To All of Our Clients:

As we put this letter in the mail, our partner, Conrad Teitell, has just returned from Washington where he testified before the United States Senate Finance Committee on the condition of the federal estate and gift tax structure in our country.  We prepared him with a report emphasizing the difficulties of rational planning by clients in a world of ever changing rules and exemptions.  We look to the Congress and the President to find common ground to stop the roller coaster which will take the current $2,000,000 federal estate tax exemption to $3,500,000 in 2009, make the sky the limit in 2010, and then roll it back to $1,000,000 in 2011 forevermore.  Hopefully, we will not be disappointed.

While watching political developments in Washington, we have not been standing still on the home front.  Our Bonita Springs and West Hartford offices moved to new quarters this year.  A new office on Florida’s east coast is being planned.

Our firm continues to be one of the largest Trusts and Estates practices in the country.  We count 53 attorneys and 30 paralegals and fiduciary accountants devoted solely to the needs of individual clients.  A complete listing is included with this letter.  They are assisted with the resources appropriate for an individual client practice by able litigation and commercial lawyers.

This year, not only do we celebrate our firm’s 98th anniversary, but also our lawyers’ achievements.  Among our lawyers are 15 Best Lawyers in America, 22 Super Lawyers, 10 American College of Trust and Estate Counsel Fellows, and one of Worth Magazine’s Top 100 Attorneys.  They serve as Directors and Trustees of private schools, health care organizations, local churches, land trusts, wildlife organizations, community foundations and private foundations.  This is without a doubt the most distinguished group of lawyers focused on individual clients ever assembled.  We are very proud of each and every one of them.

Please read the following pages with care and if you have any questions, call your Cummings & Lockwood attorney or one of us, at any time.

ANNUAL ESTATE PLANNING CHECKUP:  HOW FIT IS YOUR ESTATE PLAN?

Is your estate planning in shape, or does it need some work?  This may be a good time to meet with your Cummings & Lockwood attorney for a personalized analysis of the condition of your estate plan.  Get your estate plan in optimum health!

• Is Your Estate Plan Up-to-Date?
We encourage you to review your estate plan at least every three to five years to ensure that your plan takes into account any changes in your personal or financial circumstances and takes full advantage of changes in the tax laws. 

• Will 2008 Bring Any Estate Planning Events?
Consider whether upcoming events will necessitate any changes to your estate plan.  Are there potential family changes (marriage, birth or divorce), business issues (new job, establishing a new business, or the potential sale of an existing business), or estate planning events (a significant change in assets, a change in domicile, or the pending “expiration” of a trust such as a GRAT or QPRT) in your future?  Such events often are accompanied by estate planning responsibilities and opportunities that we would be happy to review with you. 

• Are Your Assets Properly Coordinated With Your Estate Plan?
An essential part of the estate planning process is to coordinate the beneficiary designations on assets such as retirement plans and life insurance with your estate plan.  Have you undertaken this crucial step?  For example, when you purchased new life insurance or changed jobs did you make sure these beneficiary designations match up with your plan?  Do you know what your current beneficiary designations provide?
In addition, if your estate plan provides for an Estate Tax Sheltered Trust for the benefit of a surviving spouse to be funded upon the death of the first to die of you and your spouse, you should make certain that each of you owns in your own name or in the name of your own Revocable Trust assets with a value at least equal to the amount exempt from federal estate tax ($2,000,000 in 2008).  Note that assets held by spouses as joint tenants with rights of survivorship or payable directly to a spouse by beneficiary designation (401(k), IRA, life insurance, etc.) do not count for this purpose.  Also, reallocating assets between spouses can have some tax and non-tax implications for certain couples, especially when one or both spouses are not U.S. citizens. 

• Do You Have Valid Powers of Attorney and Living Wills?
The law governing Living Wills and incapacity planning continues to evolve, especially as a result of increased emphasis on medical privacy and the passage of related statutes such as the Health Insurance Portability and Accountability Act (HIPAA).  This legislation has made it difficult for those named under Powers of Attorney and Living Wills to access medical records unless this authority is specifically granted in the document.  Talk to your Cummings & Lockwood attorney to make sure you have updated documents with the appropriate language.

