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Several update matters of significant interest:

1. FET and GST and GIft Tax--imdexed for 2012--now $5,120,000. $5,000,000 for 2011. This is important, especially for those how have the wherewithal to use, and want to use, the huge available exemption from these 3 taxes. All were indexed for 2012 and we had inflation, so. . .

2. New PA Inheritance Tax Policy Effective for Inheritance Tax Returns filed after July 1, 2012, the Bureau has announced a new policy attempting to force everyone to file a future interest compromise on sole use trusts for which a 9113A election has not been made. I have attached a copy of this policy, which in my opinion is overreaching and quite possibly ultra vires. The concern under the Uniform Trust Act is that a sole use trust might be modified during the surviving spouse's lifetime so as to give part or all of the sole use trust to other taxable beneficiaries under section 7710. While it is true that this might occur, in my judgment it is simply a gift by the surviving spouse to whomever actually receives the proceeds early, and should be treated as a gift such that if the spouse dies within one year, it should be brought back into the estate. Apart from that, it really shouldn't be a problem, but they think that it is. In order to force compliance to file a future interest compromise, they threaten a tax on the entire trust at the highest possible rate, and purport to require the executor to take full personal responsibility for the payment of any tax if the sole use trust is terminated later. Never mind, I guess, the fact that the executor and the trustee may be different people and the executor may have no knowledge of whether the trust is or is not later terminated privately. Hopefully this will be changed before it actually goes into effect, as it will be a real problem. Then too we will want to place a tickler entry in our estate files to make sure that if we have that situation next year, we file the inheritance tax return before July 1 if we are able to do so to avoid the problem.

3. Federal Estate Tax Alternate Values for Retirement Accounts. For federal estate tax purposes, where there is federal estate tax and using an alternate value reduces that tax, we have the option of calculating the federal state based on the alternate value of the federal estate. The alternate value is that value which is established by sale or other disposition, including a distribution to a beneficiary within a six-month period following decedents death, or if no disposition within the six month period, the value on the "alternate value date" 6 months from the date of death. (As an aside, where you have an estate large enough to generate federal estate tax, proper management of the alternate value, particularly by distribution can be extremely helpful in minimizing federal estate tax and capital gains tax. During the six-month period, the risk and return on investments is assymetric-- gains in value during that period would be taxed as long-term capital gain, while losses in value can result in reduced federal estate taxes if properly managed. Since the federal estate tax is 35% and the capital gains tax long-term capital gains is 15%, it is marginally advantageous to retain long-term holdings during this period, provided that it is always prudent to raise taxes sufficient to pay taxes and expenses, and to do so promptly. There is a lot more to this story--I just mention it because in the recent stock market, this has been very helpful. I have several estates where we have saved over a half Million $ in tax by proper, and lucky, timing. If you distribute securities, you can lock in the alternate value, without selling the security and realizing the actual loss, and still have the security as a long term capital asset.). The manner in which this applies to retirement accounts has always been a somewhat open question. Do you treat each individual asset in the retirement accounts separately or as a retirement account as a whole the way the alternate values established. Proposed Regulations have now been issued that answer those questions, and do so in a logical fashion. It is treated on an asset by asset basis, like a brokerage account, but a distribution from the IRS to the estate is treated as a disposition. You can find these Proposed Regulations at Prop. Treas. Reg. § 20.2032-1(c); REG-112196-07, 76 Federal Register 71491 (Nov. 18, 2011).

4. Remove and replace grantor trust powers for irrevocable life insurance trusts. Courtesy of the ACTEC listserv, note that the IRS has released revenue Ruling 2011-28, which states that generally that the power to replace an asset with another of equivalent value where the asset is a life insurance policy will not cause the life insurance policy proceeds to be includible under section 2042. For various reasons, it is important for an ILIT to be a grantor trust, and most people now use more than one "grantor trust power" to make this happen. If you use this one, and follow the instructions, you should be all right. While this is all we have to work with, note that if you use this power with an "income" trust, rather than a total return trust (discretionary or unitrust), you may have a problem. Of course in general, as most of you know, I think that a discretionary trust or a total return unitrust should be our default drafting method not income with discretionary principal. This is one more instance where that is so.

"A grantor's retention of the power, exercisable in a nonfiduciary capacity, to acquire an insurance policy held in trust by substituting other assets of equivalent value will not, by itself, cause the value of the insurance policy to be includible in the grantor's gross estate under § 2042, provided the trustee has a fiduciary obligation (under local law or the trust instrument) to ensure the grantor's compliance with the terms of this power by satisfying itself that the properties acquired and substituted by the grantor are in fact of equivalent value, and further provided that the substitution power cannot be exercised in a manner that can shift benefits among the trust beneficiaries. A substitution power cannot be exercised in a manner that can shift benefits if: (a) the trustee has both the power (under local law or the trust instrument) to reinvest the trust corpus and a duty of impartiality with respect to the trust beneficiaries; or (b) the nature of the trust's investments or the level of income produced by any or all of the trust's investments does not impact the respective interests of the beneficiaries, such as when the trust is administered as a unitrust (under local law or the trust instrument) or when distributions from the trust are limited to discretionary distributions of principal and income."

Pennsylvania's Prudent Investor Act does not contain the explicit duty of impartiality contained in the Uniform Act, but I would argue that there is still such a duty in PA. But, is the duty really equal for the current and remainder beneficiaries, or is the current beneficiary's need to be taken into account first. It is well to answer that question in our documents explicitly. If not, and you are counting on this grantor trust power, you better use discretionary or unitrust distribution provisions.

That is more than enough for you to chew on this fine December day!

I have attached two brochures one for attorneys from the Bar Association, and one from the Medical Society for health care providers.

PA Sole Use Trust Policy

Please read the important information relating to tax advice at the bottom of this web page.

Best regards,
Bob Wolf, Moderator

“Any tax advice in the foregoing message was not intended or written to be used, and cannot be used by any person for the purpose of avoiding tax penalties that may be imposed with respect to the matters addressed. Some of that advice may have been written to support the promotion or marketing of the transactions or matters addressed within the meaning of IRS Circular 230, in which case, be advised that the advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and you should seek advice based on your particular circumstances from an independent tax advisor.”