General Estate Planning FAQ

Will My Family Have to Pay Estate ("death") Taxes When I Pass Away?
Should I Include Funeral Instructions In My Will?
Where Should I Keep My Estate Planning Documents Once They Have Been Signed?
How Can I Find Out More About the Will to Live Health Care Power of Attorney?
What is a Health Care Power of Attorney?
What is a Financial Power of Attorney?
Who should be the beneficiary of my IRA?

What is a Spousal Elective Share?
How Do I Choose a Trustee for My Children’s Trust?
How can a person leave property to minor children?
What are some techniques that can be used to reduce or eliminate Tennessee Inheritance Taxes?
What do clients need to do now that the Act has passed?
Can I Find A Service That Is Cheaper Than Meeting with an Attorney To Prepare My Will and Power of Attorney?

Will My Family Have to Pay Estate ("death") Taxes When I Pass Away?

Many state and federal tax regulations impact estate planning, but a carefully crafted estate plan can reduce the tax burden on an estate and the survivors. Both state and federal rules and regulations are extremely complex and the advice of an estate planning attorney and tax professionals regarding tax savings is essential. A general understanding of estate taxes is necessary for any client with significant assets.

Tennessee Inheritance Taxes: Some states, such as Tennessee, have inheritance taxes that devisees to a will must pay; recipients under a will or trust also may face federal estate tax consequences. In Tennessee, inheritance taxes are imposed on decedents' estates that exceed the maximum single exemption. The current Tennessee inheritance tax exemption is $1 million. Any inheritance amounts over the aforementioned exemption are taxed at the following rates:

§ The first $40,000 is taxed at 5.5%

§ The next $40,000 - $240,000 is taxed at 6.5%

§ The next $240,000 - $440,000 is taxed at 7.5%

§ $440,000 and over is taxed at 9.5%

Potential Tennessee Inheritance Tax

Taxable Estate	Inheritance Tax Due
$1,000,000	0
$1,250,000	$15,950
$1,500,000	$35,900
$2,000,000	$83,400
$2,500,000	$130,900
$3,000,000	$178,400
$3,500,000	$225,900
$4,000,000	$273,400
$4,500,000	$320,900
$5,000,000	$368,400
$5,500,000	$415,900
$6,000,000	$463,400
$6,500,000	$510,900
$7,000,000	$558,400
$7,500,000	$605,900
$8,000,000	$653,400

Federal Estate "Death" Taxes: In general, when an individual passes away, the transfer of assets to his or her beneficiaries will be taxed. This is called the estate tax. Recent tax law changes which are favorable to tax payers will result in even fewer Americans being subject to this tax. In 2009, each person was given an estate tax exemption of $3.5M with any amounts above the exemption subject to a 45% tax. In 2010 the estate tax was repealed, however, the new tax laws will apply 2011 estate tax provisions to deaths in 2010 retroacvely. On December 17, 2010, the President signed the "Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010" which will be referred to herein as the "Act". The Act allows each individual to transfer up to $5M at death estate tax free, or $10M per couple. The tax rate for estates above $10M is a flat rate of 35%. Furthermore, the Act allows a surviving spouse to add to their deceased spouses exemption amount to their own exemption (which is called "portability"). Portability, in most cases, eliminates the need for the complex estate planning designed to bypass federal estate taxes (such as credit shelter "bypass" trusts) which was commonplace prior to the new law (Note: Credit Shelter Trust planning is still widely utilized to avoid TN Inheritance Tax which is imposed on estates over $1M). In order to utilize both spouses exemptions under the old law, couples would create provisions in their Wills or Revocable Trusts which would allow for the creation of a credit shelter "bypass" trust upon the death of the first spouse. The trust was typically funded up to the federal exemption amount. The surviving spouse would receive income from the trust during their lifetime and upon their death, the funds in the trust would pass to the heirs free of estate tax and the second to die spouse's exemption amount would also pass to the heirs free of estate tax. However, the exemptions were not portable, meaning that the first exemption was lost without proper estate planning. The new law virtually eliminates the need for such trusts for federal estate tax purposes. The additional federal estate tax deductions below also apply under the new law:

- The Marital Deduction - You can leave an unlimited amount to a surviving spouse resulting in a 100% deduction (and no estate tax due) for those assets left to a spouse.
- The Charitable Deduction - You can leave an unlimited amount to a tax exempt charity resulting in a 100% deduction (and no estate tax due) for those assets left to charity.
- The Applicable Exclusion Amount - As mentioned above, you can also leave assets to any other person or entity without paying estate tax so long as the total amount of all non-spouse, non-charity bequests are less than the applicable exclusion amount available in the year of your death. Under current law, the amount is $5 million (2010-2012). A table showing the applicable exclusion amounts can be found below.

