It’s been a productive year for the Estate Planning and Probate Section. Plans have been finalized for the section’s Forum on February 27 at the Doubletree Hotel in Nashville. The popularity of the Forum is evidenced by the fact that it’s already outgrown the TBA Center. We think the new location will be convenient for both out of town and local attendees.

I would like to thank all Section members, especially the members of the executive committee, for their participation and encourage you to contact Sarah Hayman or me with any comments or suggestions regarding ways the section can enhance your TBA experience. Also, we would like to have your ideas on topics for future e-newsletters.

Finally, I would like to thank Paul Hayes for chairing the Legislative Sub-Committee, which provides comments and recommendations regarding pending and proposed legislation, Angelia Morie Nystrom for editing this newsletter, and Jay Cloud for his article.


Michael R. Parham
Williams, McDaniel, Wolfe & Womack, P.C.
5521 Murray Avenue
Memphis, TN 38119
(901) 767-8200 - telephone general
(901) 312-7968 - telephone direct
(901) 767-5985 - fax

Topics will include Modification and Revocation of Irrevocable Trusts, an Insider’s View of Probate, Estate Planning for Special Needs, Seven Ways to Avoid Probate, Buy-Sell Agreements, and an Estate Planning and Administration Update.

Speakers include Al Secor, Timothy R. Lee, Jay Cloud, Victoria Tillman, Marilyn Rozier, Kelly Guyton Frere, Matthew Frere, Hon. Donn Southern, Howard G. Hogan, S. Lee Akers, Hon. Randy Kennedy, Randall Van Dolson, and Hugh Kendall.

There will be a Section Meeting from 12:00 p.m. until 1:15 p.m., with lunch provided for Section members. Please respond to Sarah Hayman if you will attend the lunch Section Meeting at this year’s Estate Planning Forum.

1. President-elect Obama’s proposed reforms to federal estate tax.
2. Annual exclusion amount for gifts increases to $13,000 per donee in 2009.
3. Federal estate tax exemption increases to $3,500,000 per person in 2009.
4. Tennessee inheritance tax exemption remains at $1,000,000 per person; Older estate plans should be reviewed to avoid Tennessee inheritance tax.

1. President-Elect Obama’s Proposed Reforms to Federal Estate Tax
President-elect Obama proposed three items related to federal estate tax reform during the campaign: (i) freezing the federal estate tax exemption amount and top marginal tax rate; (ii) creating a “portable” federal estate tax exemption; and (iii) continuing the use of fair market value on date of death as the income tax basis for property inherited from a decedent (i.e., so-called “stepped up” basis). Solid Democratic control of both the House and Senate make passage of these items likely if President Obama presses them.

(i) Freezing federal estate tax exemption amount and top marginal tax rate.
President-elect Obama has proposed freezing the federal estate tax exemption at the 2009 rate of $3,500,000 per person and freezing the top marginal tax rate at the 2009 rate of 45%.

(ii) Creating a “portable” federal estate tax exemption.
President-elect Obama has proposed creating a “portable” federal estate tax exemption for married couples. The portable exemption works as follows: if the estate of the first spouse to die does not use all or a portion of his or her $3,500,000 exemption, the unused exemption would be available for use by the estate of the surviving spouse. The estate of the surviving spouse may then shelter assets worth up to $7,000,000 from the federal estate tax. President-elect Obama’s advisors have stated that by combining a portable exemption amount with freezing the 2009 exemption and top marginal tax rate, 99.7% of estates would be exempt from federal estate taxation.

Without a portable exemption, a married couple with $7,000,000 of net assets with an estate plan leaving all assets to the surviving spouse would owe no federal estate tax on the death of the first spouse but would owe approximately $1,575,800 of federal estate tax on the death of the second spouse. Currently, this problem is solved by creating an estate plan involving one or more trusts designed to utilize the federal exemption amount of the first spouse to die. By creating a portable federal exemption, estate plans may no longer be required to use one or more trusts on the death of the first spouse to utilize the first spouse’s federal exemption amount. Nevertheless, without corresponding Tennessee legislation, the use of one or more trusts on the death of the first spouse may still be desired to utilize the Tennessee exemption amount ($1,000,000) of the first spouse to die and to defer Tennessee inheritance tax upon the first spouse to die. Finally, such trusts will continue to be useful for a variety of non-tax reasons including asset protection for beneficiaries.

