Dear Clients and Friends:

One hundred years ago, Homer S. Cummings and Charles D. Lockwood founded Cummings & Lockwood to serve the legal needs of local families and businesses.  While we have grown significantly in both size and breadth over the last century, we remain fully committed to providing our clients with the highest quality legal services and adhering to the highest standards of professional conduct.  As we celebrate the firm’s past on this important anniversary, we look forward to the future and will continue to use our collective expertise to serve our clients’ needs.

We continue to have one of the largest Trusts and Estates practices in the country, as well as significant commercial and litigation practices. We currently have 75 attorneys firm wide, 52 of whom, together with 28 paralegals and fiduciary accountants, are devoted solely to the needs of individual clients.  Among our lawyers are 20 Best Lawyers in America and 11 American College of Trust and Estate Counsel Fellows.  One of our lawyers has been appointed by Governor Rell to serve as one of Connecticut’s eight Commissioners on Uniform Laws.

We welcome this opportunity to share with you some changes in the law and recent developments that may affect your estate planning.  Please let your Cummings & Lockwood attorney know if you have any questions or wish to discuss any of these issues in additional detail.

FEDERAL ESTATE TAX REFORM
In 2001, Congress established the federal estate tax and gift tax exemption amounts and tax rates for the following ten years.  During 2009, the federal estate tax and generation-skipping transfer tax exemption amount is $3,500,000, the federal gift tax exemption amount is $1,000,000 and the top tax rate is 45%.  If the 2001 law is unchanged by Congress, the federal estate tax and generation-skipping transfer tax will be repealed in 2010.  However, the 2001 law will “sunset” on January 1, 2011.  This means that the federal estate and gift tax would be reinstated on January 1, 2011, at the 2001 exemption amounts and rates (a $1,000,000 exemption from federal estate tax and gift tax and a top tax rate of 55%).

President Obama’s budget proposal indicated that he favored maintaining a $3,500,000 estate tax exemption and a top tax rate of 45%.  However, as Congress has focused on other pressing issues such as the economy and health care reform, as of the date this letter was printed, only the House has approved any legislation that would change the current law.  Given the federal government’s need for additional revenue, we expect action to be taken before December 31, 2009, to prevent the repeal in 2010, although it is unlikely that permanent tax reform will be accomplished before the end of the year.  It is widely believed that Congress will extend the 2009 estate and gift tax laws through 2010 at the 2009 exemption and rate levels and revisit the issue before the 2001 exemption amounts and tax rates become effective on January 1, 2011.

Despite the uncertainty of the federal law, it remains important to review and update your estate plan as necessary to minimize taxes, ensure that your assets pass to the intended beneficiaries in the manner in which you want them to pass, protect the assets passing to your beneficiaries from creditors, and name appropriate fiduciaries to manage your assets in the event of your incapacity or death.
 
If Congress passes legislation by the end of the year which substantially changes the current law rather than merely extending the 2009 estate and gift tax laws through 2010, we will plan a series of seminars to update you on those changes.  If you are a Connecticut resident who expects to be in Florida after January 1, 2010, and would like to hear from us if we schedule seminars on this topic in our Bonita Springs and Naples offices, please contact your Cummings & Lockwood attorney and we will share that schedule with you as soon as it is available.

CONNECTICUT ESTATE TAX REFORM
Since 2001, the Connecticut estate tax law and the federal estate tax law have been “decoupled,” which means they are completely separate and operate independently of one another.  Currently, the first $2,000,000 of taxable gifts that do not qualify for the annual exclusion are exempt from Connecticut gift tax, and the first $2,000,000 (reduced by any gift tax exemption used during lifetime) of estate assets are exempt from Connecticut estate tax.
 
Presently, the full value of any estate or gift valued at more than $2,000,000 is taxable in Connecticut.  For example, if a Connecticut resident died in 2009 with an estate of $2,000,000, no state estate tax would be due, but if the same person died in 2009 with an estate of $2,000,001, a Connecticut estate tax of $101,700 would be due (assuming the property was not passing to a spouse).  This effect is often referred to as the “cliff.”

While the future of the federal estate tax is still uncertain, Connecticut passed legislation in September 2009 that revamped the state estate tax.  The new Connecticut law (i) increases the state estate tax exemption amount, (ii) increases the state gift tax exemption amount, (iii) reduces the marginal rates on estates and gifts in excess of these exemption amounts, and (iv) eliminates the cliff.

