November 2010
Nov 4, 2010
Hi :
In this issue:
ITA Conference A Great Success
ITA elects new officers at annual meeting
IBA to host Legislative Issues Preview Meetings across Iowa
Find out more on Regulatory Reform
It's A Matter of Trust - ITA Offers Brochure to Promote Choosing a Corporate Trustee
The Death (for the moment) of the Federal Estate Tax
TrustCompare
ITA Newsletter Subscription
ITA Conference A Great Success Sixteen exhibitors were present at this year's event. Thank you to representatives from these companies for sharing their products and services with attendees. Thank you also ProxyTrust, Broadridge Financial Solutions, Fifth Third Bank and BTC Capital Management for their sponsorship of the conference. Mark your calendar for next year's ITA Annual Conference. The event will be at the Marriott Courtyard in Ankeny on October 6-7, 2011. The meetings will take place: For a detailed agenda with meeting times and locations, click here. For more information, contact the IBA’s Senior Vice President of Government Relations Sharon Presnall or IBA Legal Counsel Bob Hartwig at (800) 532-1423. This cost effective brochure is 5½” x 8 ½” and can be personalized with your bank name, address, city state, phone and web address. Educate your trust clients about the qualities that make an effective trustee with these helpful brochures. Order a supply of these brochures today. To see the complete text of the brochure, go to The Law Governing Deaths in 2010 The Real Questions Impact of the Estate Tax Estate Tax Remnants Still Remain Planning Implications of Repeal But, in any event, estate planners should not lose sight of common planning techniques that are still in play. Such techniques include the use of annual exclusion gifts (presently $13,000 per donee per year) - they should still be made (as well as other techniques that shift future asset value to later family generations) to keep the estate size manageable in the event the estate tax again becomes law. From a gift tax planning standpoint the basic idea is to consider techniques that either take advantage of the repeal of the GSTT or the 35 percent gift tax rate. Such strategies might include using the $1 million gift tax exemption to fund a "Crummey"-type trust for children and grandchildren.15 If one believes that a higher gift tax rate will apply in the future, an aggressive gifting strategy could be utilized with the result that taxable gifts would be taxed at 35 percent rather than 45 percent. This strategy also dovetails with an estate tax minimization strategy if it is believed that the estate tax will return. Also, practitioners may want to consider the use of qualified terminable interest trusts (QTIP) to benefit a surviving spouse and allow the surviving spouse to adopt a "wait and see" approach as to whether a QTIP election should be made based on whether the estate tax is in existence.16 Future Legislative Attempts? Conclusion TRUSTCOMPARE is the industry's leading performance comparative solution to help you accurately assess and improve your performance, profitability and productivity. It is the only comparative, comprehensive ratio system for measuring trust performance, allowing you to compare your core metrics to a peer group and to the universe of subscribers. How Does It Work? Trust information is collected from subscribers, then analyzed to provide comparative trend and benchmarking tools and management information reports. Product and service results are measured by asset, income, expense and profit. And, growth in income, fees, expenses and profit are measured at both the departmental and product level. We also offer an advanced business analytics level to provide line of business and product line profitability comparisons. If you'd like to learn more about TRUSTCOMPARE, visit If you have questions, you may contact Loyd Pohl, at 
A special thank you to all who helped make the 2010 ITA Annual Conference a great success. Over 70 trust professionals attended this year's event featuring sessions on regulatory updates, economic updates, assisting trust clients, tax laws, estate planning, and customer service. This year's event was approved for 4.75 hours of CLE credit, 7 hours of CTFA credit and 6 hours of CFP hours.
Back to top
ITA elects new officers at annual meeting
At the annual meeting of the Iowa Trust Association James Benda was elected President and Julie Versluis was named Vice-President of the statewide association. Benda is Vice President and Senior Trust Officer at West Bank in West Des Moines. Versluis is Vice President and Trust Officer at Lincoln Savings Bank in Waterloo. Incoming board members for ITA this year are Frank Delaney from Two Rivers Bank & Trustin Burlington and Jim Mease from Farmers & Merchants State Bank in Winterset.
Back to top
IBA to host Legislative Issues Preview Meetings across Iowa
Bankers should plan to attend the annual Legislative Issues Preview Meetings hosted by the Iowa Bankers Association (IBA) in November. Scheduled across the state from Nov. 8 through Nov. 22, the meetings provide IBA members and state legislators with a final review of the Association’s legislative agenda prior to the beginning of the legislative session.
