THIS ISSUE'S HEADLINES

Estate Tax Considerations Now That the Elections are Over

Decanting: An Overlooked Tool in the Toolkit

The Question of Dual (Dueling) Homesteads

Considerations and Options for Reforming a Trust

ESTATE TAX CONSIDERATIONS NOW THAT THE ELECTIONS ARE OVER

Now that the elections are over and the new Congress has been seated, where do we stand from an estate tax planning standpoint? With the results of the run-off elections finalized, we now know that President Biden has enough votes to implement his tax plan. That plan calls for a reduction of the estate tax exemption from the present level of $11.5 million to $3.5 million, and there remains the possibility any new tax laws could be retroactive to the start of the year.

However, with a majority of the slimmest possible margin in the Senate, it is not likely that massive tax reform will be easily passed. Additionally, although in theory, tax legislation can be retroactive to the first day that the new Congress was sworn in (in some cases even to prior years), the more common practice historically has been for tax legislation to be effective on the date it is passed.

What does all this mean from an estate tax planning perspective? Clients having estates with exposure to federal estate tax should continue to pursue planning opportunities. Assuming assets continue to increase in value, gifting currently removes post gift appreciation from the gift giver’s estate. Also, if the estate tax exemption is reduced, making a large enough gift before the exemption is lowered will allow you to take advantage of the exemption before it is reduced. However, due to the possibility that the gift tax exemption may be lowered retroactively, in order to avoid a gift tax on large gifts it is important to build flexibility into the plan to reverse some of the gift should doing so be necessary to avoid the imposition of a gift tax. That is accomplished by incorporating into the plan disclaiming possibilities and for married couples, preserving the marital deduction election.

We continue to recommend estate tax planning strategies including spousal lifetime access trusts for married couples, zeroed out grantor retained annuity trusts, and installment sales to grantor trusts. As noted, building in flexibility to anticipate potential adverse changes in the estate tax law is an important element in each of these approaches. If you would like further information or assistance with your tax strategy and estate and trust planning, please contact PLDO Partner Gene M. Carlino in Rhode Island at 401-824-5100 or in our Florida office at 561-362-2030 or email gcarlino@pldolaw.com.

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DECANTING: AN OVERLOOKED TOOL IN THE TOOLKIT

There are many benefits to using an irrevocable trust in estate planning. Chief among them are tax savings and asset protection. However, many blanch at the thought of transferring assets into something so seemingly permanent as an irrevocable trust. You have worked hard your entire life and followed the wise advice of your financial professionals, amassing what is a significant stockpile of assets. Transferring such assets into a trust that cannot be amended or revoked and that, likely, does not benefit you during your lifetime, can give you serious pause.

However, as many estate planners will tell you, there are several back doors out of such trusts. One mechanism used is to reserve in the grantors of an irrevocable trust what is called a power of appointment; that is, the power to redirect the assets of the trust to beneficiaries of their choosing by making a will or codicil making reference to the power. Another is amending a trust by judicial reformation, and a third option is when the grantor and beneficiaries team up and agree to modify an irrevocable trust, provided that such modification does not alter a material purpose of the trust. A fourth mechanism that is available but is often underutilized to change the terms of the trust is a strategy known as “decanting.”

In an advisory by PLDO Partner Rebecca M. Murphy entitled, Decanting: An Overlooked Tool in the Toolkit, she describes the judicial reformation and non-judicial modification strategies and provides a thorough overview about the decanting mechanism and explains the process and requirements and why this tactic should be considered if you are concerned that your irrevocable trust no longer accomplishes your estate planning goals. You can read the advisory by clicking the link above and here or contact Attorney Murphy at 401-824-5100 or rmurphy@pldolaw.com to learn more about the various options described in the advisory or other estate and trust planning issues important to you.

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As domestic migration to Florida continues to increase with more businesses and individuals choosing to relocate to the Sunshine state, an important question arises regarding one’s homestead entitlements.

