Exemption and Rates. President Obama's proposed budget for 2013 (issued on February 13, 2012) would permanently restore the estate tax rates that were in effect in 2009 - a $3.5 million exemption with a top tax rate of 45%. Perhaps more importantly, the gift tax exemption would be reduced to $1 million, bringing an end to the unification of the gift and estate tax exemptions. These proposed changes add further urgency to high net worth individuals to make gifts in 2012 before the exemption decreases.

Portability. Under the Tax Relief Act of 2010, a deceased spouse's unused estate tax exemption can be transferred to the surviving spouse. This is commonly referred to as "portability". The provision allowing portability is in effect through 2012. The President proposes to make portability permanent.

Grantor Trusts. In a major rewrite of the estate tax provisions, any individual who is taxed as the owner of a trust for income tax purposes will have to include the trust assets in his/her gross estate for federal estate tax purposes. And, distributions from such grantor trusts to beneficiaries during the grantor's lifetime would be subject to gift tax. These rules would apply to trusts created on or after the enactment date and to any contributions made after the enactment date to grandfathered trusts.

Although the proposal appears to be targeting installment sales to intentionally-defective grantor trusts, the implications are far greater. For example, most irrevocable life insurance trusts (ILITs) are grantor trusts under IRC Section 677(a)(3) (because trust income can be used to pay premiums on a policy insuring the life of the grantor or the grantor's spouse); or under IRC Section 677(a)(1) and (2) (because trust income may be distributed to the grantor's spouse without the consent of an adverse party). Thus, if enacted, the proposal could result in the proceeds in an ILIT being subject to estate taxes.

Dynasty Trusts. Dynasty trusts are also under attack. Under the President's proposal, the generation-skipping tax exemption would be limited to 90 years. Thus, distributions from trusts established in states that allow trusts to continue in perpetuity (like Michigan) or for a very long time (like Florida) would be subject to generation-skipping taxes after 90 years. Trusts created before the enactment date of this proposal would be grandfathered.

Short-Term GRATs. Two-year, zeroed-out grantor retained annuity trusts (GRATs) have become one of the most popular wealth transfer planning techniques in recent years due to the low Section 7520 hurdle rate (1.4% for March 2012). The President's proposal would do away with zeroed-out GRATs by requiring a GRAT to have a minimum term of ten (10) years. This change would greatly accentuate the mortality risk of using a GRAT.

Valuation Discounts. Valuation discounts obtained through the use of family limited partnerships and family limited liability companies allow donors to "leverage" their $13,000 annual gift tax exclusion and $5.12 million gift tax exemption. Although lacking in details, the President's proposal would scale back the use of such discounts retroactively to October 8, 1990 (the effective date of IRC Section 2704).

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

Are inherited IRAs protected in bankruptcy courts, yes or no? In Michigan, the bankruptcy court for the Eastern District said "yes" back in August 2011 (In re Kalso). But it also recently said "no" in another case. The explanation? Different judge. And, in December last year, that "no" became a "yes" on appeal to the District Court (In re Stephenson).

Back in May last year, the bankruptcy court for the Western District of Wisconsin said "no." (In re
Clark). But this past January, that "no" became a "yes" on appeal to the District Court. While this "nets-out" to two more inherited IRA wins, the Wisconsin District Court may have sown the seeds for future losses with this comment:

"As a policy matter, there may be reason to question whether inherited funds should be exempt from bankruptcy just because they were held by the decedent in the form of an IRA and not as stock or gold bullion. It seems incongruous to allow the exemption from bankruptcy of an IRA worth more than a quarter-million dollars while limiting the exemption for a motor vehicle to $3,450. This, however, is a question for Congress and not this court."

For the client who wants a "yes" for an heir no matter what the jurisdiction or court, naming a trust for the heir as the plan beneficiary is the best way to go.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

On October 20, 2009, the IRS promulgated final regulations for IRC Section 2053 in order to provide guidance in determining the deductible amount of a claim against a decedent's estate, especially with respect to contested or uncertain claims and expenses. These final regulations set forth, with certain exceptions, that the amount deductible for a Section 2053 claim (or expense) is limited to the amount actually paid in settlement or satisfaction of that claim or expense. If amounts are not paid or are not otherwise deductible by the time the Form 706 is filed, the regulations allow the personal representative to file a protective refund claim. Filing of this claim allows for a refund to be sought later if amounts are paid or become deductible after the expiration of the estate tax statute of limitations. Revenue Procedure 2011-48 provides details on how to file and administer protective refund claim.

Here are some of the highlights of Rev. Proc. 2011-48:

• The protective refund claim must be filed either 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of the two periods is longer. If no return was filed by the personal representative, the claim must be filed within 2 years from the time the tax was paid.



• The person filing the protective claim must have the legal authority to do so and must provide proof of that authority.



• For decedents dying between October 19, 2009 and January 1, 2012, the claim is filed using Form 843.



• For decedent's dying on or after January 1, 2012, the claim may be filed on Form 843, or on a Schedule PC filed with Form 706. The IRS has not yet provided Schedule PC.



• A separate protective claim must be filed for each claim or expense for which a deduction will, or may, be sought. If using Schedule PC, a separate Schedule should be used for each claim.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.