Wisconsin Estate Planning and Tax Law Blog

Wisconsin Legislature Acts to Limit Estate Tax Ambiguity

In what can best be described as a perfect example of swiftness and procrastination, both house of the Wisconsin State Legislature passed SB 670 on the last day of their 2009-10 regular session.  I mention the interesting dichotomy between swiftness and procrastination because the legislature really did work quickly at the end.  The bill was introduced on April 7, 2010 and was passed just over two weeks later on April 22, 2010.  However, that is still nearly four months after the ambiguity and uncertainty regarding the federal estate tax became a reality.  In the end I am very happy that the Wisconsin legislatures turned their attention to this issue before their session ended. 

Tom Solberg of the State Bar of Wisconsin has written an article on the topic titled, Legislature addresses ambiguity caused by one-year repeal of federal estate taxes.  Some of the highlights of SB 670 from Mr. Solberg's article are as follows:

1. The bill clarifies formula clauses in the will or trust of an individual who dies in 2010 if that will or trust references the federal estate tax and or the generation-skipping transfer tax.  If a 2010 decendent's will or trust includes such a formula clause it will be administered in accordance to the federal tax law in effect on December 31, 2009
2. An exception to the above-described rule treats the applicable exclusion amount as being unlimited if all of the following apply:
3. • Decedent leaves a surviving spouse;
   • Decedent has then living issue who are also the issue of the surviving spouse; and
   • Decedent's surviving spouse is either a current income beneficiary of each trust funded by the formula clause OR surviving spouse is the sole beneficiary of any property subject to disposition by the formula that does not pass in trust.
4. The bill also provides a number of interested persons, including the personal representative, trustee, beneficiary of the decedent's trust or will, or the surviving spouse, with the opportunity to petition the court seeking the apply the formula in a manner different from points 1 and 2 above.

As of the writing of this post I have not been able to determine if the Governor has signed the bill.  I have not heard or read anything that would indicate the Governor has any intention of vetoing the bill, so I would anticipate that we will see confirmation of his signing in the near future.  I will provide a short update via this blog when I can confirm. 

Federal Estate Tax in 2010

I intentionally waited until after President Obama's State of the Union Address to post my commentary of current state of the federal estate tax because a part of me was hoping that either Congress or the President would have clarified the situation by now.  Unfortunately for me, my fellow estate planning attorneys, and everyone affected or potentially affected by the estate tax, things are no clearer today than they were on January 1, 2010. 

The reality is this:  At the present time there is no federal estate tax for deaths occurring between January 1, 2010 and December 31, 2010.  This estate tax "repeal" is part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") (also affectionately/unofficially known as the "Bush Tax Cuts."  As I have discussed previously on this blog the EGTRAA is set to sunset (i.e. expire) on January 1, 2011, roughly 10 years after the it was signed into law.  I will not go into exhaustive detail as to why the sunset provision was included in the bill, but I will say that it was added to the bill as an end run around the Byrd Rule (a Senate rule), which allows Senators to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten-year term. 

On the surface the fact that we have reached 2010 with EGTRRA still in full-force seems like a good thing for individuals with large estates.  In fact it may well play out to be a good thing depending on Congress's actions this year.  However, therein lies the problem for a couple of reasons.  One, since Congress has not acted we are in an unenviable position of not having anything resembling clarity in regards to the current, let alone, the future federal estate tax system.  Given this uncertainty, it is extremely difficult to advise clients on matters related to the estate tax so it is difficult to be proactive in the estate planning realm at the moment.  Second, there is a thought shared by many commentators that Congress may look to make any changes to the federal estate tax system retroactive to January 1, 2010.  This makes it difficult to properly administer estates for individuals that die after January 1, 2010 and the date the any new estate tax law is passed.  Therefore, even reactionary planning and tax compliance are complicated by the uncertainty in the estate tax arena.

It does not give me great joy to deliver this state of the federal estate tax system to this blog's readers or to my clients.  Unfortunately, it is the reality we find ourselves in for the foreseeable future.  We simply do not know when or if Congress will revisit the federal estate tax issue this year.  In the event that they do not act the entirety of EGTRRA will expire, which will mean the pre-2001 federal estate tax system will return in full force.  That means the estate tax exemption returns to $1 million per person, the estate tax rate will be 55%, step-up basis returns after a one year hiatus, and the federal estate tax credit for state death taxes paid returns.  The return of that last item will in turn reignite numerous state estate tax systems that have been dormant since the federal estate tax credit of state death taxes was transitioned to a deduction.  Wisconsin is on such "pick-up" estate tax states that will go from having no estate tax on December 31, 2010 to having an estate tax on January 1, 2011.