Florida has some of the most liberal homestead exemptions from an asset protection standpoint, and a generous cap on annual property tax assessment increases. However, when a person has two or more residences – how does the law recognize which one is “home” for homestead purposes?

To qualify for the homestead exemption contained in Florida’s Constitution and Fla. Stat. §196.031, one must be a permanent resident, own or occupy the home as a permanent resident and hold legal or equitable title to the property. There are many nuances in application of the homestead exemption depending on how title is held, and the question of proper titling of the asset should be considered at the time of acquisition.

Article 7, §6 of the Florida Constitution allows this exemption to every person who has legal or equitable title, but limits any individual or family unit to one exemption. The law begs the question what if one spouse owns the Florida property and the other spouse owns property in a different jurisdiction (say Rhode Island, for instance) - can each property be considered “homestead” and receive the entitlements and advantages that arise due to that status?

Florida courts have narrowly allowed separate homesteads for spouses when each spouse has and maintains a separate residence; the spouses are not financially connected; and neither spouse provides the other with income or support. This is a high bar from an evidentiary perspective. The better option may be when an individual otherwise qualifies to file for homestead in Florida to consult with his or her attorney and determine which state provides the better homestead benefits, and claim only in that state. Filing for homestead when one is not entitled to do so can result in a retroactive denial of benefits and a lien on the real property.

Homestead exemption applications are taken year-round, although eligibility is determined based on ownership on January 1 and filing by March 1. Many counties in Florida have convenient online homestead applications, but other counties require an in-person visit. Generally, the following documents are needed: Florida Driver’s License or Florida ID, Florida car registration, and Florida Voter’s ID. Your driver’s license and car registration should reflect the homestead address. Once granted, the exemption will generally be renewed each year, as long as the property continues to qualify as your homestead. If you would like assistance with filing an exemption or have questions about Florida’s homestead exemption, please contact PLDO Attorney Leah A. Foertsch in our Boca Raton office at 561-362-2030 or email lfoertsch@pldolaw.com.

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As a beneficiary of a trust or as a trustee, there may be times when it is in the best interest of all parties to reform or even dissolve a trust. However, the ability to reform or dissolve a trust is limited to both the terms of the trust and the state law that applies to the trust.

The first question that should be answered is why does the trust need to be reformed. Sometimes a trust’s terms may be too restrictive and the intended purpose may no longer make sense for the beneficiaries. Alternatively, a poorly drafted trust instrument may create confusion and paralyze the trustee from acting, and thus defeating the purpose of the trust.

The second question that must be answered is whether all parties, beneficiaries and trustees, are in agreement that the trust should be reformed. Any disagreement among beneficiaries and the trustee will affect how the trust is reformed. Depending on the terms of the trust, a trustee may have the authority to reform the trust without approval from all the beneficiaries. However, if there is a dispute among the parties, then reformation may not be possible with or without the courts.

Even if a trust is “irrevocable,” there are, nevertheless, potential options to reform the trust. Three examples are:

• Reformation by Agreement of the Parties. Some states allow reformation of an irrevocable trust on certain substantive issues through a “non-judicial” settlement agreement.
  
  
• Dissolution of Small Trusts. Rhode Island allows for dissolution of a trust without court intervention when the trustee is a bank or other financial institution and the trust principal is less than $200,000.
  
  
• Petitioning the Court. If there is an issue with the trust that is not addressed directly by the trust terms and the trustee does not have authority to resolve the issue, petitioning the court’s equity jurisdiction may be necessary. Because of the costs and uncertainty of litigating any trust issues, petitioning the court should generally be the last resort.

The available options to resolve and reform a trust will depend on the issue at hand, the trust’s terms, and the state laws that apply. An attorney can help review the terms of the trust and devise a path to reform or dissolve the trust. If you have questions about trusts or other estate planning matters, please contact PLDO Attorney Joshua J. Butera at 401-824-5100 or email jbutera@pldolaw.com.

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