not anticipate the SLAT assets will return to the original donor spouse upon the death of the donee spouse. If economic circumstances change and the original donor spouse needs assets in the SLAT created for his or her spouse, then the original donee spouse can exercise a power of appointment in favor of an asset protected trust for the original donor spouse (or outright to the original donor spouse) in which event inclusion of such assets in the estate of the original donor spouse may not result in creating a taxable estate for the original donor spouse (i.e., because the estate of the original donor spouse, including assets returning to the original donor spouse from the SLAT, are less than the original donor’s remaining basic exclusion amount at death), or if there may be a taxable estate, the tax may not be so significant as compared to the benefit of the original donor spouse having access to SLAT assets upon the death of the original donee spouse.
When SLATs are created by spouses who believe they will need to have access to the SLAT assets upon the death of the original donor spouse and, in fact, such assets revert to a trust for the original donor spouse upon the death of the original donee spouse and the trustee makes frequent distributions to the original donor spouse, then the SLAT assets returning in trust to the original donor spouse would likely be included in the original donor spouse’s estate under current federal tax law. This risk is even greater if shortly after creation of a SLAT, the original donee spouse exercises his or her power of appointment in his or her Last Will in favor of the original donor spouse.
We identified a number of recent issues, above, that we believe are most important for our clients. Unless changed by Congress, the current $12.06 million (for 2022, but estimated to increase to $12.92 in 2023 based upon the August 2022 Consumer Price Index) federal exemption from estate and generation skipping taxes is scheduled to be reduced to about $6 million on January 1, 2026. Accordingly, planning should be considered to fully utilize the existing $12.06 million (for 2022) exemption. For those clients who have not made full use of their annual exclusion gifting for the year 2022, such clients should consider utilizing the $16,000 annual exclusion for tax free gifts less prior gifts (for 2022). As stated in this letter, above, the annual exclusion for tax free gifts is estimated to increase to up to $17,000 in 2023 based upon the August 2022 Consumer Price Index.
 Ariz. Rev. Stat. § 14-10505(E); Ark. Code. Ann. § 28-73-505(c)(1); 12 Del. C. § 3536(c)(4); Fla. Stat. § 736.0505(3); Ga. Code Ann. § 53-12-82(b); Ky. Rev. Stat. Ann. § 386B.5-020(8)(a); Md. Code Ann., Est. & Trusts § 14.5-1003(a)(2); Mich. Comp. Laws § 700.7506(4)(b); N.H. Rev. Stat. § 564-B:5-505A(e)(3)-(4); N.C. Gen. Stat. § 36C-5-505(c); Ohio Revised Code § 5805.06(B)(2)(b); Or. Rev. Stat. § 130.315(4); S.C. Code Ann. § 62-7-505(b)(2); Tenn. Code Ann. § 35-15-505(d); Tex. Prop. Code Ann. § 112.035(g); Va. Code Ann. § 64.2-747(B)(3); Wisc. Stat. Ann. § 701.0505(2)(e)1.a.; and Wyo. Stat. Ann. § 4-10-506(f).; See David G. Shaftel, Twelfth ACTEC Comparison of the Domestic Asset Protection Trust Statutes, updated through August 2022, available at https://www.actec.org/assets/1/6/Shaftel-Comparison-of-the-Domestic-Asset-Protection-Trust-Statutes.pdf?hssc=1.
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Disclaimer: This information has been prepared for educational purposes only and is not offered, nor should be construed, as legal advice. Use of this information without careful analysis and review by your attorney, CPA, and/or financial advisor may cause serious adverse consequences. We provide absolutely no warranty or representation of any kind, whether express or implied, concerning the appropriateness or legal sufficiency of this information as to any individual’s tax and related planning.