For deaths on or after January 1, 2010, the Connecticut estate tax exemption amount is $3,500,000.  Likewise, on January 1, 2010, the Connecticut gift tax exemption amount will increase to $3,500,000.  Only the portion of the estate or gift in excess of the exemption amount will be taxed, thereby eliminating the cliff.  The Connecticut estate and gift tax rates were reduced by 25% and will range from 7.2% to a top rate of 12% for estates in excess of $10,100,000.

The new law also shortens the deadline for filing a Connecticut estate tax return and paying any Connecticut estate taxes for decedents dying after July 1, 2009, from nine months to six months.

New Jersey, Rhode Island, New York and Massachusetts state estate taxes also are decoupled from the federal estate tax.  Although it appears that the federal and Connecticut exemption amounts may be the same during 2010, it is important to remember that the Connecticut and federal estate tax laws remain decoupled, and the exemption amounts may be different in the future.  The decoupled tax systems make estate planning more complex, especially for married couples living in decoupled states or owning real estate in decoupled states.  For example, many older estate plans provide that at the death of the first spouse, an amount of the decedent’s assets equal to the federal exemption amount will be held in a trust for the benefit of the decedent’s spouse and descendants.  The assets in this trust will pass free of estate taxes at the survivor’s death, but the trust does not qualify for the marital deduction.  If the decedent died in 2009, the trust would be funded with $3,500,000.  If the decedent resided in a decoupled state with an exemption amount lower than $3,500,000, state estate taxes would be due on the difference between the federal exemption amount and the state exemption amount.

However, it is possible to structure an estate plan which provides flexibility by allowing the executor of the decedent’s estate to make certain decisions regarding the deferral and payment of taxes with the benefit of knowing the then existing exemption amounts.  To prevent unintended tax consequences at your death, it is important to review your estate planning documents with your Cummings & Lockwood attorney to determine if they adequately meet your current needs in light of the changing law.

WAIVER OF 2009 REQUIRED MINIMUM DISTRIBUTIONS AND ROLLOVER OF CERTAIN DISTRIBUTIONS
Generally, upon reaching the age of 70½, a participant in a qualified retirement plan or an owner of a traditional IRA is required to make withdrawals from the plan or account, often referred to as “required minimum distributions” or “RMDs.”  The first withdrawal must be made by April 1 of the year following the year in which such participant or owner reaches age 70½.  An RMD must then be made by the end of each year following the year in which the participant or owner reached age 70½.  The timing of RMDs to a beneficiary of a decedent’s retirement plan or IRA varies depending on certain factors.  Generally, RMDs cannot be rolled over into an IRA or an eligible retirement plan.

In response to the downturn in the economy, Congress enacted the Worker, Retiree and Employer Recovery Act of 2008 (the “Act”) in December 2008.  The Act waives the RMD requirements for calendar year 2009.  The Act, however, does not waive the RMD requirements for calendar year 2010 or thereafter. The effects of this waiver are:

 1.  If you were receiving RMDs prior to 2009, you do not have to withdraw an RMD during the 2009 calendar year. 
 2.  If you reached the age of 70½ during 2008, you were required to receive your initial RMD by April 1, 2009.  However, you do not have to withdraw an additional RMD by December 31, 2009.
 3.  If you reached the age of 70½ during 2009, you do not have to withdraw an RMD by April 1, 2010.  However, you must take your initial RMD by December 31, 2010.
 4.  If you are a beneficiary receiving distributions from a decedent’s plan or IRA over    five years, you do not have to take a distribution in 2009, which effectively allows you to receive the benefits over six years, rather than over five years.

Pursuant to recent IRS guidance, a qualified retirement plan may allow you to roll over a distribution you received during 2009 that would otherwise have been an RMD.  The distribution may be rolled over into an IRA or other eligible retirement plan by the later of November 30, 2009, or sixty (60) days after you received the distribution.

If you have any questions about whether and when you are required to commence taking RMDs, the amount and timing of such RMDs, or if you can roll over a 2009 RMD, you should consult with your Cummings & Lockwood attorney.

CONVERSION OF IRA TO ROTH IRA
Currently, you cannot convert a traditional IRA or a rollover IRA to a Roth IRA unless your modified adjusted gross income is $100,000 or less.  However, the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) repealed the modified adjusted gross income limitation beginning January 1, 2010.  As a result, regardless of your income or age, you can convert all or any part of an IRA account to a Roth IRA on or after January 1, 2010.

