American Taxpayer Relief Act of 2012

Happy New Year!  We hope this finds you having enjoyed a joyous and relaxing holiday season.  As you may know, on Wednesday, January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012. The new law contains some favorable provisions for taxpayers and donors and provides some certainty, for at least another year, and in some cases, permanently.  Below we have included some highlights of changes in effect for 2013 in the areas of charitable and estate planning:

The IRA Charitable Rollover

As we expected, donors age 70½ or older are once again eligible to transfer up to $100,000 from their IRAs directly to qualified charities without having to pay income taxes on the qualified distribution in 2013. In addition to the extension of the IRA Rollover provision for 2013, Congress provided two special transition rules:

1) Qualified distributions made by February 1, 2013, may be counted retroactively for the 2012 tax year.  This means that it is possible for those who act in a timely manner to make IRA Rollover gifts of up to $200,000 in 2013.

2) Another unexpected but welcome feature of the new law is the “do-over” provision.  Taxpayers who took a withdrawal from an IRA (mandatory or otherwise) during December 2012 may make a cash contribution to a qualified charity before February 1, 2013, and treat the gift as if it had been a direct distribution to charity that qualified as an IRA Rollover gift for 2012.

Estate, Gift and Generation-Skipping Tax Exemptions

The new law permanently preserves the current individual gift, estate and generation-skipping tax to a unified $5 million exemption level. This amount will be indexed for inflation – the inflation adjusted amount for 2013 is $5,250,000. The top gift, estate and generation-skipping tax rate was increased to 40 percent from the previous 35 percent. The new law also makes the portability of exemption between spouses permanent.  The higher exemption amount will certainly limit the number of estates subject to the federal estate tax which could provide opportunities to simplify estate plans.

However, keep in mind that Tennessee still has an inheritance tax.  The Tennessee inheritance tax will be phased out over the next three years.  For the remainder of 2013, the inheritance tax exemption will remain $1,250,000.  Beginning January 1, 2014, the exemption will increase each year  as follows:




As of January 1, 2016, the Tennessee inheritance tax will be eliminated, while the Tennessee gift tax was repealed last year.

Charitable Deduction Remains

Throughout 2012, a number of proposals were made to limit the charitable deduction.  Fortunately, the legislation as passed does not address or specifically limit the charitable deduction.

Individual Income Tax Rates

The new law permanently extends tax rates set by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 for taxpayers earning less than $400,000 a year and married couples earning less than $450,000. It increases the tax rate for high-income households earning more than that to 39.6 percent. The 2013 tax rates will be 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.

Capital Gains Tax Rates

The capital gains and dividend tax rates for high-income households ($400,000 a year for single taxpayers and $450,000 for married couples) will increase to 20 percent. There will be no capital gains tax for taxpayers whose income falls in tax brackets below 25 percent. The capital gains tax rate will be 15 percent for taxpayers whose income falls at or above the 25 percent tax bracket but below the new 39.6 percent rate.  A medicare contribution tax of 3.8% on capital gains, dividends, interest and other unearned income will also come into play in 2013 for those with adjusted gross income over $250,000 ($200,000 for single taxpayers).  With higher capital gains rates and the addition of the Medicare contribution tax, gifts of appreciated stock or other appreciated property (either outright or to fund a charitable remainder trust or charitable gift annuity) will once again provide taxpayers with the opportunity to diversify out of appreciated assets in a tax efficient manner.

The next logical question is, “How does the new law impact me and my family?”  Of course, it depends.  Certainly, the climate for gifting is excellent.  People with potentially taxable estates can make large gifts to take advantage of the high federal exemption amount without paying Tennessee gift tax.  Thus, the combination of a high federal exemption and no Tennessee tax can yield extremely favorable tax and other results for your family.

We would love the opportunity to talk with you about how these changes impact your estate plan.  Please contact our office to learn more about potential opportunities for you and your family with this new legislation.

Change to the Tennessee Inheritance Tax Proposed

Governor Bill Haslam and Republican leaders in the state legislature have proposed changes to the Tennessee Inheritance Tax as discussed recently in an article in The Tennessean (see full article here).  The current Tennessee Inheritance Tax Exemption amount is $1 million with inheritance tax rates ranging from 5.5% – 9.5%.  The proposal would raise the exemption to $1.25 million and will continue to raise the exemption incrementally over the next several years to $5 million.  The current Federal Estate Tax Exemption amount is also $5 million.

