On a periodic basis, we write to discuss changes in the law that may impact our clients’ estate planning and to provide updated information about our law firm and the services we provide. We welcome this opportunity to share our insights into a number of recent developments and hope that you will feel free to contact your Cummings & Lockwood attorney to discuss any of the items mentioned in this letter which you would like to review in additional detail.

While we wait for more certainty from Congress, we are left with the 10-year plan which Congress created in 2001. That plan calls for the phase-out of the federal estate tax in 2010 and its reinstatement in 2011 with the highest rates in more than 10 years. In the meantime, the final scheduled rate adjustment will occur on January 1, 2007, and the exemption of each individual from the estate tax will increase to $3,500,000 on January 1, 2009. While gift tax rates will also decline to 45% on January 1, 2007, the federal gift tax exemption does not change from its current $1,000,000 level.

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

Although both opponents and supporters of the federal estate tax system have been highly critical of this 10-year plan, more sensible reform solutions appear to have fallen victim to a combination of political calculations and budgetary pressure. The failure of the federal estate tax legislation in 2006, combined with the results of the 2006 Congressional elections, suggests that outright repeal of the estate tax is a more remote possibility than it has been at any time during the last 10 years. At the same time, in light of the relatively modest scheduled changes to the estate tax prior to 2010, it is not difficult to imagine that other priorities will continue to dominate the attention of Washington and that we may not see a significant piece of estate tax legislation for several years.

Many of our clients have echoed the frustration of the commentators that it is difficult to plan for a federal estate tax system which is changing from year to year and seems like a certain candidate for significant reform within the next few years. While we are sympathetic to that frustration, we continue to emphasize that it is important to plan for the existing federal estate tax and for the likelihood that the estate tax will remain in place beyond 2009. At Cummings & Lockwood, we are constantly updating our documents to ensure that they include the flexibility required to achieve the objectives of our clients regardless of what Congress may do in the future. Therefore, this remains an appropriate time to review your estate plan with us in order to ensure that it takes full advantage of the existing federal estate tax system and is consistent with your objectives.

President Bush signed the Pension Protection Act of 2006 ("the PPA") into law on August 17, 2006. The PPA is a comprehensive piece of legislation which will have an impact on many different estate planning arenas, including charitable giving.

While its charitable giving incentives are rather modest, the PPA places significant limitations on the deductibility of a host of charitable contributions that have been of particular concern to Congress in recent years. The PPA requires more careful recordkeeping for charitable donations made after January 1, 2007. In order to receive a deduction for a contribution to charity, the donor will be required to provide a cancelled check, bank statement or receipt from the charity memorializing the name of the charity and the date and amount of the gift. Thus, the onus has shifted to taxpayers to substantiate small charitable cash contributions that have been made without any documentation in the past, as, for example, periodic cash contributions to a church.

The PPA similarly attempts to discourage unsubstantiated charitable deductions for clothing or household items donated after August 17, 2006. The taxpayer seeking a deduction for donations of clothing or household items will be required to demonstrate that the donated items were in "good" used condition or better. It will still be possible to receive a deduction for clothing or items which are not in "good" condition if the donor can produce a qualified appraisal confirming that the value of the donated item is in excess of $500.

The PPA defines what a donor advised fund is for the first time. It also mandates a one-year study by the Treasury to determine the additional rules that should be imposed on donor advised funds. The PPA restricts the types of grants donor advised funds can make, particularly those to Supporting Organizations (charitable organizations whose purpose is to support other charities). It also creates penalties for any transactions that benefit the donor to a donor advised fund. There are additional reporting requirements for donor advised funds, and the private foundation excise tax on excess business holdings now applies to donor advised funds.

The PPA includes sweeping provisions on Supporting Organizations, which Congress has perceived to be an area of abuse for years. In addition to calling for a Treasury study on Supporting Organizations, there are a number of new rules. The new rules impose excise taxes on any payments made by a Supporting Organization to a broad range of disqualified persons. Certain Supporting Organizations are now subject to excess business holdings rules and are prohibited from supporting foreign charities.

The PPA made three changes that affect private foundations: (1) it doubled the penalties for violating the private foundation excise tax rules, (2) it broadened the types of income that are subject to the 2% excise income tax, and (3) it imposed new restrictions on grants to certain (but not all) Supporting Organizations. The consequence of the new grant restrictions for private foundations is that it increases the "due diligence" that must be done before making a grant in order to protect the foundation and its fiduciaries from liability for penalty taxes. Please call your attorney if you would like us to send you a copy of our client memorandum, "Provisions of The Pension Protection Act of 2006 Affecting Private Foundations."

Retirement accounts (qualified plans and individual retirement accounts) present an opportunity to defer income taxes for both the account owner during his or her life and for the successor beneficiaries after the owner’s death. Sometimes the best estate planning choice for the successor beneficiaries is a trust for the owner’s family. IRS regulations and rulings have made it difficult to use the beneficiary designation forms which custodians typically provide in order to name a trust as the successor beneficiary. If you have not reviewed your retirement account beneficiary designations recently to confirm that they are consistent with your income tax and estate planning objectives, we recommend that you do so now. Your carefully constructed estate plan can be frustrated if the beneficiary designations for your retirement accounts are not coordinated with your estate planning documents.