Generally, the funds contributed to an IRA are “pre-tax” and, therefore, the portion converted to a Roth IRA will be treated as ordinary income reportable in the year of conversion.  However, if you convert to a Roth IRA during 2010, you can report one half of the income in 2011 and one half of the income in 2012 unless you affirmatively elect to recognize all the income in 2010.  If you haven’t reached age 59½, by using funds held outside of your IRA to pay the taxes resulting from the conversion, you can avoid a 10% early withdrawal penalty on the funds you would have withdrawn to pay taxes.  In addition, it may be prudent to use funds held outside of your IRA to pay the taxes, to allow the continued tax-free growth of the funds in your IRA.

TIPRA did not change the limitations on your ability to contribute to a Roth IRA.  During 2009 and 2010, a single taxpayer or a married taxpayer filing singly with an adjusted gross income of $120,000 or more cannot contribute to a Roth IRA, and a married couple filing jointly with an adjusted gross income of $176,000 or more in 2009 or $177,000 or more in 2010 cannot contribute to a Roth IRA.  The limits on the amount of contributions to a Roth IRA are phased out at lower income levels.  During each of 2009 and 2010, the maximum contribution is $5,000, or $6,000 for those over the age of 50.

If you have reached age 59½ and the account has been open for five years, qualified distributions to you from a Roth IRA are tax-free.  This makes conversion to a Roth IRA worth considering if you anticipate that your income tax rate will increase, whether due to an increase in the federal and state income tax rates or because you will be in a higher income tax bracket later in life.  Unlike traditional IRAs and rollover IRAs, owners of Roth IRAs are not required to take RMDs and may continue to contribute to the Roth IRA after they reach age 70½.

It is important to remember that assets held in an IRA and a Roth IRA do not pass at death by your Will or trust but according to beneficiary designation.  As these assets may be a substantial part of your estate, it is important to coordinate the beneficiary designations with the rest of your estate plan. 

NEW YORK POWER OF ATTORNEY CHANGES
Effective September 1, 2009, New York’s law regarding Powers of Attorney and the approved New York Statutory Short Form Power of Attorney have been changed.  While Powers of Attorney signed in New York and/or signed by New York residents before September 1, 2009 remain valid, the new law contains pitfalls for the unwary.  For example, signing any Power of Attorney in New York, whether limited or broad in scope and whether signed by a New York resident or nonresident, may inadvertently revoke your existing Powers of Attorney for incapacity and estate planning purposes, so care should be taken to ensure you do not accidentally invalidate part of your estate plan.  The application of the new law to existing Powers of Attorney is unclear, so you should discuss with your Cummings & Lockwood attorney whether to sign new Powers of Attorney.

DESIGNATED REPRESENTATIVES FOR FLORIDA TRUSTS
The Florida Trust Code now requires a Trustee of an irrevocable trust to provide annual accountings to “qualified beneficiaries,” which include present and possible future recipients of trust income and principal.  Further, a Trustee also must provide other trust information upon request by any qualified beneficiary, including a copy of the trust and information about the trust’s assets and liabilities.  The right to receive a copy of the trust agreement allows a beneficiary to review all previous trust amendments, which may disclose that a beneficiary was disinherited under a prior amendment.  These expanded Trustee duties could potentially frustrate your intentions with respect to your estate plan and the administration of the trust.  However, the Florida Trust Code permits the grantor to appoint, in the trust instrument or any subsequent amendment, a “designated representative” who would receive annual accountings and other trust information on behalf of one or more qualified beneficiaries.  You may wish to appoint a designated representative in your revocable trust, since that will become subject to the new rule at your death, or in an existing irrevocable trust, such as an insurance trust.  In many ways, the appointment of a designated representative could promote family harmony.

