Presented by Alan J. Yanowitz, Billi M. Ellingson and Claire Langton-Yanowitz

1. 2011 – 2012 ESTATE
PLANNING UPDATE
Yanowitz & Associates, PLLC
www.yanowitzlaw.com
507-252-8997

2. Overview
 Inherited Retirement Plan Benefits –
Possible Minimum Distribution Rule
Changes
 Committee Update - Uniform Trust
Code in Minnesota
 Portability
 Proposals for Fiscal Year 2012
Federal Legislation
 Drafting for Qualified Small Business
and Farming Deduction
 Planning for Income Tax Basis Step
Up In The Bypass Trust

3. INHERITED PLAN
BENEFITS- ARE THE TAX
RULES ABOUT TO
CHANGE?

4. Inherited retirement plans –
minimum distributions
 Proposal by Sen. Max Baucus of the Senate
Finance Committee
 5 year rule is the general rule for all
distributions after death for all plans and all
IRA’s.
 Exceptions for the following beneficiaries:
spouse, disabled and “chronically ill
persons”, persons less than 10 years younger
than the deceased person, minor children of the
deceased plan participant.
 Effective date proposed: death’s occurring after
2012.

5. Inherited retirement plans –
minimum distributions
 Planning Considerations:
 Roth Conversions
 Funding of Bypass Trusts
 Conduit Trusts
 Accumulation Trusts
 Charitable Remainder Trusts

6. WILL THE UTC COME TO
MINNESOTA?

7. Uniform Trust Code
Committee
 Decanting
 Trust Protectors
 Required Notices to Beneficiaries
 Spendthrift Provisions
 HEMS powers
 Lapsed Crummey Powers
 Spousal Lifetime Access Trusts (SLAT Trusts)

8. PORTABILIT
Y

9. Portability: Requirements
 Surviving spouse can use deceased spouse’s
unused unified credit for gift and estate tax
purposes (NOT GST)
 deceased spousal unused exclusion amount
(DSUEA)
 1st Spouse dies in 2011 or later
 2nd Spouse dies before 2013
 Not allowed for noncitizen and nonresident
alien spouses.

10. Basic Example
 H dies in 2011 with a $3 million estate which
passes to his children
 W’s exclusion becomes $7 million
 $5 million from her own exemption
 $2 million from her husband’s unused unified
credit

11. Electing Portability
 Elected: file timely and complete Form 706
 Statute of Limitations
 Cannot increase tax due for predeceased spouse
 Service can review predeceased spouse’s return
anytime for purposes of determining DSUEA
 Electing out
 Following instructions on Form 706
 Do not file Form 706

12. Multiple Spouses
 Can only claim DSUEA of last deceased
spouse
 H1 and W married. H1 dies. H2 and W married.
H2 dies.
 W has DSUEA from H2 IF H2 made election.

13. Multiple Spouse: Divorce
 Divorce revives DSUEA of first deceased
spouse
 H1 and W married. H1 dies. H2 and W married.
H2 and W divorce. H2 dies.
 W has DSUEA from H1

14. Recapture with Reduced
Exemption?
 Exemption is $5M
 H1 dies with $2M estate
 W receives $3M in DSUEA
 Exemption is reduced to $1M
W dies
 Does W have exemption of $2M or $4M?
 $2M: Section 2010(c)(4)(A) limits DSUEA to the
basic exclusion amount

15. Recapture with Gifts?
 W gets $5M DSUEA from H1.
 W makes $10M in gifts
 W remarries H2
 H2 dies leaving W with $0 DESUEA
 W has no assets at death
 W’s taxable estate of $5M ($10M lifetime gifts -
$5M exemption)
 Result: will create estate tax that exceeds
decedent’s estate (who pays the tax?)