(iii) Continuing the basis step-up for property inherited from a decedent.
President-elect Obama has proposed continuing the use of the fair market value of most assets on date of death as the income tax basis for inherited property. The notion of fair market value on date of death as the income tax basis for inherited property is known as the “basis step up” or “stepped up basis” assuming the inherited property has increased in value from the date of acquisition to the date of death. Under current law, property inherited from a decedent receives a tax basis equal to the fair market value of the property at the date of the decedent’s death (or, in some instances, the fair market value six months after the date of the decedent’s death). For example, if a decedent purchased stock in 1990 for $100,000 and the stock is worth $1,000,000 on the date of the decedent’s death, the person inheriting the stock would receive a tax basis in the stock of $1,000,000. The subsequent sale of the stock by the beneficiary for $1,000,000 would not result in any taxable gain. Under current law, the basis of property received from decedent’s dying after December 31, 2009, generally will not receive a fair market value basis. As a result, in the above example, the beneficiary receiving the stock worth $1,000,000 purchased in 1990 for $100,000, would realize $900,000 in taxable gain. President-elect Obama is in favor of continuing the basis step-up for property inherited from a decedent and amending the current law for property inherited from a decedent dying after December 31, 2009.

2. Annual Exclusion Amount Increases
The annual exclusion amount will increase, effective for gifts made on or after January 1, 2009, from $12,000 to $13,000 per donee. In 2009, donors may give $13,000 to any other individual without incurring federal gift tax, and to any close relative without incurring any Tennessee gift tax. For gifts made before January 1, 2009, the limit was $12,000 per donee. Beginning in 2009, married donors may give up to $26,000 per donee (previously $24,000) without incurring gift tax, even if only one spouse makes the gift, so long as the both spouses agree to split the gift for federal and Tennessee gift tax purposes. Amounts paid directly to health care providers and educational institutions for tuition for the benefit of any donee continue not to be treated as gifts for federal and Tennessee gift tax purposes.

Creating and implementing an annual gifting program, either through outright gifts or gifts in trust to children, is a relatively simple way for individuals or married couples with taxable estates to transfer assets to their children without paying gift tax on the transfer and to remove those assets from their estates for federal estate tax and Tennessee inheritance tax purposes, including any appreciation in the assets occurring between the date of the gift and the date of the donor’s death. Gifts are often made to one or more trusts for the benefit of the donors’ children. The use of a trust is often appropriate if the children are not of an age where they are financially responsible. Either spouse could be the trustee of such trust, which would permit the trustee spouse to retain control over the investment of the assets. A properly drafted trust will permit a married couple to give up to $26,000 per child to the trust annually. Gifts to an irrevocable trust for children will be protected from creditors of the children, including divorced spouses.

An example of the estate tax savings that can be achieved through the implementation of an annual gifting program follows. A married couple age 60 with $5,000,000 of net assets today will be worth approximately $19,384,422 in 20 years (assuming 7% annual growth and income). The estate tax (based on the 2009 rates and exemption) due on the death of the surviving spouse in 20 years will be approximately $6,500,000. By gifting $100,000 per year, or 2% of the growth and income from $5,000,000, this married couple will have net assets valued at $13,266,488 in 20 years. The federal estate and Tennessee inheritance tax (based on the 2009 rates and exemption) due on the death of the surviving spouse in 20 years will be approximately $3,500,000. Consequently, by implementing an annual gifting program, this couple has saved their children approximately $3,000,000 in estate and inheritance tax, without paying any gift tax on the annual gifts. If this married couple were to contribute to the trust an asset with a discounted value, like a family limited partnership interest, the estate and inheritance tax savings would be even more pronounced.

3. & 4. Federal Estate Tax Exemption Increases; Tennessee Inheritance Tax “GAP” Increases Dramatically
The federal estate tax exemption will increase from $2,000,000 to $3,500,000 for decedents dying on or after January 1, 2009. The unlimited marital deduction remains in effect. An individual, therefore, may pass an unlimited amount to his or her surviving spouse upon his or her death and up to $3,500,000 to non-spouse beneficiaries without paying any federal estate tax. Under current law, the federal estate tax exemption amount will remain $3,500,000 for the 2009 tax year and, in 2010, the federal estate tax will be repealed for one year. In 2011, the tax returns with an exemption of $1,000,000. As discussed above, however, President-elect Obama has proposed freezing the federal estate tax exemption at $3,500,000.

The federal exemption amount was as low as $600,000 in 1997 and $1,000,000 as recently as 2003. Many estate plans developed and implemented in 2003 and before for married couples provide that upon the death of the first spouse, an amount equal to the exemption amount to be set aside in a family trust for the benefit of the spouse and children with the amount in excess of the exemption to be distributed to the surviving spouse (either outright or in trust). The family trust is designed to avoid the federal estate tax on the amount in the family trust upon the death of the surviving spouse. If a married couple has this type of plan in place today and their combined assets (including the death benefit from any life insurance) are less than $3,500,000, they should consider simplifying their wills since the family trust is not necessary upon the death of the first spouse to avoid estate tax upon the second death. Married couples for whom this type of planning is still appropriate may want to consider capping the amount available to fund the family trust to insure the surviving spouse receives sufficient assets.