• When Were Your Powers of Attorney Signed?
Generally, Durable Powers of Attorney remain legally valid until they are specifically revoked.  We are finding, however, that many financial institutions are reluctant to respect Powers of Attorney that are more than a few years old.  This is because of the institutions’ policies, not because the Powers of Attorney are no longer valid.  In light of this, we encourage you to sign new Powers of Attorney at least once every five years, to ensure that your wishes can be carried out.

• Have You Taken Full Advantage of Your 2007 Gifting Privileges? 
Under the current tax law, you may make gifts of up to $12,000 per recipient each year (or $24,000, if you and your spouse elect to “split gifts” on your gift tax returns) free of federal gift tax and without a reduction of your federal lifetime exemptions from estate and gift tax.  Unlimited gifts are allowed for tuition (if paid directly to the educational institution) and medical payments (if paid directly to the medical provider).
Please bear in mind that payment of insurance premiums for insurance held in an Irrevocable Life Insurance Trust is a gift to the trust beneficiaries for the purpose of determining whether you have fully used your gift tax annual exclusion.  For example, if you pay a $30,000 premium for a trust policy and there are four eligible beneficiaries, this is a $7,500 gift to each of them.  If you then give each beneficiary $5,000 in cash that year, there will be a total of $12,500 of taxable gifts for each of them, and a gift tax return is required.

• Do You Need to File 2007 Gift Tax Returns?
The gifts you make in 2007 may need to be reported on a federal (and possibly a state) gift tax return, which is due on or before April 15, 2008.  A Federal Gift Tax Return (Form 709) should be filed for gifts that exceed or do not qualify for the $12,000 annual exclusion or medical/educational exclusions, including certain contributions made to irrevocable trusts.  Federal Gift Tax Returns also must be filed to report gifts that are “split” between you and your spouse and/or if you wish to make certain elections relating to the use of your generation-skipping transfer tax exemption. 
Also, if you have a Grantor Retained Annuity Trust (“GRAT”) or Qualified Personal Residence Trust (“QPRT”) that will terminate soon, you should consider whether you should opt out of the automatic allocation of generation-skipping transfer tax exemption to any continuing trust for your beneficiaries that may be created under the GRAT or QPRT.  Your Cummings & Lockwood attorney can discuss this with you.

• Is Now the Time to Fund Your Revocable Trust?
Funding a Revocable Trust (sometimes also referred to as a “Living Trust”) may minimize some of the costs and delays attendant to the management of assets during incapacity or the probate of an estate.  This may be a good time to consider funding your Revocable Trust.  For more information, ask your Cummings & Lockwood attorney for a copy of our Client Memorandum on the subject of Administration of Revocable Trusts.

• Do You Properly Administer Your Insurance Trust?
Insurance premiums should be paid from an appropriate account and appropriate trust records should be kept.  If you have any questions about the administration of your Insurance Trust, please do not hesitate to ask your Cummings & Lockwood attorney for a copy of our Client Memorandum on the subject of Administration of Irrevocable Insurance Trusts.

• Have You Sent Your Annual Crummey Notice Letters?
Contributions to irrevocable trusts can qualify for the annual exclusion from gift tax if the trust beneficiaries have the right to withdraw the trust assets up to the amount of the annual gift tax exclusion.  To achieve this tax benefit, a written notice, often referred to as a “Crummey” letter, should be sent to the trust beneficiaries each year a contribution is made to the trust.  We strongly urge you to keep copies of these letters and proof of mailing in your files and with your Cummings & Lockwood attorney for safekeeping.

• Have You Properly Managed Your LLCs and Other Family Business Entities?
Family business entities, such as partnerships and LLCs, should be operated with the same discipline as any other active trade or business.  This may include the holding of periodic meetings of officers, preparation and filing of various business documents and periodic updating of the entity’s books and records.  If you have one or more of these business entities, review the actions taken in the past year to be certain that all proper records have been kept and all required filings have been made.