The Pension Protection Act of 2006 ("the PPA") presents a notable option for individuals who are interested in using funds from their IRA in order to make a contribution to charity. In the past, amounts which were withdrawn from an IRA and then contributed to charity were first included in the donor’s income and then reported as an itemized deduction. The PPA permits an individual to make contributions of up to $100,000 from the IRA account directly to qualified charities (excluding donor advised funds and private foundations) during 2006 and 2007. The amount that the charity receives will be deemed a portion of the donor’s minimum required distribution. Naturally, there are some restrictions on contributions made in this manner. For example, the transfer must be made directly from the IRA to the charity and the donor must have already attained age 70 ½.

Finally, the PPA presents a new potential opportunity for non-spouse beneficiaries of a 401(k). Under the existing rules, non-spouse beneficiaries are not permitted to roll over distributions resulting from the participant’s death and, as a result, may incur an immediate tax liability upon distribution. Beginning in 2007, a non-spouse beneficiary will be allowed to roll over the benefits they receive from a 401(k) to an IRA. The IRA would be treated as an inherited IRA and subject to the minimum distribution rules that apply to inherited IRAs, but this opportunity will permit significant income tax deferral for many non-spouse beneficiaries.

Dealing with one’s potential incapacity can be easily overlooked. The Health Insurance Portability and Accountability Act (HIPAA) was passed by Congress in order to prevent the unauthorized sharing of health information. The fines associated with a HIPAA violation are so severe that health care providers have interpreted HIPAA requirements very narrowly. This has led to situations in which doctors and other health care providers are prohibited from talking to a patient’s spouse or other immediate family members about a patient’s medical affairs without the patient’s prior consent. Individuals can sign a form designed to authorize their health care providers to share information concerning their care with their designated family members and, if necessary, their attorney. This form is referred to as a "HIPAA Authorization" and is ordinarily signed in conjunction with other estate planning documents.

Governor Jodi Rell signed new legislation that modernizes the Connecticut statutes governing Living Wills. Although Connecticut residents should not feel obligated to immediately revisit their Living Wills as a result of this new legislation, we have updated our Connecticut Living Will forms to address both HIPAA and the changes in the Connecticut legislative regime.

The Pension Protection Act of 2006 permanently extends the rules allowing for Section 529 accounts, which have become a popular way to finance college education costs. Beginning in 2006, Connecticut taxpayers can deduct from their gross income amounts which were contributed to Connecticut’s Section 529 Plan, known as the Connecticut Higher Education Trust ("CHET"). A Connecticut taxpayer cannot deduct contributions to another state’s 529 plan, and the annual deductions for CHET contributions are limited to $5,000 for individual taxpayers (or $10,000 for taxpayers filing joint returns).

The "Med-Ed" exclusion provides that a donor can make tuition payments directly to a school or payments for medical care directly to the provider and that those payments are not taxable gifts and do not count against the donor’s ability to make annual exclusion gifts of $12,000 to any individual in any year. The IRS has confirmed in a 2006 private letter ruling that prepaid tuition payments qualify for this exclusion. Therefore, tuition payments remain a powerful tool which our clients can use in order to benefit the members of their family while reducing their own exposure to the estate tax. The facts which led to the private letter ruling illustrate the potential advantages of this approach: the grandmother who requested the ruling made nonrefundable prepaid tuition payments through grade twelve for six of her grandchildren who were attending a private school.

The Deficit Reduction Act of 2005 ("the DRA") has made it much more difficult for elders who need long-term care to qualify for the Medicaid program. A single person who is applying for Medicaid cannot have more than $1,600 in his or her name. Prior to the DRA, the Medicaid program "looked-back" at gifts which an individual made during the previous 36 months. Most gifts during that period of time created a penalty period, or limited period of ineligibility, following the date of the gift. This meant that an individual could transfer unlimited amounts to family and qualify for Medicaid after waiting 36 months with no additional delay, if he or she spent down other countable assets to the $1,600 cap by the time of the application.

The DRA has changed this in two important respects. First, the look-back period has increased from 36 months to 60 months, dramatically increasing the amount of money the individual has to retain to pay for care during the look-back period. Second, the penalty period starts not on the date of the transfer, but much later, on the date that the individual applies for and is otherwise eligible for Medicaid. Therefore, an individual who had made even a $24,000 gift to family members within the look-back period would be ineligible for Medicaid for three months following the date of his or her application. It is important to note that the same analysis would apply if the gift to the family had instead been a contribution to charity or a college tuition payment. Thus, the increased look-back period of the DRA makes it much more difficult to use a gifting program to reduce an individual’s assets to qualify for Medicaid. The DRA seems certain to achieve its twin objectives of trimming the number of individuals who qualify for Medicaid and encouraging more widespread use of long-term care insurance. Individuals who are concerned about funding long-term care costs and the potential availability of Medicaid should pay close attention to these changes resulting from the DRA.