The cut in inheritance tax would cost the state of Tennessee approximately $14 million a year and is paired with a proposal to a reduction in state sales tax on food.  Democrats have expressed little opposition to cutting both taxes.  Haslam plans to cover the tax loss with rising revenue from other taxes.

The change to the Tennessee Inheritance Tax would keep wealthy residents from leaving Tennessee and avoid the sale of family businesses to pay death taxes.

Law FAQ: What is Digital Estate Planning?

Death in the digital age is a lot more complicated than it used to be.  In the past, it was easy to search paper records and watch the mail for bills and account statements to gather information about an estate.  It’s not so easy today.  Now many, if not all, records are filed or transmitted electronically, online.  And unfortunately, people have not left the passwords and location for the electronic records that the surviving family members will need.

In many cases, survivors may not even be aware of the existence of accounts or assets, prompting a load of questions: Can we find this stuff? Which computer is it on? Is it stored in the cloud? What about the smartphone? Can we circumvent the password or decrypt the data?

But there are other potential pitfalls, too. What, for example, happens to your social-network accounts when you die? Some people want them perpetuated while some people them destroyed.  Instructions should be provided and included with the list of passwords that are going to go to their survivors.

You should also consider potential liabilities lurking in your digital estate. For example, what if you have trade secrets or other sensitive information on your computer and, after your death, your family donates the computer for recycling without wiping the hard drive clean? If that trade secret falls into the wrong hands, your estate might be liable.

Digital-savvy estate planners advise clients to take three basic steps. First, do a complete inventory of all digital accounts and assets (see Digital Assets Checklist below) so that your estate administrator will know just what you have of potential value (or liability) and where it is. Second, assemble a list of all passwords. Third, select a fiduciary and give them the proper power to administer your estate and follow through with your wishes.

Digital Assets Checklist

• Home-security systems

• Smartphones

• Computers

• Voice mail

• Email accounts

• Cloud storage

• Social-network accounts

• Web pages and blogs

• Financial accounts (banks, stock trading, tax, etc.)

• Online sales and purchasing accounts

• Domain names

• Intellectual-property rights (manuscripts, music, photographs, etc.)

• Video games and virtual worlds

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Law FAQ: What is a HEET?

A HEET is a Health and Education Exemption Trust.  This time of year many clients are making gifts to their children and grandchildren.  They often forget that gifts in excess of the $13,000 annual gift tax exclusion amount will be subject to Tennessee gift tax and affect their Federal Estate Tax exemption amount.  However, gifts made for a beneficiary’s health or education paid directly to the provider of services or to the educational institution are statutorily exempt and do not count against the annual gift tax exclusion amount.  And there is a code section that specifically authorizes a trust for the beneficiary’s health and education, a HEET.

A HEET enables clients to make completed gifts to beneficiaries for qualified health or education expenses.  Gifts to HEETs are not limited to the annual gift tax exclusion amount.  HEETs can provide a powerful planning tool for parents or grandparents who want to provide for their younger beneficiaries’ health or education needs, and who don’t want to be limited to annual exclusion gifts, don’t want complexity of more sophisticated gifting strategies, and don’t want to deal with the restrictions of strategies like 529 plans.

If you have questions regarding a HEET or how this trust could benefit your estate plan, please contact our office.

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Who are my Beneficiaries? A critical question in planning for the future.

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How does Property Pass to Beneficiaries?

Do you know who your beneficiaries are? When we ask clients this question, their first response is often quick and affirmative. However, we frequently discover through the estate planning process that the beneficiaries listed on our clients’ life insurance policies and retirement accounts are not who they think they are, nor are they the intended recipients of the property.

One of the most common misconceptions we see is how property passes at someone’s death.  Accounts that have beneficiary designations  pass to the beneficiary or beneficiaries named on the beneficiary designation form for that account regardless of what your will or trust says.  So, for example, if my Will says that everything passes to my spouse at my death, but my beneficiary form on my life insurance names my children as beneficiaries, my life insurance proceeds  pass to my children and not to my spouse. Here are some examples of accounts that typically designate beneficiaries:

  • life insurance
  • retirement accounts
  • transfer on death accounts (TOD)
  • payable on death accounts (POD)