• Did You Pay Any Rent on Your Residence?
If you established a Qualified Personal Residence Trust (“QPRT”) and survived the term, it is extremely important that you enter into an arm’s length fair market value rental arrangement with the new owner (who may be your children or a trust for their benefit).  The arrangement should be reflected in a written lease agreement which should be renewed annually at fair market rates.

 
THE FUTURE OF ESTATE TAXATION

The current federal law relating to estate and gift taxes is summarized in the following chart:

Conrad admits that predicting what Congress will do is virtually impossible.  He speculates that: "Congress will in 2008 or 2009 enact a new estate tax law with a $3.5 million to $5 million exemption ($7 million to $10 million for a couple) and with rates ranging from 25% to 40% or 45%."

In the midst of the uncertain future of estate taxation, we continue to urge our clients to resist the natural temptation to defer important estate planning matters while waiting for future legislative guidance.  Instead, you should continue to take whatever estate planning steps are necessary to preserve your assets and protect your loved ones.  As always, Cummings & Lockwood estate planning documents incorporate the flexibility needed to achieve our clients’ goals regardless of what Congress may do in the future. 
 
SELECTED 2007 DEVELOPMENTS

More Flexibility for Transferring Retirement Benefits at Death

The IRS recently clarified a new rule concerning rollovers of qualified retirement plans, such as 401(k) plans, after the death of a retirement plan participant.  Before this clarification, only surviving spouses were guaranteed the ability to “stretch” distributions from inherited plans over their life expectancies.  Beginning January 1, 2008, nonspouse beneficiaries are guaranteed to have this ability as well.

The Pension Protection Act of 2006 provided nonspouse beneficiaries with the ability to roll over an inherited qualified plan to a “stretch” IRA.  Unfortunately, the IRS took the position that nonspouse beneficiary rollovers were optional plan provisions for 2007.  As a result, many employers did not offer this feature.  The IRS has reversed its position and now mandates that all qualified plans allow a rollover for nonspouse beneficiaries to a “stretch” IRA for plan years beginning in 2008 and thereafter.

The ability to “stretch” distributions from an inherited retirement plan over the life expectancy of a beneficiary is significant because it allows the beneficiary to defer the payment of income taxes on the plan assets.  When distributions are made from a retirement plan, the recipient of the distribution pays income tax on the distribution as though it was earned income.  Before the recent clarification, most nonspouse beneficiaries of qualified retirement plans were forced to take a lump sum distribution of the entire plan following the death of the plan participant.  The income tax consequences, when combined with the estate tax consequences, could be considerable.  As a result, clients with large qualified plans were encouraged to transfer their interests in the employer plan to an IRA during their lifetimes in order to guarantee their nonspouse beneficiaries the ability to stretch out the distributions.  In light of the rule change, a lifetime transfer of a qualified plan to an IRA is no longer necessary to achieve “stretch” distribution planning.

Charitable “Rollover” of an IRA

For 2007, an individual age 70½ or older can make direct charitable gifts from an IRA (including required minimum distributions) of up to $100,000 to public charities (other than donor advised funds and supporting organizations) and not report the IRA distributions as taxable income on his or her federal income tax return.  Donations to a community foundation’s endowment, field-of-interest fund or designated fund qualify if the donor has no advisory rights.  Donations to private foundations (except operating and "conduit" foundations) don’t qualify for the tax-free rollover.

Important to remember:  Gifts must be made directly from your IRA to the qualified charity; not first payable to you with a subsequent transfer to the charity.  So the check must be payable to the charity, not to you.  But it is OK if the check is payable to the charity but delivered by you to the charity (instead of being delivered by the IRA custodian).  Congress is now considering legislation that would extend this provision for one or two years.
 
Some finer but crucial points:

Although charitable IRA distributions are not deductible charitable contributions, they are excluded from income and therefore not taken into account for purposes of the adjusted gross income ceilings for traditional charitable gifts.

For inherited IRAs, the exclusion from gross income is available for distributions from an IRA maintained for the benefit of a beneficiary after the death of the IRA owner if the beneficiary has attained age 70½ before the distribution is made.