Bankers recognize the opportunities and challenges facing Iowa and work with legislators to develop positive public policy. It is vital for bankers to remain current on issues facing our state, our community and our industry.November 8 Burlington Group 11 November 9 Council Bluffs Group 5 November 10 Marshalltown Group 7 November 15 Johnston Group 6 November 16 Cherokee Group 1 & 12 November 17 Fort Dodge Group 2 November 18 Coralville Group 8 November 22 Dyersville Group 4
Back to top
Find out more on Regulatory Reform
Are you looking for information on Regulatory Reform? Here are a few great resources.
Iowa Bankers Association -
Includes educational resources, compliance articles, federal bulletins and more
American Bankers Association
Includes bill summaries, comment letters, effective date charts and more
Back to top
It's A Matter of Trust - ITA Offers Brochure to Promote Choosing a Corporate Trustee
Choosing qualified trust professionals is an important part of estate planning. How do you counsel clients and potential clients about the qualities of an effective trustee? To help you the Iowa Trust Association has produced a brochure outlining the qualities of an effective trustee and the advantages of a corporate trustee.
Back to top
The Death (for the moment) of the Federal Estate Tax
Reprinted with permission from Dr. by Roger A. McEowen from Iowa State University's Center for Agricultural Law & Taxation.Overview
The Congress has failed in its attempts to extend the federal estate tax for deaths in 2010.1 That means that the estate tax (and the generation-skipping transfer tax (GSTT)2) does not exist for
deaths in 2010.3 Federal gift tax stays in place, but at a flat 35 percent rate and a maximum exclusion of $1 million. The expiration of the estate tax has significant implications for practitioners and their clients, and may provide some planning opportunities.
For property acquired via the estate of a 2010 decedent that is sold in 2010, the property's basis will be the lesser of the decedent's adjusted basis in the property or the property's fair market value as of the time of the decedent's death. So, no basis step-up will be allowed (but basis could go down). Two significant exceptions may apply - (1) the executor can allocate up to $3 million to increase the basis of assets that pass to the surviving spouse (or to a qualifying trust for the surviving spouse); and (2) the executor can allocate an additional $1.3 million (increased by unused losses and loss carryovers) of aggregate basis to other assets (on an asset-by-asset basis). So, for assets received via the estate of a 2010 decedent that are sold in 2010, the heirs would have to pay capital gain tax on excess amounts not covered by the basis increase rules. But, those rates are far less than the 45 percent estate tax rate that was proposed in the legislation that the U.S. House voted on in late 2009.4
Note: The above basis rule is a result of the 2001 EGTRRA provisions. That Act specifies that its provisions "shall not apply to taxable…years beginning after December 31, 2010."5 Thus, based on a strict reading of the statute, the modified carryover basis rule is only applicable to assets inherited in 2010 that are also sold in 2010. For assets inherited in 2010 that are sold after 2010, the income tax basis is the fair market value of the assets at the time of the decedent's death. So, for deaths in 2010, there is no estate tax, and the heirs will still retain a fair market value basis if the inherited assets are sold after 2010.6
While more estates would likely be impacted by the loss of stepped-up basis than would be impacted by the estate tax, the real question is whether the tax bill would be greater for the heirs if (and when) the inherited property is sold, and whether repeal reduces the impact on the functioning of business operations. Another key point is that with an estate tax, payment of any estate tax is due within nine months after death which may be at a time that is particularly inconvenient for an ongoing family business or farming operation after the decedent's death.7 This can be a particular problem for a small business or family farming operation where it is impractical to sell a fraction of the business to pay estate tax due to a lack of a recognizable market for non-control interests that are not actively traded. However, the capital gains tax can be timed and managed by the heirs to minimize interference to existing business operations.
Note: There is general agreement that carryover basis is not good tax policy as applied to estates. The loss of complete stepped-up basis for assets inherited in 2010 that are sold in 2010 will produce administrative and compliance issues. That will be particularly true for estates that lack good basis information. Fortunately, the problem is only for asset sales occurring in 2010.