Periodically Review Your Beneficiary Designations

The  Supreme Court case of Kennedy v. Plan Administrator of DuPont highlights the unintended results that may occur if your beneficiary designations are not reviewed periodically.  In this case, William Kennedy named his wife, Liv, as the sole beneficiary of his pension and retirement savings plans at DuPont.  When the couple later divorced, the Qualified Domestic Relations Order (QDRO) provided that Liv gave up her rights to receive any benefits from William’s pension and retirement plan.  Unfortunately, however, the court order was never submitted to DuPont and the beneficiary was never changed.  When William later died, DuPont paid out the plan benefits to his ex-wife, Liv.  Their daughter, Keri, was appointed as Executor of William’s Estate and filed suit claiming that the Estate should receive his retirement benefits because the QDRO clearly provided that Liv had waived any interest she might have in those benefits.  The Supreme Court upheld the ruling of the Circuit Court in saying that DuPont properly paid the benefits to Liv and that Liv was entitled to the pension and retirement funds even though the parties were not married at the time of William’s death and the QDRO clearly provided otherwise.

Moral of the Story

The moral to the story is that the beneficiary designation governs. Thus, it is very important that you know who is named on your various beneficiary forms so that your property goes to the beneficiary or beneficiaries that you intend for it to go to.  It is clear that William did not intend for his benefits to go to his ex-wife instead of his daughter, but the Supreme Court held that the beneficiary designation governed and that DuPont properly paid the benefits to Liv.

Tips for Beneficiary Designation Forms

Here are some tips and common problems to watch out for with your beneficiary designation forms:

1. Do you know where the form is? Generally, employers maintain records of the form, but if they cannot find their form when the time comes, the burden may be on you to produce a copy of the form.

2. Is the form up to date? Changes in your life may require you to review the forms periodically. If you have had a recent marriage, divorce, birth or death in your family, it is important to review your beneficiary designations. And remember, your Will does not change who the beneficiary is on an account or insurance policy.

3. Do you have a contingent beneficiary named? If the beneficiary you have named dies before you or is involved in a common accident with you, you may not know who the benefits will go to if you do not name a contingent or secondary beneficiary.

4. Have you named a minor as a beneficiary? Minors cannot legally hold title to property, including these benefits. If you have named a minor, a guardianship may have to be established and administered through the Probate Court concerning applicable funds.

Want to talk it over with an Estate Planning and Probate Lawyer?

If you have questions regarding your beneficiary designations and how they factor into your Estate Plan, please call us at 901-372-5003 or email us today. We’re ready to help you plan for the future.


Is Tennessee a Community Property State for Estate Planning?

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Tennessee is NOT a Community Property State

Community property states such as California and Texas, permit assets to receive a step-up in basis to the current fair market value (FMV) at the death of the first spouse to die regardless of which spouse owns the assets.

Tennessee is a separate property state. This means that only the separate assets of the deceased spouse (titled in his or her name), or 1/2  of any jointly-owned property,  are entitled to a step-up in basis to the current FMV at the death of the first spouse to die.

Tennessee Community Property Act of 2010

But wait—this Act allows for ownership of assets in a Tennessee Community Property Trust.  Although this type of ownership of assets between a husband and wife is not always beneficial, it can provide a significant advantage in the right circumstances, especially for property with a very low tax basis.Provided the Trust meets certain requirements, the property owned by the Trust will be treated as community property.


The most significant advantage of this type of ownership is that both spouses’ interests receive a step-up in basis up to the FMV of the property upon the death of the first spouse.  In contrast, if the property was owned jointly or as tenants by the entireties, only 1/2 of the property would receive a step-up in basis at the first death. Thus, community property ownership can significantly reduce or even eliminate capital gains upon the death of a spouse.

We can advise you further.

Call us today at 901-372-5003 or email us here. We can talk with you about your assets and the best way to structure an Estate Plan that fits your family’s particular circumstances.

Law FAQ: Can I Place My Assets in a Trust and Protect Them from My Creditors?

Before 2007, if an individual created a trust under which he is a beneficiary, the assets of the trust were subject to the claims of his creditors. As a result, an individual could not protect his wealth from creditors and lawsuits while retaining control of his assets. With the passing of the “Tennessee Investment Services Act,” Tennessee has become one of a few states in the nation to enact legislation permitting the creation of self-created (self-settled) asset protection trusts.
The law allows this protection by permitting the individual to create a self-settled asset protection trust referred to as an “Investment Services Trust” (IST).