Applicable Federal and State Exclusions

Transfer Year	Federal Estate Tax Exclusion	Federal Gift Tax Exclusion	Tennessee Inheritance Tax Exemption
2009	$3,500,000	$1,000,000	$1,000,000
2010	$5,000,000	$1,000,000	$1,000,000
2011	$5,000,000	$5,000,000	$1,000,000
2012	$5,000,000	$5,000,000	$1,000,000
2013	$1,000,000	$1,000,000	$1,000,000

Under the current law in 2011-2012, if your total taxable estate (including stocks, bonds, real estate, business interests, life insurance, personal property, retirement plans, etc.) exceeds the $5 million applicable exclusion equivalent, your estate will be subject to federal estate taxes at a rate of 35%. Furthermore, if your taxable estate exceeds the $1 million Tennessee Inheritance Tax Exemption, your estate will be subject to state inheritance taxes at a maximum rate of 9.5%. However, there are many planning strategies available to help you minimize your TN Inheritance Tax burden.

Key Points:

$5M per person total Gift and Estate Tax Exemption, or $10M per married couple.
The Act increases the lifetime Gift Tax Exclusion from $1M to $5M.
The Gift and Estate Exemptions are combined for a unified credit of $5M and the estate exemption is reduced by the amount of lifetime taxable gifts. In other words, if $1M was used to make lifetime gifts, then only $4M would be available under the estate tax exemption.
Portability Applies to the Gift and Estate Tax Exemption.
Portability is not automatic. The executor of the deceased spouse must file an estate tax return within 9 months of death to qualify.
The Act reinstates stepped up basis for assets passed to heirs. Therefore, for income tax purposes, the heirs cost basis of inherited property gets adjusted to the fair market value on the date of the owner's death (which limits capital gains taxes).
Unlimited Marital Deduction and Unlimited Charitable Deductions still apply.
The Act is set to expire Dec. 31, 2012, unless congress acts to extend it. Therefore, flexible estate planning is critical.
Less than 1% of Americans will pay any Federal Estate Taxes upon death.

TN Inheritance Tax Exemption Remains at $1,000,000 and TN gift taxes still apply.

Should I Include Funeral Instructions In My Will?

Funeral instructions and instructions for the disposition of remains should not be included in your will. Instead, a separate writing with such instructions should be created by you and your executor should be informed of its whereabouts.

Where Should I Keep My Estate Planning Documents Once They Have Been Signed?

The original will should be kept in a safe place so that it will not get lost or harmed by fire or weather, such as in a fireproof safe or a safe-deposit box. Additionally, the testator should leave readily available instructions to the executor regarding the whereabouts of the original will. For example, a notation can be placed on any copies of the will stating the location of the original will. The executor should also be fully informed (either in writing or orally) of the location of safe deposit boxes, the whereabouts of any keys to such safe deposit box, have access to such safe deposit boxes, and should be informed of any codes necessary to access a fireproof safe. Some Tennessee counties will allow you to record the Will in their probate records or Register of Deeds office for a small fee, however, you should contact your specific county to see if this option is available. Financial Power of Attorney documents should also be kept in a safe place such as a fireproof safe or a safe-deposit box. Furthermore, you should inform your attorney in fact(s) of their appointment. A copy of your Health Care Power of Attorney should typically be given to your physician.

How Can I Find Out More About the Will to Live Health Care Power of Attorney?

To learn more about the Will to Live, we would suggest the following websites:

http://www.nrlc.org/euthanasia/willtolive/index.html (National Right to Life Website)
http://www.all.org/article.php?id=10689 (American Life League- a Catholic pro-life organization)
http://www.all.org/article.php?id=10686 (American Life League)

http://www.family.org/socialissues/A000000371.cfm (Focus on the Family Ministry).

What is a Health Care Power of Attorney?