Even though the federal estate tax impacts less than one percent of all estates (this is the projected impact for deaths in 2009), extending the estate tax became politicized in recent months.8 Proponents of extending the tax have typically claimed that it's just certain wealthy individuals that have been pushing for its elimination. While that may be true, such claims are typically not accompanied with a mention of data that indicates the estate tax's negative impact on businesses and the economy. For example, a couple of recent studies have shown that the tax is a drag on the economy, and is particularly harsh on small businesses. One study concluded that full and permanent repeal of the estate tax would create 1.5 million jobs, increase the probability of hiring by 8.6 percent, increase payrolls by 2.6 percent, expand investment by 3 percent and reduce the jobless rate (as of February 2009) by .9 percent.9 Another study found that the estate
tax "impacts small firms disproportionately by encouraging well-capitalized companies to gobble-up smaller ones at the owner's death" and promotes concentration of wealth by preventing small businesses from being passed on to heirs.10
Note: Proponents of extending the estate tax also typically fail to point out that not all countries have an estate tax. Those countries without an estate tax include Austria, Australia, New Zealand, Sweden, India, Virgin Islands, Gibraltar, Singapore and Russia. A reasonable question to ask is why these countries do not have an estate tax and the United States does.
In one sense, the estate tax is not completely gone for 2010. Even though the estate tax is repealed for deaths in 2010, those estates that have elected special use valuation, the qualified family-owned business deduction, or have elected to pay the estate tax in installments from pre-2010 deaths, the recapture rules will continue to apply in 2010 through the end of the applicable recapture period.
If the Congress does not enact legislation to deal with the estate tax in 2010, the estate tax will return for deaths in 2011 and thereafter. However, when it returns, the exemption will only be $1 million (for generation skipping transfer tax (GSTT) purposes also) and the tax will have a top marginal rate of 55 percent (with a 5 percent surcharge applicable to adjusted taxable estates between $10 million and $17.184 million). Thus, for taxable estates exceeding $17.184 million, the tax will be a flat 55 percent. The gift tax will return at a 45 percent rate. For married couples, a common estate planning technique that has been utilized for many years with respect to potentially taxable estates is to utilize drafting language in will and trusts that eliminates federal estate tax upon the first spouse's death and minimizes estate tax upon the surviving spouse's death by dividing the first spouse's estate into two packages - (1) formula clause language that leaves the maximum amount of property to the surviving spouse in a form that does not qualify for the marital deduction so as to fully utilize the deceased spouse's applicable exclusion against the estate tax (in other words, the clause language leaves the maximum amount of property to the
surviving spouse in life estate form that eliminates estate tax in the first spouse's estate - typically referred to as the "bypass trust")11; and (2) an outright gift to the surviving spouse (or a trust for the surviving spouse's benefit - known as the "marital trust") of the balance of the estate (which passes tax free via the unlimited marital deduction).
Note: Some estate planners, especially when handling very large estates, utilize formula drafting language which has each spouse gift the spouse's GSTT exemption to a trust for the children (and, perhaps, grandchildren), with the balance of the estate passing either to the surviving spouse or the children. Because of the use of formula clause language that is tied to the level of the exemption at the time of death to minimize tax over both spouse's estates (for example, typical drafting language may specify that the credit shelter amount (the "bypass trust" amount) is pegged as "the largest amount that can pass free of federal estate tax"), for deaths occurring while no estate tax exists a question will be raised as to the effect of any formula-derived gift. Will it fail because the formula clause language utilized refers to a nonexistent tax (and/or exemption)? If so, the entire estate might pass to the surviving spouse.12 That could create a problem on the surviving spouse's estate if the Congress re-enacts the estate tax. The surviving spouse's estate would be inadvertently "over-stuffed" resulting in a higher tax than would have been the case had the formula clause language worked as anticipated in the first estate. Another concern is that while all of the property may go to the surviving spouse, it may pass to the spouse in life estateform rather than outright. That will give the surviving spouse an income interest in the property for life, but not outright control. Will the income stream from the life estate property be enough for the surviving spouse? The answer to that question depends on the age and lifestyle of the surviving spouse, among other things.