An IST is an irrevocable trust into which an individual transfers assets while retaining the following rights: ability to direct the investment of the IST assets; receive distributions of principal upon the discretion of the Trustee; live in a home owned by the trust; veto distributions to any other permissible beneficiaries; direct the distribution of the trust assets upon death to any one or more persons; remove the Trustee and other trust advisors and appoint their successors under certain provisions. The settlor may not serve as the Trustee of the IST.

The Trustee must be either an individual residing in Tennessee or a corporate Trustee who is authorized to conduct business in Tennessee. At least a portion of the assets of the IST must be administered in Tennessee. At the creation of an IST, the settlor must provide an affidavit stating under oath that he does not intend to defraud a creditor and that he does not have any pending or threatened court action against him.

The Tennessee Investment Services Act provides an asset protection opportunity for individuals who are concerned about the loss of their assets due to unforeseen creditors. An IST presents a unique solution to those who wish to protect their assets during their lifetime while still retaining the ability to manage those assets and benefit from them.

If you are interested in protecting your assets from future creditors, please contact our office to schedule an appointment to discuss the use of an IST in your estate plan.

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Law FAQ: Can I Sell My House to My Children for $1 to Avoid Gift Tax?

Many clients and others have asked if they could sell their house to their children for $1 to avoid gift tax.  The short answer to that question is “no”.  Any transfer for less than fair market value to an individual is a gift.  For example, if the residence being gifted is valued by a real estate appraiser to be $100,000, and the residence is sold to children for $1; there will be a transfer subject to gift tax of $99,999!

Whether or not a transfer results in the payment of gift tax depends on several factors.  Under both Federal gift tax law and Tennessee gift tax law, each individual can gift up to $13,000 to each child without incurring a gift tax.  This is referred to as the Annual Gift Tax Exemption amount.  However, Federal law and Tennessee law differ on how gifts in excess of the Annual Gift Tax Exemption are taxed.

Federal law currently provides for an additional lifetime gift exemption amount of $5 million.  Any exemption not used during lifetime can be used at death.  But Tennessee law does not provide for an additional lifetime gift exemption amount.  In other words, any gifts from an individual to a child in excess of the Annual Gift Tax Exemption amount will be subject to Tennessee gift tax at rates ranging from 5.5% to 9.5% depending on the total value of the taxable gift.  Each state has separate gift tax laws, so residents of states other than Tennessee and gifts made of real estate located in other states may have different tax rules that apply.

Therefore, making gifts (or sales for less than fair market value) to children of assets, especially real estate, can be wrought with potential gift tax traps.  Please contact us if you need assistance in making tax-efficient gifts to your children or if you have any related questions.

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Law FAQ: I’ve been named as Trustee of a trust….what do I do now?

The most important thing to remember when you step in as trustee is that these are not your assets.  You are safeguarding them for others:  for the grantor (if living) and for the beneficiaries, who will receive them after the grantor dies.  As a trustee, you have certain responsibilities.  For example:

-You must follow the instructions in the trust document.

-You cannot mix trust assets with your own.  You must keep separate checking accounts and investments.

-You cannot use trust assets for your own benefit (unless the trust authorizes it).

-You must treat trust beneficiaries the same; you cannot favor one over another (unless the trust says you can).

-Trust assets must be invested in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.

-You are responsible for keeping accurate records, filing tax returns and reporting to the beneficiaries as the trust requires.

But you can have professionals help you, especially with the accounting and investing.  You will also probably need to consult with an attorney from time to time.  However, as trustee, you are ultimately responsible to the beneficiaries for prudent management of the trust assets.

Please contact us if you need assistance in serving in the role of a trustee or if you have any related question.

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Law FAQ: What is living probate?

If you can’t conduct business due to mental or physical incapacity (dementia, stroke, heart attack, etc.), only a court appointee can sign for you – even if you have a will.  Remember, a will only goes into effect after you die.  Once the court gets involved, it usually stays involved until you recover or die and it, not your family, will control how your assets are used to care for you.  This public, probate process can be expensive, embarrassing, time consuming and difficult to end.  It does not replace probate at death, so your family may have to go through probate court twice!

In some cases, a durable power of attorney may prevent the lifetime probate process.  A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so.  However, many financial institutions will not honor one unless it is on their form.  If accepted, it may work too well, giving someone a “blank check” to do whatever the agent wants with your assets.  It can be very effective when used with a living trust, but risky when used alone.

Please contact our office if you have questions about the living probate process or if you wnat more information on strategies to avoid the process.