A Health Care Power of Attorney is a document which names someone to make health care decisions for you (your "health care agent") if you develop a condition that makes it impossible for you to speak for yourself (you become "incompetent"), and it makes clear (in the form of written instructions to your health care agent) what medical treatment you would want if you can no longer speak for yourself. Michael L. Smith, PLLC does not provide nor do we charge a fee for health care documents. With quality documents available online for free, which meet the statutory requirements of the Tennessee Code, we direct all clients to print and execute Health Care documents from one of two websites. The Tennessee Department of Health website which provides an Advance Health Care Directive is available at:
http://health.state.tn.us/AdvanceDirectives/index.htm

For clients who would prefer a Health Care Power of Attorney from a distinctly Pro Life perspective , we would suggest the National Right to Life's "Will to Live" available at:
http://www.nrlc.org/euthanasia/willtolive/index.html
Only one of the aforementioned Health Care Power of Attorney documents (either the Will to Live or Advanced Medical Directives provided by the Tennessee Department of Health) is necessary. Consult your physician if you have any questions about the medical terms used in the documents.
PLEASE BE ADVISED: Having health care directives is critically important to your estate plan and your life plan. Even if we are not preparing the documents, all clients should have these documents in place. Please be proactive about printing the form of your choice, completing the form, and signing the form in the presence of a notary public according to the specific directions. Please do not put this off for a later time. The best time to execute the appropriate health care directives is when you are updating or creating your overall estate plan.

What is a Financial Power of Attorney?

A financial durable power of attorney is a document which authorizes an "agent" or an "attorney- in- fact" to make financial decisions on your behalf, particularly when you are not able to do so yourself. A durable power of attorney can be effective upon execution or it can be a "springing" power of attorney to be triggered only in the event of the client’s incapacity. Creating a durable power of attorney for financial decisions avoids the possibility of the court system appointing a conservator to make decisions for you during incapacity. You and not the court system get to decide who will make important choices for you when you are not able to make them yourself. Every client should have a financial power of attorney prepared along with their Will.

Who should be the beneficiary of my IRA?

Tax deferred accounts such as IRA’s consist of money which has not been subject to federal income taxes. Therefore, when funds are distributed from the IRA to the participant or to the plan’s beneficiaries upon the participant’s death, federal income taxes will be assessed. A surviving spouse can roll over the IRA into their own IRA in order to defer the distribution income taxes and a non-spousal designated beneficiary can roll over the IRA into an Inherited IRA, thereby deferring the distribution income taxes. The period for deferral varies depending on the specific circumstances. Additionally, an IRA roll over must occur within 60 days of the participants death in order to meet the IRS guidelines. If the estate of the participant is the named beneficiary, income taxes will be due upon death. A trust may also be named beneficiary of the IRA and the trust can defer income taxes, however, very technical rules must be followed in order to do so. So, who should you name as beneficiary of your IRA? A spouse is typically the best choice with children being named as contingent beneficiaries. A charity would be a good choice if a spouse and/or children are not named. Your estate would be the next best choice. A trust would be the last option. IRA participants should consult with their financial advisor to make sure that their beneficiary designations on the plan reflect their wishes, and they should review the beneficiary designations regularly.

What is a Spousal Elective Share?

Under T.C.A. § 31-4-101(a)(1), a surviving spouse may elect against his or her share under the decedent's will, or against the intestate share if there is no will. If the surviving spouse elects to exercise this right, they will be entitled to an amount equal to the value of the decedent's net estate multiplied by a percentage which is based on the number of years of marriage. Therefore, a surviving spouse may demand a larger distribution of their deceased spouse's estate, even if the decedent wanted them to have a smaller share. The elective share percentage is determined as follows:

Number of Years Married	Elective Share %
less than 3 years	10% of net estate
3-6 years	20% of net estate
6-9 years	30% of net estate
9 years or more	40% of net estate

How Do I Choose a Trustee for My Children’s Trust?

The choice of a trustee is extremely important. The trustee owes beneficiaries a fiduciary duty to act in their best interests and usually receives compensation for trust management activities, so the grantor usually wants to make this decision personally. Many grantors choose family members or close friends due to personal confidence in those individuals, but others prefer professional trustee institutions (such as attorneys, trust companies, banks, or CPA’s) because of staff expertise. A grantor should consider the burden posed by the trust's administration, the compensation required by a trustee, and the particular needs of the trust. If a trustee is not specified in the trust document, then a court will appoint one, possibly choosing a trustee the grantor would not have chosen freely. Legally, it is not necessary to notify the trustee prior to creating a trust, but a trustee may decline his or her appointment. Therefore, the grantor should choose someone who is willing to take on the required responsibilities, and should inform them of their appointment. It is advisable to choose an alternate trustee in the event the original choice is unable or unwilling to accept the trust obligations when the trust commences.

