News & Announcements 

Dear Clients and Friends, 
  

Client Testimonial      

On December 17, 2010, President Obama signed a new act into law: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  The estate tax exemption for 2011 is now $5 million per person.  This exemption means that a person can transfer $5 million in assets at his or her death without estate tax consequences.*  The new Act also includes a provision offering something new in the world of estate planning: portability of the federal estate tax exemption between spouses for 2011 and 2012.  But what exactly does portability of the exemption mean?  To answer this question, it is helpful to understand how estates were taxed under the former law.

Begin with the understanding that transfers between spouses are not taxable; this is called the unlimited marital deduction.  Prior to the new Act, one of the main goals of estate tax planning was to allow each spouse's estate the opportunity to use his or her estate tax exemption amount.  Without planning, the assets of the first spouse to die would pass tax-free to the second spouse because of the unlimited marital deduction.  When the second spouse died, however, the second spouse's estate would include his or her assets and the remaining assets of the first spouse to die.  To allow both spouses' estates to take advantage of the estate tax exemption, estate planners often used a marital and family trust designed to take advantage of the exemption:  upon the death of the first spouse to die, a family trust would be established and would provide for the surviving spouse's needs during his or her lifetime, but the ultimate beneficiaries would be other people (usually the couple's children).  Since the ultimate beneficiary was not the spouse, but other people, the assets transferred to the trust would be part of the taxable estate of the first spouse to die.  The amount transferred to the family trust was usually equal to the estate tax exemption amount.  Remaining assets were transferred to a marital trust, again for the benefit of the surviving spouse.  This trust, however, named the surviving spouse as the ultimate beneficiary and because it was considered a transfer between spouses, there was no estate tax liability when the first spouse died because of the unlimited marital deduction.

Under the new portability rules, even without a trust, if the first spouse to die does not use his or her entire estate tax exemption, the surviving spouse can use any remainder in addition to his or her own exemption amount.  For example, assume John and Ann are married and have a combined estate worth $6 million.  John dies first without a marital trust and leaves everything to Ann in his will.  Since he leaves everything to Ann, his spouse, there are no estate tax consequences when John dies because of the unlimited marital deduction.  Ann then dies and leaves her estate, worth $6 million, to her children.  Ann has a $5 million exemption herself and can use John's unused exemption.  The result is neither John nor Ann have a taxable estate. 

So are trusts no longer necessary?  While portability makes it more convenient for married couples to fully take advantage of the estate tax exemption, there are still some compelling reasons to use trusts:

·         The portability of the estate tax exemption applies to people passing away in 2011 and 2012.  We do not know if the portability of the estate tax exemption will continue after 2012.

·         In the case of remarriage later in life, trusts can be useful in providing for a second spouse during his or her lifetime, while ensuring that remaining assets will pass to the children of the grantor (maker) of the trust and not the spouse's children.

·         Trusts are also helpful in providing for the health, education, maintenance, and support of children and young adults (or anyone who doesn't manage money well) in lieu of giving a large amount of assets outright.

·         Trusts may help protect funds from a beneficiary's creditors. 

Some trust models are outdated and may not be as flexible as possible to ensure that a client's wishes are carried out while allowing for the uncertain future of the federal estate tax.  Now is a good time to have an "estate planning checkup" to ensure that your estate planning will continue to function as designed and to review any changes in your life that may affect your estate planning.

* Large gifts (currently over $13,000 per year, per recipient) given during the person's lifetime may reduce the estate tax exemption.

Bryan C. Benbow       

Bryan joined the firm in October 2010 as an associate working in all areas of the firm with an emphasis on probate administration and estate planning.  He was admitted to practice law in Colorado in October, 2005.  Prior to joining the firm, he was employed as an associate attorney at Sagrillo Kohnlein, LLC, and as staff attorney at Protocols, a Medicare Set-Aside consulting firm.   Bryan received his B.A. in English Literature and History from the University of Denver in 1998.  He received his J.D., cum laude, from Thomas M. Cooley Law School in Lansing, Michigan in 2005 and an LLM in Taxation from Cooley in 2007.  As a law student, he was a Senior Ethics Fellow with the Center for Ethics and Responsibility at Cooley, Editor-in-Chief of the Cooley Journal of Ethics and Responsibility, and received Certificates of Merit for highest grade in Legal Research and Writing, Scholarly Writing, and Business Organizations.   

Prior to entering law school, Bryan worked with the Pikes Peak United Way and the American Red Cross, Pikes Peak Chapter.  He is a Colorado native and enjoys spending time with his family, studying the history of the American West, and exploring Colorado. 

Vicki McKay

Vicki McKay began working at the Law Offices of Bradley J. Frigon in October of 2010 as a legal secretary. Vicki recently moved to Colorado from northern Idaho where she had been a legal secretary for over 15 years. Vicki was raised in Las Alamos, NM, and went to college in Lubbock, TX, and Las Cruces, NM. She is married with two children. Vicki enjoys reading, gardening, cross-stitch, bike riding, hiking, and baking.

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