The exemption for the Tennessee state inheritance tax remains unchanged at $1,000,000, which is $2,500,000 less than the current federal estate tax exemption of $3,500,000. This substantial difference is sometimes referred to as the “Tennessee gap.” The Tennessee exemption and the federal exemption were the same amount until recently so that any amount passing into a family trust upon the death of the first spouse under the planning described in the preceding paragraph would have been exempt from both the Tennessee inheritance and the federal estate taxes at the death of the surviving spouse. These types of estate plans now result in Tennessee inheritance tax being due upon the first-to-die of a married couple since an amount in excess of the Tennessee exemption (i.e., the “Tennessee gap”) passes to the family trust and not to the surviving spouse. The amount of the Tennessee inheritance tax that would be due currently upon the first-to-die in an estate with this type of planning is $225,900. These types of estate plans for married couples should be revised to avoid the Tennessee inheritance tax upon the first-to-die.

On October 1, 2008, the Tennessee Long-Term Care Partnership became effective. With The adoption of the Long-Term Care Partnership, Tennessee became one of 25 states to enter into such a partnership. The Long-Term Care Partnership rewards Tennesseans for buying even a small long-term care insurance policy. With the purchase of a long-term care policy, Medicaid becomes the payor of last resort ---not first resort. This means that individuals have more choices as to facility and services, that individuals can keep a greater amount of assets even after applying for Medicaid, and that the state Medicaid budget saves money.

The Long-Term Care Partnership involves private insurors, long-term care insurance agents and brokers, the Bureau of TennCare, the Dept. of Human Services, and the Tennessee Department of Commerce and Insurance. Although the Long-Term Care Partnership is overseen by the federal centers for Medicare and Medicaid Services, each state that participates has a great deal of autonomy in its administration.

In Tennessee, qualified long-term care policies must provide a specific amount of inflation protection based on the insured’s age when the policy is purchased and must meet other requirements. A person who requests TennCare payment of long-term care services after exhausting some or all of the benefits under a long-term care policy may have certain assets “disregarded” equal to the benefits paid by the qualified long-term care policy at the time the person is determined to be eligible for TennCare. These assets are not counted when the person’s TennCare eligibility is determined and will not be recovered during estate recovery when the person dies.

A Long-Term Care Partnership participant in Tennessee is someone who either: (1) requests payment of long-term care services after exhausting all benefits of a qualified long-term care policy; or (2) exhausts all benefits of a long-term care policy while receiving payment of long-term care services under TennCare; or (3) receives TennCare payment of long-term care services and dies before the long-term care policy benefits are exhausted.

A Long-Term Care Partnership participant receives the following benefits during his or her lifetime: (1) Assets may be designated for disregard in an amount equal to the benefits paid out by the qualified long-term care policy as of the date of application for Medicaid eligibility; (2) designated assets are not counted toward the TennCare asset limit for eligibility purposes; (3) The designated assets may be transferred to another person without penalty; and (4) Additional benefits paid by the qualified long-term care policy after application for Medicaid shall not be disregarded in future review and/or determination for Medicaid eligibility.

After the Long-Term Care Partnership participant is deceased, assets which were disregarded for purposes of Medicaid eligibility determination are protected from estate recovery. When the amount of assets disregarded during the person’s lifetime was less than the total benefits paid by the Long-Term Care Partnership policy, additional assets may be protected in the estate recovery process up to the amount of payments made by the individual’s qualifying long-term care policy for services covered under the policy. If no assets were disregarded during the person’s lifetime, the Personal Representative may designate assets to protect from estate recovery up to the lesser of the two previous options—even if Long-Term Care Partnership policy benefits were not completely exhausted.

For more information, go to the Tennessee Department of Commerce and Insurance .

Section members were quick to respond to Chair Mike Parham’s request to lend support for Wills for Heroes. Wills for Heroes in a unique pro bono initiative that provides free wills and other basic estate planning documents to emergency first responders and their families. In each location, the TBA's Young Lawyers Division will organize volunteer lawyers to draft wills, powers of attorney and advance directives; recruit notaries and witnesses to finalize documents on site; and provide access to specialists for those with more complicated estate planning needs.

We now have enough volunteers to cover each of the events that have been scheduled across the state. Thank you! Events in Dyersburg and Loudon have yet to be scheduled, so if any Section members would like to volunteer to participate in those locations, please contact Sarah Hayman.