On July 28, 2006, Governor Jeb Bush signed House Bill 209 eliminating the Florida intangible personal property tax (commonly referred to as the "intangible tax"). The intangible tax was an annual tax on the value of stocks, bonds and other kinds of taxable intangible personal property held by Florida residents on January 1 of each year. The intangible tax was in effect for January 1, 2006, and Florida residents on that date may have been required to file an intangible tax return for 2006. However, effective January 1, 2007, the intangible tax will be eliminated.

With the elimination of the intangible tax, there is no longer any reason to use a Florida Intangible Tax ("FIT") Trust.  If you have a FIT Trust, the Trustee should distribute all of the assets held in the FIT Trust back to you (or your Revocable Trust).  Any brokerage or investment accounts in the name of the FIT Trust can be closed as they will no longer be needed. It is not necessary to formally "terminate" the FIT Trust.

If you became a Florida resident during 2006, you must apply for the property tax homestead exemption with respect to your Florida home no later than March 1, 2007. If you were already a Florida resident prior to 2006, you may need to reapply for the exemption if, in 2006, you purchased a new Florida home or made a transfer of your Florida home to your spouse or to a trust which qualifies for the 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, 2007:  (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 which may need to include special language to confirm your right to use, possess and occupy your home.

As another year comes to an end, it is the perfect time to undertake a little housekeeping with respect to your estate planning. Items to consider include:

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. You should also keep in mind that unlimited gifts are allowed for tuition (if paid directly to the educational institution) and medical payments (if paid directly to the medical provider). If you have not taken advantage of these exemptions in 2006, there is still time to do so. We also encourage you to establish a plan now for making your 2007 gifts (this annual tax-free exemption will remain at $12,000 per recipient).

The gifts you make in 2006 may need to be reported on a federal (and possibly a state) gift tax return, which is due on or before April 16, 2007. A Federal Gift Tax Return (Form 709) should be filed for gifts that exceed or do not qualify for the 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. For example, if you have a Grantor Retained Annuity Trust ("GRAT") or Qualified Personal Residence Trust ("QPRT") that will terminate soon, you should make certain that you have opted 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.

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.

An essential part of the estate planning process is to coordinate the beneficiary designations on assets such as retirement plans and life insurance with the balance of your estate plan. Many of our clients fail to undertake this crucial step, while others purchase new life insurance or change jobs without revisiting the issue of beneficiary designations.

In addition, if your estate plan provides for an Estate Tax Sheltered Trust for the benefit of your 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. Since this exemption amount increased to $2,000,000 on January 1, 2006, it is a good time to review your asset ownership to make certain that your assets are titled in a manner which achieves this objective. Note, however, that 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.

In order to be respected for estate and gift tax purposes, family business entities, such as partnerships and LLCs, should be operated with the same discipline as any other active trade or business. Depending on the nature of the entity, 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, this is an ideal time to 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.

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. If you have not attended to this task this year, now is an ideal time to do so. We strongly urge you to keep copies of these letters and proof of mailing in your files or with your Cummings & Lockwood attorney for safekeeping.

Although generally not onerous, there are certain requirements related to the administration of Irrevocable Life Insurance Trusts. In addition to the Crummey letters discussed above, it is important to ensure that premiums are paid from an appropriate account and that all necessary trust records are kept. Finally, it may be appropriate to revisit your selection of life insurance policies in light of changing mortality experience at many insurance companies and declining interest rates, which may have resulted in lower dividends earned on many policies. 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.

Many clients who have established Revocable Trusts (sometimes also referred to as "Living Trusts") do not transfer any substantial assets into these trusts while they are alive. Other clients endeavor to retitle all or most of their property into their Revocable Trusts, in order to minimize some of the costs and delays attendant to the management of these assets during incapacity or the probate of their estates. If you have never considered funding your Revocable Trust, this may be a good time to consider doing so. For more information, ask your Cummings & Lockwood attorney for a copy of our Client Memorandum on the subject of Administration of Revocable Trusts.

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). For this reason, we always recommend that our clients periodically visit us to review their entire estate plan and re-execute documents such as Living Wills and Powers of Attorney in the most current form.

Many clients ask what they should do with their executed Living Wills and Powers of Attorney. Our general advice is that you should freely provide your physician and your loved ones with copies of your Living Will so that your intentions with regard to health care are known to all. In contrast, Durable Powers of Attorney (including all photocopies) generally should be safeguarded to avoid misuse, yet held someplace where your named attorney-in-fact could access them if needed in an emergency.

Now is the ideal time to consider whether upcoming events will necessitate any changes to your estate plan. Issues to consider include potential family changes (a pending marriage, birth or divorce), business issues (changing jobs, establishment of a new business, or the potential sale of an existing business), and 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). Such events are often accompanied by estate planning responsibilities and opportunities that we would be happy to review with you.

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. Given the magnitude and complexity of recent tax law changes, this may be an opportune time to meet with your Cummings & Lockwood attorney for a personalized analysis of how these changes impact you and your estate plan.