16. Advantages of Credit Shelter
Trusts
 Asset protection during surviving spouse’s life
 Can protect children’s inheritance
 Shelter appreciation and income from estate
tax, DSUEA not indexed for inflation
 Preservation of predeceased spouse’s
exemption if exemption is reduced
 Minnesota’s estate tax has no portability

17. Advantages of Credit Shelter
Trust
 Use of predeceased spouse’s GST Exemption
 Avoid filing estate tax return if estate is not so
large
 Portability lost if surviving spouse remarries
and outlives second spouse
 Less risk of audit at second death if trust is
funded with non-publicly traded assets that are
difficult to value
 Portability may sunset in 2013

18. Advantages of Portability
 Simplicity (no segregation of assets)
 Property depreciates after first spouse’s death
(like retirement assets)
 Second step-up in basis for appreciated
assets
 Acts as back up if couple fails to fully
implement asset retitling

19. Predictions
 No significant modifications of estate plans
currently needed
 Gift planning using DSUEA
 Could have direction in estate plans to file a Form
706
 Wealthy spouses should treat DSUEA like basic
exclusion and use as soon as possible so assets
begin appreciating outside of estate
 Premarital agreements
 Require surviving spouse’s estate to file an estate
tax return and elect portability.

20. FISCAL YEAR 2012
PROPOSALS

21. Administration’s Fiscal Year 2012
Budget Proposals
 Federal Exemptions:
 3.5Million Estate and GST Tax Exemptions
 45% top tax rate
 2013 proposal would limit gift tax exemption to
$1 Million
 Continuing Portability: potentially costing
$3.681 billion over the next 10 years

22. Administration’s Fiscal Year 2012
Budget Proposals
 Consistency in Value for Transfer Tax and
Income Tax Purposes:
 New subsections 1014(f)(1) & 1015(f)(1)
 New Section 6035 Basis Information Sheet
 Could add authorization for Treasury to issue
regulations requiring reporting basis even where
Forms 706 and 709 are not required
 Could raise $2.095 billion in revenue over 10
years

23. Administration’s Fiscal Year 2012
Budget Proposals
 Grantor Retained Annuity Trust regulations
 10 year minimum terms
 Remainder interest (the gift) must have value >
0
 Annuity amounts not to decrease in any year of
the annuity term
 Could raise $2.959 billion in revenue over 10
years

24. Administration’s Fiscal Year 2012
Budget Proposals
 Limiting GST dynasty trusts to 90 years tax
free
 The GST inclusion ratio is increased to 1 on the
90th anniversary of the date of the trust’s
creation
 Would impact trusts created after the date of
enactment plus the portion of pre-existing trusts
with contributions after the date of enactment

25. Administration’s Fiscal Year 2012
Budget Proposals
 Valuation Discount Modifications
 Attacking discounts primarily related to family
transactions, potentially including minority and
marketability discounts
 Could raise $18.166 billion in revenue over 10
years

26. Administration’s Fiscal Year 2013
Budget Proposal
 Grantor Trust Coordination of Income and
Transfer Tax Rules
To the extent that income tax rules treat a grantor as
the owner of the trust, the proposal:
1. Includes the assets of the trust in the gross
estate of the grantor for estate tax purposes;
2. Subjects distributions from the trust to gift tax
during the grantor’s life; and
3. Subjects remaining assets to gift tax during the
grantor’s life if the grantor ceases to be an
owner.

27. DRAFTING FOR THE NEW
MINNESOTA QUALIFIED
SMALL BUSINESS AND
FARMING DEDUCTION

28. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 Statutory Requirements – For A Deduction Of
Up To $4 Million
 Deathafter 6/30/2011
 Decedent must own “Qualified Property”:
 Qualified Small Business Property or
 Qualified Farm Property
 The Qualified Property must pass to a Qualified
Heir
 The statute does not address whether the ownership
interest by the deceased person or his/her family
members can be in a trust and if so, which
beneficiaries of the trust (current, future, contingent, all
of the above) must be qualified heirs.

