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Timothy J. Vitollo is a lawyer in Lynchburg, Virginia. He is a member of the South Carolina Bar's Trust Code Revision Committee and currently serves as the primary drafter of a proposed decanting statute.
One aspect of estate planning that makes the practice so rewarding is that the law is continually developing. After more than 20 years of prodding by practitioners, the introduction of the Taxpayer Certainty and Relief Act of 2009 in the Senate Finance Committee may very well indicate that portability of a spouse's unused estate tax exemption might soon become a reality. In addition, as more states enact decanting statutes, irrevocable trusts are becoming slightly less irrevocable than they once were. For young lawyers, a dynamic legal environment creates opportunities to develop expertise in emerging practice areas.
In 1988 the ABA Tax Section's Task Force on Transfer Tax Restructuring formally recommended making a spouse's unused estate tax exemption portable. Under current law, any estate tax exemption amount that a spouse fails to use before or at death cannot be used by a surviving spouse and simply expires on the death of the first spouse. As a result, maximizing transfer tax savings often requires the use of complex lifetime planning techniques for a couple when only one of the spouses is likely to leave behind an estate valued in excess of the applicable exclusion amount. Portability would allow the surviving spouse to be credited with the deceased spouse's unused exclusion amount, reducing the amount of planning necessary in a number of circumstances and possibly even eliminating the need for transfer tax planning in certain situations.
As proposed in the Taxpayer Certainty and Relief Act, portability comes with caveats, including two anti-abuse provisions and a requirement that the deceased spouse make the appropriate election on a timely filed estate tax return that calculates the remaining exclusion available to the surviving spouse. The first anti-abuse provision caps the portable exclusion amount available to a surviving spouse. In effect, even though the Act allows a surviving spouse to aggregate the unused exclusion amounts of multiple deceased spouses, this first anti-abuse provision limits the entire portable exclusion amount available to the surviving spouse to the applicable exclusion amount otherwise available to a decedent, currently $3.5 million. The second anti-abuse provision, which is more likely to prove controversial, suspends the statute of limitations for purposes of determining the amount of a deceased spouse's unused exclusion amount until the statute has run for purposes of auditing the surviving spouse's estate tax return. In effect, the provision would allow the IRS to undertake an audit of the deceased spouse's return and add any additional tax assessed to the surviving spouse's estate tax liability.
Even though New York enacted the first statute in 1992, until recently decanting authority has been limited to trustees in only a handful of states. As of 2006, decanting statutes had been enacted in only four states— New York (1992), Alaska (1998), Delaware (2003), and Tennessee (2004). Since 2007, however, the number of states enacting decanting statutes has steadily increased, including Florida and South Dakota in 2007, followed by New Hampshire in 2008, and North Carolina and Arizona in 2009, for a total of nine states. In addition, efforts to enact statutes are underway currently in at least four states, including Minnesota, Missouri, Ohio, and South Carolina.
Providing decanting authority to a trustee, which is authority to appoint the property of an original trust to a second trust, provides flexibility to adapt the terms of a trust on account of unforeseen circumstances or drafting error. In effect, statutory decanting authority makes it possible to modify undesirable terms of an irrevocable trust when doing so would be in the best interests of the beneficiaries. Although a trustee's decanting authority varies widely among the states that have adopted statutes, decanting authority can be used to achieve significant benefits in many different circumstances, such as (1) modifying administrative provisions when a change in law allows conversion of an income interest into a unitrust interest, (2) allowing a trustee to delegate investment decisions to another fiduciary to reduce potential liability, (3) changing the situs of a trust to a state with more favorable law, (4) relocating trust assets to a state that does not impose a state income tax, (5) combining multiple trusts to reduce administrative costs, (6) dividing trusts to reduce disagreements among beneficiaries, (7) limiting the authority of interested trustees, (8) correcting drafting errors to mitigate the effect of attorney malpractice, and (9) conforming the distribution provisions of a trust to the requirements of a special needs trust.
The ever-changing nature of estate law makes the practice rewarding and exciting and creates opportunities for young lawyers. Developments in the law make it possible for young lawyers to contribute by helping more experienced practitioners stay on the cutting edge of the practice. A dynamic legal environment also provides the opportunity to develop a niche in emerging specialties.Return to Probate & Property Magazine