How can a person leave property to minor children?

Generally, the law requires that adults manage children's inheritances until the children turn eighteen. If a testator wants to leave property to children, it makes sense to name an adult to manage that property. Otherwise, a court will name someone to safeguard the property, a procedure that may delay speedy transfer of assets. There are several ways a will can provide for property management while heirs are underage, including:

§ Trusts: A will can establish a trust to handle property left to children. A trustee is named to manage the property for the children's benefit, and distribute trust property according to the testator's instructions. A will can either set up an individual trust for each individual child, or a pot trust that covers multiple children. The trustee usually follows instructions to spend trust funds to meet children's needs until they come of age. When the child or youngest child covered by the trust reaches eighteen or another given age, the trust funds usually are distributed amongst the beneficiaries and the trust ends. A trust for minors can be very flexible. For example, the testator can specify that the children are to receive 1/3 of the trust principal at the ages of 21, 25, and 30. Or the trust may specify that all of a child's share of the trust principal be distributed to any child who is 18 years of age. Due to its flexibility, most clients prefer setting up a trust for minors as opposed to allowing transfers under the statutory guidelines of the Uniform Trust to Minors Act. For more information on adding a trust form minors clause to your Will, please review "How do I choose a trustee for my children's trust" below.

§ Uniform Transfers to Minors Act (UTMA) Custodians: The UTMA is a law that exists in almost every state, and gives a testator the ability to choose a custodian to manage property left to a child. If at the testator's death, the child is a minor, the custodian will manage the property until the child reaches the statutory age of twenty -one (21). At that age, the child receives whatever is left of the property outright. Unlike a trust, the testator cannot change the age at which the child receives this distribution.

§ Property Guardians: A will can name a property guardian for a child. At the testator's death, if the child is still underage, the probate court will appoint the chosen guardian to manage property for the child. At age 18, the child receives the property outright and without restrictions.

What are some techniques that can be used to reduce or eliminate Tennessee Inheritance Taxes?

Most clients will not be subject to federal estate taxes due to the increased applicable exclusion amount of $5 million per person. However, many clients' estates could be subject to Tennessee Inheritance taxes. Your taxable estate is probably more than you realize and your family may be faced with paying hefty inheritance taxes to the state of Tennessee (Remember- life insurance proceeds will be included in your taxable estate regardless of who the beneficiary is unless the policy is owned by an irrevocable trust). Below are a few of the techniques that can be used to reduce or eliminate your estates Tennessee tax burden.

Gifting: Clients may wish to keep their taxable estate below the $1 million threshold by taking full advantage of the gift tax exceptions, including 1) giving away portions of the estate in the form of gifts that are less than the applicable exclusion of $13,000 per individual 2) paying educational expenses for a family member or friend directly to the educational institution 3) giving a portion of the estate outright to a qualified charitable organization during the life of the donor, or 4) making a charitable contribution in their will.

Insurance: Assuming a husband and wife have a taxable estate of $1.5 million, the Tennessee Inheritance tax owed by the estate when the second spouse dies would be $35,900 (5.5% to 9.5% on the amount above the $1 million exemption which in this case is $500,000). The couple in this case could purchase a life insurance policy and the death benefit would be used to pay the Tennessee inheritance taxes. Insurance proceeds owned by an ILIT could also pay the taxes. In the most basic scenario, the couple would just purchase enough insurance to cover the estimated $35,900 tax burden. Insurance can be a great tool to provide liquidity to pay for taxes while at the same time increasing the amount of assets left to heirs.

Credit Shelter Trust: Including a discretionary credit shelter trust provision in the estate planning documents is a great way to "bypass" Tennessee inheritance taxes. Credit Shelter Trust provisions may be inserted into a Will or into a Revocable Living Trust. While current laws permit an unlimited amount of assets and property to pass to a surviving spouse tax free, transfers to children and other beneficiaries valued in excess of the Tennessee Inheritance Tax Exclusion ($1M in 2011) will be subject to the inheritance tax. A couple taking advantage of a credit shelter trust generally arranges for certain assets to pass into a trust for the benefit of a surviving spouse, rather than passing all assets directly to the spouse. This trust, which would not be considered part of the surviving spouse's estate, may pay the surviving spouse income for life and then upon his or her death may pass to a beneficiary, such as a child, free of inheritance taxes if under the exclusion amount (with the appreciation of the trust assets also passing free from this tax). In addition, the gross estate of the surviving spouse, upon his or her death, could also pass to the same beneficiary an amount equal to their own $1M exclusion. Which means that both $1M exclusions could be utilized to pass up to $2M to the heirs inheritance tax free. Here is how this technique would work:

Example: Tennessee Husband owns property worth $1.5 million when he dies in 2011. His wife owns nothing in her name alone. If he passes the estate assets to his wife outright she will not have to pay any inheritance taxes in Tennessee (due to the unlimited marital deduction available), but when she dies six months later and the children receive their mother's $1.5 million, they will have to pay Tennessee inheritance taxes on $500,000 at graduated rates up to 9.5% = $35,900 inheritance taxes paid to the Tennessee Department of Revenue. That $35,900 could go to the testators family, a charitable organization, or a combination of the two with the addition of a Credit Shelter Trust provision in the husband's Will. With a Discretionary Credit Shelter Trust provision in the husband's Will, upon her husband's death, the wife is given the power to disclaim all or a portion of the husband's estate and fund a credit shelter trust with an amount that she sees fit. In the above scenario, the wife could place $500,000 in a credit shelter and receive income from the trust during her lifetime. The wife also has the right to the principal in the trust subject to a few limitations (i.e., she can use the principal for her health, education, maintenance, support, and can receive the greater of $5,000 or 5% of the trust annually). The trust assets upon her death will pass inheritance tax free to the children. The $1 million which the wife chooses to receive outright from her husband's estate will qualify for the unlimited marital deduction and she can pass this amount tax free to the children upon her death (not accounting for an increase in value), considering this amount is not subject to Tennessee inheritance taxes under her own $1M exclusion. The discretionary aspect of the trust gives the wife the freedom to fund the trust as needed after consulting with her attorney and financial advisors. Therefore, the discretionary nature of the Credit Shelter Trust gives families options to deal with the tax laws on the books at the time of death. A word of caution- the estate assets must be disclaimed and placed into the trust within 9 months of the death of the first spouse to die. With a minimal investment during life, this couple saves their heirs thousands of dollars and avoids giving a portion of their estate to the state treasury.

PLANNING POINT: Considering the ever changing estate tax and inheritance tax landscape, flexibility is the key to creating an estate plan that can accomplish your wishes regardless of future tax law changes. For most estates over the $1million, including Credit Shelter Trust language in your Will is a must. In fact, once the first spouse dies without such language in their will, there is no longer an opportunity for a married couple to put this type of plan in place. Discretionary Credit Shelter Trust language in your estate plan gives the surviving spouse the option to fund a trust for tax avoidance purposes based upon their needs and the current laws. Upon the death of the first spouse, there is no obligation to establish a trust. Furthermore, if the surviving spouse does choose to establish a trust, they have the freedom to determine the amount of money that will be used to fund the trust. Simply put, the Discretionary Credit Shelter Trust is the most flexible estate planning tool for Tennessee families with estates over $1million.

529 College Savings Plan: Section 529 of the Internal Revenue Code affords a taxpayer with an opportunity to establish a special account for the purpose of paying higher education expenses. Investments in a 529 Plan accumulate income tax free and distributions used for qualified education expenses are not subject to federal income tax. One common technique used to reduce the size of taxable estate involves "frontloading" gifts to a 529 education savings plan. You can make five years worth of annual exclusion gifts ($65,000 as an individual or $130,000 per couple) to a 529 plan in 2009 for the benefit of any one person, but annual exclusion gifting to that person over the next four years will be reduced by $13,000 per year. A 529 plan will not be subject to gift tax or the Hall income tax in Tennessee. Qualified higher education includes anything past high school, meaning college, grad school, or trade school would all qualify. Furthermore, the person who makes the gift owns the account and has control over it. The owner can change the beneficiaries at will and can even get to the money during an emergency if they are willing to pay a penalty.

Example: Grandpa and Grandma want to reduce their $1.5 million taxable estate below the $1 million Tennessee inheritance tax threshold. Grandpa and Grandma set up a 529 plan and frontload their gifts to the plan for the benefit of their 4 young grandchildren. Using both of their 5 year frontloading gifts the couple is able to fund the 529 with $130,000 per grandchild or $520,000 total. The gifts will grow tax free and be available to pay for the grandchildren's post high school education. Grandma and Grandpa could get to the money if it was absolutely necessary, but they would have to pay penalties to do so. However, that safety net is there if they need it. Now suppose one of the grandkids goes to 2 years of junior college and one wants to go to medical school. The donors can give the remaining money in the account of one of the beneficiaries to another beneficiary who is continuing their studies. The couple here has reduced their Tennessee inheritance tax to zero and they have provided for their loved ones education. The flexibility and tax free benefits of the 529 College Savings Plan make it a great estate planning tool.