FLORIDA PROPERTY TAX HOMESTEAD EXEMPTION
If you became a Florida resident during 2009, you must apply for the property tax homestead exemption with respect to your Florida home no later than March 1, 2010.  If you were already a Florida resident prior to 2009, you may need to reapply for the exemption if during 2009 you purchased a new Florida home or your Florida home was transferred to your spouse or to a trust which qualifies for the exemption.  For example, if a Florida homestead was owned in survivorship by both spouses and one spouse died in 2009, the property automatically passed to the surviving spouse.  If the surviving spouse did not sign the original homestead application, he would have to reapply to continue to receive the property tax exemption.  Before preparing an application, you should call your County Property Appraiser to determine your county’s application requirements.  In most counties, you will need to submit the following items, which must be dated before January 1, 2010:  (1) the recorded deed reflecting your ownership (or your trust’s ownership) of your Florida home, (2) your Florida driver’s license, (3) your Florida voter’s registration, (4) your Florida motor vehicle registration, (5) a current utility bill issued in your name, and (6) your Social Security number.  If you transferred your home to a trust, you may also need to provide a copy of the trust.  In order for a trust to qualify for an exemption, it needs to include special language that confirms your right to use, possess and occupy your home.

DEVISING FLORIDA HOMESTEAD
Florida’s homestead laws afford significant benefits to Florida residents.  Among these benefits are a property tax exemption of up to $50,000, prohibitions against unexpected surges in property tax bills and protection from creditors’ claims.  You should also be aware that Florida law restricts the manner by which a Florida resident can devise his homestead at death.  For example, if a Florida resident is survived by a spouse, homestead protections may prohibit using a Florida homestead to fund a trust for the surviving spouse designed to maximize the federal estate tax exemption.  To avoid this result, married clients can execute a Conditional Homestead Waiver, which would allow the Florida homestead to be available to use a portion of the survivor’s estate tax exemption at his death.  If you have not already executed a Conditional Homestead Waiver, we recommend that you discuss the potential advantages and disadvantages with your Cummings & Lockwood attorney.  In addition, you should also contact your attorney prior to transferring title of your Florida homestead or retitling your Florida homestead into the name of any trust.

HIPAA WAIVERS
Under the Health Insurance Portability and Accountability Act (“HIPAA”), federal law restricts access to protected health information by anyone not involved in the treatment, payment or health care operations without the patient’s permission.  Having an Authorization for Use and Disclosure of Protected Information (a “HIPAA Waiver”) will ensure that the people you designate will be able to access the information they need to make important decisions concerning your care.  Additionally, a HIPAA Waiver allows health care providers to disclose information concerning your health to your designees for purposes of determining your incapacity.

SAME SEX MARRIAGE IN CONNECTICUT
On October 28, 2008, the Connecticut Supreme Court ruled in Kerrigan v. Commissioner that same sex couples can legally marry, and on April 23, 2009, an act codifying the decision became law in Connecticut.  Civil unions previously entered into in Connecticut (unless proceedings to terminate the union have been filed) will be automatically converted to marriage on October 1, 2010.

Following Kerrigan, a person in a same sex marriage in Connecticut will have many of the same rights as a person in a traditional marriage, including hospital visitation rights, family leave benefits, intestate rights of inheritance and eligibility for joint income tax filings.  Furthermore, the ability to pass property in excess of the Connecticut estate tax exemption tax-free to a spouse is available to same sex married couples.

In contrast, the federal Defense of Marriage Act, enacted in 1996, defines marriage as a legal union between one man and one woman as husband and wife and does not require any state or the federal government to recognize same sex marriage.  The effect of this, among other things, is that same sex couples (whether legally married in Connecticut or elsewhere) are not entitled to the federal estate tax and gift tax marital deductions and cannot file a federal joint income tax return. 

CONNECTICUT PROBATE COURT REFORM
This year, the Connecticut General Assembly enacted historic legislation which will ultimately restructure Connecticut’s probate system. By January 5, 2011, the 117 probate courts will be reduced to 54, with centralized finances, a reduction in the number of non-attorney judges (as all new judges must be lawyers, eventually they all will be), mandatory work hours and additional reforms and oversight designed to improve efficiency and professionalism in the system.

CONNECTICUT PET TRUST STATUTE
A new law effective October 1, 2009, allows Connecticut residents to establish a trust for the benefit of their pets to protect the animals from neglect or euthanasia in the event the owner can no longer take care of them or dies.  The owner must designate a “trust protector” who will oversee the trust and act in the best interest of the pets.  For the first time, courts now have jurisdiction over the pet trusts, thereby ensuring that they are enforceable.

______________________________________________________
Copyright 2009, 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 Update is 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 Update was written to support the promotion or marketing of the transaction(s) or matter(s) addressed by such materials; and (iii) each taxpayer should seek advice on his or her particular circumstances from an independent tax advisor.