Critical substantiation requirements:  Although not deductible, to be excludable from your gross income, the IRA payments to the charity must still satisfy the substantiation requirements for charitable gifts.  Get a receipt from the charity by the earlier of the April 15, 2008 due date for filing your return or the actual filing of your return.  The receipt must state the amount of the gift and that no goods or services were given in consideration of the gift.  So don’t accept a chicken dinner or any other benefit, no matter how small.

“Kiddie” Tax Becomes Young Adult Tax

The “kiddie” tax prevents taxpayers from shifting income from their investments to their children in order to take advantage of a child’s lower tax bracket, thereby lowering the family’s overall tax bill.  For 2007, if a child under 18 years of age has unearned income (meaning income from investments as opposed to wages) in excess of $1,700, the child’s unearned income will be taxed at the child’s parents’ highest marginal tax rate.  The child’s earned income and the first $1,700 of unearned income will be taxed at the child’s lower income tax rate.

As a result of the Small Business and Work Opportunity Tax Act, however, the kiddie tax will expand its reach.  In 2008, the kiddie tax also will include children who are 18 years old or who are full-time students over the age of 18 and under the age of 24.  In addition, the unearned income exemption will increase to $1,800.  A   full-time student means a person attending college full-time for at least five months of the year.  The tax will not apply to children between 18 to 24 if the child’s earned income accounts for more than half of the child’s support. 

The change in the law will result in a higher tax bill for families with college age children.  Children who are generating investment income independent of their parents should consult with their parents and their parents’ tax advisors as to their tax filing requirements.  For example, if parents had transferred securities to their children in order to take advantage of the 0% capital gains rate available in 2008 for the lowest bracket taxpayers, the change in the law effectively prevents the child from taking advantage of the lower rate.

Florida Homestead & Revocable Trusts

The Florida homestead exemption protects a person’s home from creditors, regardless of its value, provided certain constitutional requirements are met.  In 2001, a Florida bankruptcy court held that the homestead exemption was not available if the homestead was held in a revocable trust.  Although a number of state courts in Florida have addressed this same issue and have uniformly held that the homestead exemption is available to Florida residents who hold their homesteads in revocable trusts, as a result of the 2001 case, we advised clients not to hold a homestead in a revocable trust.  Since 2006, however, two other bankruptcy courts in Florida rejected the 2001 decision and held that a residence in Florida held in a revocable trust may qualify for homestead protection.  In fact, the same judge who ruled unfavorably in 2001 was recently overturned on appeal in a similar case.  Consequently, bankruptcy courts should now rule consistently with Florida law that a homestead exemption is available for property held in a revocable trust.  Notwithstanding the favorable case law following the original 2001 decision, we continue to recommend holding title to a homestead in your individual name instead of through a revocable trust.  A resident’s ability to claim the benefit of the homestead exemption remains more certain when the residence is titled in an individual’s name. 

Please talk to your Cummings & Lockwood attorney if you have any questions about how these cases may impact your ability to avail yourself of the homestead exemption.

Qualified Conservation Easements

A “Qualified Conservation Easement” is a way to benefit your community and also your tax situation.  This technique is particularly useful for people who do not intend to maximize the development of their land and who wish to keep their land in the family for future generations. 

The easement is a legal restriction prohibiting future development of your land.  The benefit of that restriction is given to a charity, such as a land trust.  The restriction must be for public use and recreation, for the promotion of wildlife protection, for the preservation of historic land or structures or, most typically, simply to preserve open space.  You then have the value of your land appraised with and without the restriction and the difference is taken as a charitable deduction on your federal income tax return (up to 30% of your adjusted gross income in most years).  Any value which cannot be deducted in the current year can be carried over up to five future years. 

Furthermore, upon your death, your estate receives a deduction for estate tax purposes for the lesser of 40% of the value of the land subject to the easement or $500,000.  Thus, there is a triple tax deduction for doing the Conservation Easement:  the income tax deduction, the fact that the value of the easement is not included in your estate, and the additional charitable estate tax deduction.  Until the end of 2007, there is a special opportunity:  you will be able to take a deduction of up to 50% of your adjusted gross income with a carry-forward of the excess deduction for up to 15 years, instead of 5 years.  Please talk to your Cummings & Lockwood attorney if you are interested in a Qualified Conservation Easement. 