Family Limited Liability Company: A Family Limited Liability Company (FLLC) is an estate planning device which is commonly used to eliminate or minimize estate taxes. In a FLLC, the senior generation (parents) transfers valuable assets (such as investment real estate) into the entity in exchange for membership interests in the company. The junior generation (children) are given membership interests in the company as a result of a gift from the senior generation or by transferring their own assets into the company in exchange for such membership interests. The senior generation can use annual exclusion gifting ($13,000 per person or $26,000 per married couple) to transfer their wealth during their lifetime to the junior generation via membership interests in the family controlled company. There are a couple of reasons for creating a FLLC. First, when the senior generation passes away, their property which has been converted to membership interests in the FLLC will receive a valuation discount for estate tax purposes. Due to a lack of control rights and the lack of marketability associated with membership interests which are restricted to family ownership, the value of the interests owned by the senior generation are discounted for estate tax purposes. Secondly, the FLLC provides a legal structure for transferring wealth from one generation to the next. If drafted properly, the value of the membership interests transferred to the junior generation will not be included in the taxable estate of the senior generation. The FLLC can be a powerful tool used to reduce or avoid state or federal estate taxes. However, due to very complex tax laws associated with this structure, the advice of an attorney is essential when creating this estate planning device. Furthermore, a bill already introduced in the U.S. House of Representatives could substantially limit the use of this planning technique. HR 436, introduced by Congressman Pomeroy (D-ND), would restrict estate and gift tax benefits associated with closely-held business entities, including FLLC's. If passed, the bill would prohibit valuation discounts with respect to the transfer of an interest in a closely-held entity. Therefore, there is a current incentive to complete any such gift planning in a timely manner.

Conservation Easements in Estate Planning: A conservation easement is a legally enforceable land preservation agreement between a landowner and a qualified land protection organization (often called a "land trust" or "land conservancy"), for the purposes of conservation. It restricts real estate development, commercial and industrial uses, and certain other activities on a property to a mutually agreed upon level. The activities allowed by a conservation easement depend on the landowner's wishes and the characteristics of the property. In some instances, no further development is allowed on the land. In other circumstances, development is allowed, but the amount and type of development is restricted by the terms of the agreement. Conservation easements may be designed to cover all or only a portion of a property. Every easement is a unique document, tailored to a particular landowner's goals and their land. The decision to place a conservation easement on a property is strictly a voluntary one where the easement is sold or donated. The restrictions, once set in place, "run with the land" and are binding on all future landowners. After the easement is signed, it is recorded with the County Register of Deeds and it becomes a part of the chain of title for the property. The primary purpose of a conservation easement is to protect agricultural land, timber resources, and/or other valuable natural resources such as wildlife habitat, clean water, clean air, or scenic open space by separating the right to subdivide and build on the property from the other rights of ownership. The landowner who gives up these development rights continues to privately own and manage the land and receives a charitable deduction on their federal income taxes (which may be applied over a period of several years). Additionally, the property owner may benefit from reduced property taxes and estate taxes. If granted during lifetime, the easement significantly reduces the value of the property for estate tax valuation purposes and a portion of the land value may be excluded from the gross estate altogether. Perhaps more importantly, the landowner has made the decision to be a good steward of their natural resources preserving the conservation values associated with their land for future generations. Conservation easements are particularly useful for families looking to pass along a family farm to their heirs in a tax efficient manner. In a state with rich natural resources like Tennessee, the conservation easement is becoming a poplar estate planning tool. Because conservation easement negotiation and conservation easement drafting can both be quite complex, both the land trust and the landowner are typically represented by legal counsel. Michael L. Smith walks clients through the conservation easement process, negotiates the terms of the agreement, and helps clients identify a qualified land protection organization who will accept and enforce the easement.

What do clients need to do now that the Act has passed?