29. Drafting for Qualified Small Business and
Farming Deduction – MS 291.03
 Definition of a Qualified Small Business
 Thevalue of the property was included in the
federal adjusted taxable estate.
 There is no minimum percentage of the estate that
must be comprised of the Qualified Small Business
(i.e. no 25% or 50% test as is the case for IRC Section
2032A)
 The reference to the adjusted taxable estate prevents
the deduction from applying in the case of property
qualifying for the estate tax marital deduction.

30. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 Definition of a Qualified Small Business
 The property consists of the assets of a trade or
business or shares of stock or other ownership
interests in a corporation or other entity engaged
in a trade or business.
 There is no requirement that the qualified small
business property be real estate.
Equipment, inventory and other personal property
would appear to qualify.
 There is no requirement that the qualified small
business be located in Minnesota.

31. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 Definition of a Qualified Small Business
 The decedent or the decedent's spouse must
have materially participated in the trade or
business within the meaning of section 469 of the
Internal Revenue Code during the taxable year
that ended before the date of the decedent's
death.
 See Treasury Regulation 1.469-5T. Material
participation requires satisfaction of one of 7 tests.
 The test which is most likely to apply requires the
decedent or spouse to have participated in the activity
for more than 500 hours during the taxable year.

32. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 This is a stricter test than the material
participation test under IRC Section
2032A, which adopts the IRC Section 1402
standard for determining if an activity is
sufficiently active to be subject to tax as net
earnings for self-employment.
 There is no provision which permits the
satisfaction of the material participation
requirement for a retired or disabled individual.

33. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 Shares of stock in a corporation or an ownership interest in
another type of entity do not qualify under this subdivision if
the shares or ownership interests are traded on a public stock
exchange at any time during the three-year period ending on
the decedent's date of death.
 The gross annual sales of the trade or business were
$10,000,000 or less for the last taxable year that ended
before the date of the death of the decedent.
 The property does not consist of cash or cash equivalents.
For property consisting of shares of stock or other ownership
interests in an entity, the amount of cash or cash equivalents
held by the corporation or other entity must be deducted from
the value of the property qualifying under this subdivision in
proportion to the decedent's share of ownership of the entity
on the date of death.

34. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 The decedent continuously owned the property for the
three-year period ending on the date of death of the
decedent.
 A family member “continuously uses” the property in
the operation of the trade or business for three years
following the date of death of the decedent.
 What is the standard for the measurement of continuous
use?
 Unlike IRC Section 2032A, this seems to require that the
family member who inherits the property must be the same
family member who continuously uses it.
 The estate and the qualified heir elect to treat the
property as qualified small business property and
agree, in the form prescribed by the Commissioner, to
pay the recapture tax under subdivision 11, if
applicable.

35. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 The value of the property was included in the federal adjusted
taxable estate.
 The property consists of:
 consists of a farm meeting the requirements of section 500.24.
Note: this is the corporate farming statute which in turn regulates
the ownership of trusts owning farm land. The statute excludes
timber and poultry operations, and by ruling, the commissioner
has exclude land in the CRP program,
 was classified for property tax purposes as the homestead of the
decedent or the decedent's spouse or both under section
273.124, and
 was classified as class 2a property under section
273.13, subdivision 23 [relating to vacant contiguous land].
 The definition requires that the qualified property must consist of
agricultural land, the farm home and farm buildings.
Grain, livestock and equipment and other farm related personal
property do not qualify.

36. Drafting for Qualified Small Business
and Farming Deduction – MS 291.03
 The decedent continuously owned the property for
the three-year period ending on the date of death
of the decedent.
 There does not appear to be any material participation
requirement during the period before the decedent’s
death.
 A family member continuously uses the property in the
operation of the trade or business for three years
following the date of death of the decedent.
 The estate and the qualified heir elect to treat the
property as qualified farm property and agree, in a
form prescribed by the commissioner, to pay the
recapture tax under subdivision 11, if applicable.