New Restrictions on Private Foundation Grantmaking

The Pension Protection Act of 2006 has imposed new restrictions on private foundation grantmaking.  Now grants to certain supporting organizations must be made using the same grant procedures required when making a grant to a private foundation, including using a grant agreement, obtaining grant reports, and reporting to the IRS on the grant.  Failure to follow these procedures when required will give rise to penalty taxes.  In addition, grants made to certain supporting organizations cannot be counted towards satisfying a private foundation's 5% annual distribution requirement.  The IRS permits a private foundation to use and rely on GuideStar's CharityCheck (a subscription service at www.guidestar.org) to determine whether it must follow special procedures when making a grant.

An alternative way to satisfy these additional restrictions is for the private foundation to establish and make grants to a donor-advised fund.  The foundation can then recommend grants to be made from the donor-advised fund to various charities.  The charity administering the donor-advised fund program will be responsible for determining and documenting that the grantee charitable organization is qualified to receive a grant, and also will handle making the grants and reporting them to the IRS.  This simplifies the foundation’s recordkeeping and reporting and satisfies the foundation’s compliance requirements.

New Florida Trust Code May Change How Your Florida Trust Is Administered

On July 1, 2007, the new Florida Trust Code became effective.  This Code will affect the governance and administration of most Florida trusts, regardless of when such trusts were created.  While many principles of the former Florida Trust Law are found within the Code, there are a few important changes.  For example, although Florida still requires trustees to inform and account to trust beneficiaries at least annually, trust grantors may now specify a “designated representative” to receive notices and information on behalf of the trust beneficiaries.  The new Code also provides default rules for the change and/or succession in trustees when a trust instrument is silent on the subject.  In fact, the new Code clarifies the necessary requirements for the creation, modification and termination of Florida trusts.  These are but a few examples of the changes made by the Florida Trust Code.  Some rules provided by the Code are mandatory; others can be modified by providing otherwise in the trust instrument.  To learn more about the Florida Trust Code and how it might apply to your Florida trust (or to a Florida trust of which you are a beneficiary), consult your Cummings & Lockwood attorney.

Possible Change in the Taxation of Municipal Bond Interest

Residents of Connecticut and New York who own municipal bonds issued by their state of residence do not pay state income taxes on those bonds, but do pay state income taxes on municipal bonds issued by states outside of their primary residence.  A majority of states, including Kentucky, tax municipal bonds in this manner.  In January 2006, the Kentucky Court of Appeals ruled, in Kentucky v. Davis, that the "dormant" Commerce Clause of the Constitution prohibited Kentucky from taxing interest received by its residents for municipal bonds issued outside of Kentucky.

The Supreme Court has decided to hear the Kentucky v. Davis case during the upcoming term.  The Supreme Court will determine whether or not the manner in which Kentucky, Connecticut, New York and many other states tax municipal bonds violates the "dormant" Commerce Clause's prohibition against state regulations which discriminate against citizens of other states without congressional authorization.  Observers of the Supreme Court believe that a decision from the last term will enable the Court to uphold the manner in which Kentucky, Connecticut, New York and other states tax municipal bonds.  If those observers prove mistaken, the decision that the Kentucky system of taxation violates the “dormant” Commerce Clause could lead to the demise of state-specific municipal bond funds in favor of larger national funds.  In light of the important role which municipal bonds play in the role of many investors, the Kentucky v. Davis case could have a significant impact on the manner in which investment portfolios are structured in the future.

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Copyright 2007, Cummings & Lockwood LLC. All rights reserved.
In this Update, we have deliberately simplified technical aspects of the law in the interest of clear communication.  Under no circumstances should you or your advisors rely solely on the contents of this Update for legal advice, nor should you reach any decisions with respect to your personal tax or estate planning without further discussion and consultation with your advisors.

In accordance with IRS Circular 230, we are required to disclose that:  (i) this memorandum was not intended or written by us to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer; (ii) this memorandum was written to support the promotion or marketing of the transaction(s) or matter(s) addressed by the memorandum; and (iii) each taxpayer should seek advice on his or her particular circumstances from an independent tax advisor.