I will do my best to monitor the situation and I will pass on any commentary or thoughts that I come across on the federal estate tax matter as we move forward.  We have less than 11 months remaining in 2010 so presumably the window of opportunity is closing quickly.  However, Washington had almost 9 years to plan for this and yet here we are, so I would not recommend holding one's breath. 

   

Two New Estate Tax Bills Introduced

The week before Thanksgiving 2009 was a busy one for some legislators with an eye on our country's estate tax system.  Through November 20, 2009 the tally of estate tax related bills has reached 20, including the two newest bills discussed below.  The eleventh month does not translate into the eleventh hour, but we are quickly approaching what we would naturally think is the last possible time to act since the estate tax as we know it is set to change dramatically on January 1, 2010.  I do not believe that the December 31, 2009 "deadline" is as much of a call to action as I once did.  In fact, it would not surprise me to see little or no action by Congress prior to the end of 2009.  If that is the case, I would not be surprised to see Congress address the estate tax issue with retroactive legislation.  I have hoped for years that our lawmakers would take a more proactive approach, but I have grown less and less confident as each month and year has passed.

With that, let's turn our attention to the latest round of entrants (bills) in the estate tax lottery.  The first bill, S. 2784, A bill to amend the Internal Revenue Code of 1986 to permanently extend the estate tax as in effect in 2009, and for other purposes, was introduced on November 17, 2009 by Sen. Thomas R. Carper (D-DE) and Sen. George V. Voinovich (R-OH).  The highlights are as follows:

• Making the $3.5 million estate tax exemption permanent and indexing it for inflation starting in 2011;
• Tax rate of 45%;
• Unification of the gift and estate tax exemptions; and
• Portability of the exemption between spouses.

Late last week Rep. Earl Pomeroy (D-ND) introduced his second estate tax related bill this year.  The most recent, H.R. 4154, Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, was introduced on November 19, 2009.  Rep. Pomeroy's earlier bill, H.R. 436, Certain Estate Tax Relief Act of 2009, was introduced in January and has received a fair amount of attention, mostly attributable to the restrictions it places on valuation discounts.  The highlights of H.R. 4154 are as follows:

• Repeal of EGTRRA (a/k/a the 2001 Bush tax cuts)
• Making the $3.5 million estate tax exemption permanent;
• Freezing gift tax and estate tax rates at 45%
• Repeal of carryover basis rules

This is admittedly a very brief summary of the two estate tax related bills.  As always there is much more than meets the eye with new legislation.  What I take from last week's activity is that at least a few lawmakers have this issue on their radar as we near the end of November.  With the amount of time and attention that the health care bill is garnering it would be a major surprise to see any substantive movement on any estate tax bill for the foreseeable future. 

FDIC: Deposit Insurance Regulations; Revocable Trust Accounts

The FDIC recently came out with an interim final regulation regarding deposit insurance for revocable trust accounts. The FDIC summarized the interim rule as follows:

SUMMARY: The FDIC is adopting an interim rule to simplify and modernize its deposit insurance rules for revocable trust accounts. The FDIC's main goal in implementing these revisions is to make the rules easier to understand and apply, without decreasing coverage currently available for revocable trust account owners. The FDIC believes that the interim rule will result in faster deposit insurance determinations after depository institution closings and will help improve public confidence in the banking system. The interim rule eliminates the concept of qualifying beneficiaries. Also, for account owners with revocable trust accounts totaling no more than $500,000, coverage will be determined without regard to the beneficial interest of each beneficiary in the trust.

Under the new rules, a trust account owner with up to five different beneficiaries named in all his or her revocable trust accounts at one FDIC-insured institution will be insured up to $100,000 per beneficiary. Revocable trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) will be insured for the greater of either: $500,000 or the aggregate amount of all the beneficiaries' interests in the trust(s), limited to $100,000 per beneficiary.

Federal Register: September 30, 2008 (Volume 73, Number 190).

Attorney Neil Hendershot at the PA Elder, Estate & Fiduciary Law Blog provided a great post on the interim rule titled, FDIC's Interim Rule for Living Trust Deposits.  Instead of reinventing the wheel I'm happy to defer to Attorney Hendershot on this topic.  As you will see from Attorney Hendershot's post, this is not the first time that FDIC has attempted to clarify deposit insurance in regards to revocable trusts.

One item of note given the recent passage of the $700 billion dollar bailout plan is that the $100,000 per depositor limit was temporarily raised to $250,000 through December 31, 2009.  Since the interim rule came out a week prior to the temporary increase it does not expressly state whether it is applicable to revocable trust.  It is logical that the temporary $250,000 per depositor increase also applies to each beneficiary of a revocable trust.  I will continue to research that aspect and report back any findings.