Note: For deaths into 2010, only those assets that pass outright to the surviving spouse or pass to the surviving spouse via a marital trust qualify for a basis increase. So, if the formula clause results in the assets of the first spouse passing entirely to the surviving spouse in life estate form, none of the assets would be eligible for a basis increase.13 So, are there ways around the problem of the impact of repeal on present formula drafting language in wills and trusts? Maybe all that is necessary is that a codicil to an existing will be executed or that trust language be amended. But, clients must take action to update their plans - or practitioners should review existing client plans and take the initiative to get clients to make the necessary changes. However, some clients will want to delay doing anything, preferring instead to wait and see what, if anything, the Congress chooses to do. That could be a real client counseling issue. For clients that really need to have some estate planning done (for various reasons), here are some suggestions: (1) revise existing estate planning clause language to specify that if death occurs at a time when the federal estate tax is not in effect, a specified pecuniary amount will pass either outright or in trust for the children so as to reduce the amount passing to the surviving spouse; (2) alternatively, revise existing clause language to specify that if death occurs when there is no estate tax, all property passing to the surviving spouse is in trust with the spouse as beneficiary with the trust having language designed to minimize (or avoid) the impact of any estate tax that may be in effect at the
surviving spouse's death; or (3) for GSTT planning purposes, revise existing clause language to specify that property that would have passed outright to children now passes in trust for their benefit - again to minimize or avoid the impact of a reinstated GSTT.14
Note: Some states have taken legislative action that would treat decedents dying in 2010 as having died on December 31, 2009, for purposes of construing formula clause and other tax-relevant language in wills and trusts.
The Congress may try to pass an extension bill in 2010 and make it retroactive to January 1.17But, that will surely trigger lawsuits. A retroactive reinstatement of the estate tax could be challenged as an unconstitutional violation of the Ex Post Facto Clause - i.e., it's unconstitutional to retroactively collect tax on the estates of people that died during the timeframe that the tax was repealed, or upon trust terminations or distributions in that same timeframe.18 However, the U.S. Supreme Court previously stated in Carlton v. United States19, that a retroactive tax law is valid under the Constitution if (1) the government shows that the statute has a rational legislative purpose and is not arbitrary and irrational; and (2) the period of retroactivity is "modest."20 However, there is caselaw indicating that the result might be different if the Supreme Court were to view the passage of a retroactive estate tax bill as a "wholly new" tax rather than as simply fixing something in an existing tax.21 But, because the Congress allowed the estate tax to die, a
retroactive "fix" would be a new tax - there is no estate tax law on the books at the present time. That is what could make a reinstatement of the estate tax retroactive to January 1, 2010,unconstitutional.22 In early February 2010, an estate tax prepayment idea was floated by Senator Cantwell (D-WA) as a compromise between those Senators that don't want the estate tax rate to exceed 35 percent and the push by the Administration (and Senate Democratic leadership) for a 45 percent rate. Under the proposal, individuals with relatively large estates that might be subjected to estate tax if it is reenacted could essentially "prepay" estate taxes by placing assets in a "prepayment trust" during life with the trust assets taxed at a 35 percent rate. The tax could be paid over a five year period.23 Also, in 2009, there were some attempts to provide permanent estate tax relief for small businesses and farms. Perhaps those efforts will become reality in 2010. One approach may be to exclude closely held business interests from estate tax with recapture if sale occurs within a specified period of time from the transferor's death. Such excluded transfers could also be tagged with a carryover basis if that is deemed necessary as a political compromise.
Perhaps the Congress will consider some type of compromise legislation in the next few weeks. Clearly, any debate concerning reenactment of the estate tax should involve discussions concerning the estate tax rate, the structure of the tax rate (graduated, flat or stair-stepped), the amount of the estate tax exemption, whether the estate and gift tax are to be unified, whether the estate tax exemption should be portable among spouses, and any applicable phase-ins (with respect to either the rate of tax, or the exemption amount). In any event, practitioners should carefully counsel clients that the utilization of techniques designed to provide maximum benefit without an estate tax in place may not actually provide any benefit if the Congress passes retroactive estate and gift tax legislation that is ultimately upheld by the courts. That's one of the scenarios that makes estate planning at the present time so difficult, and makes the review of present estate planning documents critical to make sure that they still carry out the client's intent for disposition of the assets at death, and contain language that is as flexible as possible to deal with future changes in the law.
Back to top
TrustCompare
If you were asked to demonstrate how your organization's Trust Department is performing, how would you answer? In addition to the broad "assets under management number," how are you measuring the growth, profitability, resource efficiency, and success of your Trust Services?
Back to top
ITA Newsletter Subscription
If this message was forwarded to you and you would like to receive the ITA Newsletter, e-mail Darcy Burnett to subscribe.
Back to top
To remove yourself from this mailing list, click here.
Published with Newsletter Ease