37. Recapture Tax
 The amount of the additional tax equals the
amount of the exclusion claimed by the estate
under subdivision 8, paragraph (d), multiplied
by 16 percent.
 The additional tax under this subdivision is due
on the day which is six months after the date
of the disposition or cessation of the qualifying
use.

38. Recapture Tax
 If, within three years after the decedent's death
and before the death of the qualified heir, the
qualified heir disposes of any interest in the
qualified property, other than by a disposition
to a family member, or a family member
ceases to use the qualified property which was
acquired or passed from the decedent, an
additional estate tax is imposed on the
property.

39. Drafting Considerations With Respect To
The Qualified Interest Deduction
 In the case of married clients, consider potential
decrease of Federal exemption to $1 Million on
1/1/2013.
 Directing qualified interest to a share that does not qualify
for the marital deduction may trigger an unexpected federal
estate tax on the first spouse’s death. A gift to the marital
share does not qualify for the qualified interest deduction.
 Note: if IRC Section 2032A planning is being considered for a
married couple, a lead pecuniary marital formula is often
selected under which the Section 2032A property is often
passed under the marital share so that the valuation reduction
may be achieved in both spouse’s estates.
 A formula gift could be employed which requires that the
transfer occur only to the extent that no federal estate tax is
triggered.

40. Drafting Considerations With Respect To
The Qualified Interest Deduction
 Review the tax payment provision.
Generally, the tax, including the recapture
tax, should be apportioned to the qualified
heirs receiving the qualified property.
 Consider alternatives to trust ownership by the
property owner and the qualified heir until
further guidance is received. To avoid
probate, consider the use of TOD deeds for
real estate, and TOD certification for
partnership interests, LLC interests and
corporate shares.

41. Drafting Considerations With Respect To
The Qualified Interest Deduction
 Consider requiring each heir who receives an
interest in the qualified property, other than a
surviving spouse, upon the request of the
personal representative, to:
 sign the election and recapture agreement
(including any protective elections) before the due
date of the return, as a condition to receiving their
inheritance of the qualified property, and
 such signing should also be required with respect
to any further matters required to perfect the
election.

42. Drafting Considerations With Respect To
The Qualified Interest Deduction
 If the qualified property will be transferred into
a trust, consider a provision which requires the
personal representative and trustee to
designate a qualified heir to manage such
property to secure qualification for the
deduction. The fiduciary should be exonerated
from liability for such delegation.
 Permit an independent trustee or trust
protector to amend the trust to the extent
necessary to permit qualification for the
deduction.

43. WAIT & SEE PLANNING –
ELECTING BASIS STEP
UP IN THE BYPASS
TRUST

44. Planning for Income Tax Basis
Step Up In Bypass Trust
 Income tax basis step up at death under IRC
Section 1014.
 Directing the independent trustee to consider
IRC Section 1014.
 Creation and elimination of general powers by
independent trustees.
 Problems with formula general powers.

45. Planning for Income Tax Basis
Step Up In Bypass Trust
 Solution: The Delaware Tax Trap
 Section 2041(a)(3) provides that an exercise by a
beneficiary of a limited power of appointment will
be taxed as if it were a general power of
appointment if the exercise of the power is to a
further trust which “postpone(s) the vesting of any
… interest in such property, or suspends the
absolute ownership or power of alienation of such
property, for a period ascertainable without regard
to the date of the creation of the first power.”

46. Planning for Income Tax Basis
Step Up In The Bypass Trust
 Technique to exercise a power of appointment
which transfers property in further trust in a
manner which postpones the vesting of an
interest in trust:
 Problem: the law of most states – including the
Minnesota version of the Uniform Statutory Rule
Against Perpetuities (USRAP) – generally
prohibits an exercise in further trust with a new
measuring period.
 Solution – Minnesota and all other states with
rules against perpetuities permit a transfer in a
further trust in which the beneficiary of the
appointed trust has a presently exercisable