All estate over $1M should have their estate planning documents reviewed by an attorney to make sure their plan is compliant with the new tax laws.
Estate plans should be revised if they contain formula clauses. If your will or revocable trust contain phrases such as "that amount", "that fraction", "that portion" or other language which creates a formula for bypassing federal estate taxes, your current plan could have devastating consequences. The old formulas typically funded the bypass trust first, up to the Applicable Exclusion amount, and then passed the remaining estate property to the surviving spouse. Therefore, under the new law, a surviving spouse may not receive any property outright because all of the funds will flow to the bypass trust up to the new exemption amount of $5M. For example, Husband and wife create wills with bypass trust provisions in 1999 which contain federal tax formulas. Their estate is worth $1.5M (for this example we will assume all assets are in the husband's name). The estate tax exemption in 1999 was $650,000, so this was not bad advice at the time. However, when Husband dies in 2011 without updating his will, $1.5M must be used to fully fund a bypass trust (because the estate is less than the new $5M exemption amount) and the wife will receive NOTHING OUTRIGHT!
For the 70% of people out there who have never created an Estate Plan, there has never been a better time do so considering the favorable new tax law. Be proactive and make sure your estate plan is in order.

Gift Taxes- Federal

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift. Gift taxes are paid by the donor of the gift. The donor must file a gift tax return with the IRS when a taxable gift has been made. There is not a limit on how much a person can give to others during their lifetime, but a gift to an individual that is more than $13,000 (2011) in a year must be reported to the IRS in the form of a gift tax return. Additionally, any amount above $13,000 will be counted against a $5 million lifetime federal gift tax exclusion and the estate tax applicable exclusion amount (unified $5 million in 2011, discussed above) available to the individual will be reduced by the lifetime gift tax exclusion used. The $13,000 figure is an annual exclusion from the gift tax reporting requirement. This means that you may make an annual gift of $13,000 to each individual of your choice without reporting the gifts to the IRS. If you are married, both you and your spouse can separately give gifts valued at up to $13,000 (collectively $26,000) to the same person in 2011 without making a taxable gift.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally the following gifts are not taxable gifts:

§ Gifts that are less than the annual exclusion for the calendar year ($13,000 in 2011, discussed above).

§ Tuition or medical expenses you pay directly to a medical or educational institution for someone else

§ Gifts to your spouse

§ Gifts to a political organization for its use, and

§ Gifts to qualified charities

Concerning education and medical expenses, federal tax law allows an individual to pay for another's tuition or medical expenses above and beyond the annual exclusion amount and there is no limit on the amount that can be given for these purposes. The payments, however, must be made directly to the medical or educational institution, rather than to the recipient of the gift. Educational gifts must be applied specifically towards tuition. Payments cannot be used for room, board, books or other ancillary education expenses. Tuition payment applies to any level of schooling from nursery school to graduate school. The student may be enrolled full or part-time. Additionally, the exemption is not limited to traditional academic institutions such as colleges and universities. Any educational organization with a regular faculty, curriculum, and a student body will generally qualify.

The following examples should clarify how the federal gift tax works.

Example 1: In 2011, you give your daughter a cash gift of $10,000. It is your only gift to her that year. The gift is not a taxable gift because it is less than the $13,000 annual exclusion. No gift tax return needs to be filed.

Example 2: In 2011, you and your spouse give your son $26,000, your daughter $26,000, and your grandson $26,000. It is your only gift to each of them that year. None of the gifts are taxable because the gifts to each individual do not exceed the annual gift tax exclusion (husband and wife combined their $13,000 annual exclusions). No gift tax returns need to be filed.

Example 3: In 2011, you pay the $30,000 college tuition of your friend directly to his college. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift. No gift tax return needs to be filed.

Example 4: In 2011, a single mom gives her 25 year old son $25,000. The first $13,000 of the gift is not subject to the gift tax because of the annual exclusion. The remaining $12,000 is a taxable gift. Due to the $5 million lifetime gift tax exclusion, the mom will likely never have to pay gift taxes on the remaining $12,000. However, a gift tax return must be filed with the IRS and the mom's applicable exclusion for estate tax purposes will be reduced by the amount of the taxable gift.

Gift Taxes- Tennessee

A Tennessee gift tax is imposed on the donor for gifts in excess of the allowable exemptions. The Tennessee exemptions are as follows:

Tennessee Gift Tax Exemptions Per Donee

Date of Gift	Class A	Class B
2009 and after	$13,000	$3,000

Class A includes husband, wife, son, daughter, lineal ancestor, lineal descendant, brother, sister, son-in-law, daughter-in-law, or stepchild. If a person has no child or grandchild, a niece or nephew of such person shall be a Class A donee (Tenn. Code Ann. Section 67-8-102(1)). Class B consists of all other individuals.

The gift tax rate in Tennessee is a graduated rate between 5.5% and 16%. Unlike the federal gift tax, Tennessee does not have a lifetime gift tax exclusion. Therefore, any gifts which are over the $13,000 (Class A) or $3,000 (Class B) exemptions in a given year will have to be reported to the Tennessee Department of Revenue and they will be taxed at the applicable rates.

Annual Exclusion Gifting

For clients who are trying to reduce their taxable estate (particularly for TN Inheritance Tax purposes), an aggressive gifting plan which utilizes the annual gift tax exclusions can be a great way to reduce estate tax liability while providing gifts for family, friends, and charity while the donor is still alive.

Example: Grandpa and Grandma have a combined taxable estate of $1.1 million. They have plenty of cash and income producing assets to live comfortably through their retirement years. They do not want their heirs to pay any Tennessee Inheritance taxes when the second spouse passes away. They also have simple wills which dispose of their property according to their wishes. In order to reduce their taxable estate to an amount which is below the $1 million Tennessee Inheritance Tax Exemption the couple decides to adopt an aggressive gifting plan. In 2011, they use their combined annual gift tax exclusions to give $26,000 to their son and $26,000 to their daughter. In that same year, they also pay tuition payments of $20,000 directly to a private college for each of their 4 grandkids who attend that college ($80,000 in total tuition payments for the year 2011). Grandpa and Grandma have reduced their taxable estate from $1.1 million to $968,000. The value of their estate is no longer subject to current Tennessee Inheritance taxes and they have helped their loved ones in a significant way while they are still alive. In order to keep their estate below the inheritance tax threshold, Grandpa and Grandma will want to monitor the growth of their estate and make future non taxable gifts in order to compensate for the inflation and growth.

Generation-Skipping Transfer Tax (GST)

The generation-skipping transfer tax is a flat tax applied to estates in addition to income, estate, and gift taxes. The tax is imposed on a transfer (either a gift during life or a transfer at death) to a person two or more generations below the transferor. A person two or more generations below the transferor is referred to as a "skip person". Grandchildren and nonrelatives 37.5 years younger than the transferor are considered skip persons by the IRS. There are several exclusions from GST. First, each transferor is granted an exemption on generation-skipping transfers. The exemption is $5 million for 2011 and 2012 with a flat rate of 35% and it is scheduled to return to $1 million in 2013 with a flat tax rate of 55% (assuming Congress does not pass additional tax legislation before 2013). Secondly, transfers under I.R.C. § 2503(e) for medical or educational expenses are excluded. Thirdly, annual exclusion gifts of $13,000 or less (subject to adjustment annually for inflation) are excluded. Lastly, the predeceased parent exception allows a grandparent to make a transfer to their grandchild free from GST where the grandchild's parent (i.e. grandparent's child) has predeceased them.

Federal Estate, Tennessee Inheritance & Gift Tax Summary

	Federal 2011	Federal 2012*	Federal 2013	Tennessee
Estate Tax Exemption	$5,000,000	$5,000,000	$1,000,000**	$1,000,000
Maximum Estate Tax Rate	35%	35%	55%	9.5%
Lifetime Gift Tax Exemption	$5,000,000	$5,000,000	$1,000,000	None
Maximum Gift Tax Rate	35%	35%	55%	16%
Annual Gift Tax Exclusion Amount	$13,000 or $26,000 per married couple	$13,000 or $26,000 per married couple	$13,000 or $26,000 per married couple	$13,000 or $26,000 per married couple
Generation Skipping Tax Exemption	$5,000,000	$5,000,000	1,000,000***	N/A
Generation Skipping Tax Rate	35%	35%	55%	N/A

* 2012 rates will be increased to compensate for inflation

** If Congress fails to re-instate the current exemptions before December 31, 2012

*** Rate will be increased to compensate for inflation

Can I Find A Service That Is Cheaper Than Meeting with an Attorney To Prepare My Will and Power of Attorney?

Sure you can, however, it is true that you get what you pay for. Attorneys are licensed professionals who provide high quality legal document preparation and legal advice. There are countless do it yourself estate document prep websites and software programs, however, there is no substitute for competent and state licensed legal counsel. A software program may be able to spit out a document, but without legal counsel and a complete review of your estate assets, there is no way to know whether the cheap document will accomplish its goals.