It has been a great year for the Estate Planning and Probate Section. Plans have been finalized for the Section's Forum on February 26 at the Doubletree Hotel in Nashville. Our Forum has increased in size each year, and I hope you will make plans to attend. If you are planning to attend and have not made hotel reservations, please call the Doubletree and ask for the TBA rate.

I would like to thank all Section members, especially the members of the Executive Council, for their participation and hard work this year. Members include Mike Parham, Jennifer Kent, Jay Cloud, Paul Hayes, David Heller, David Parsons, Darsi Sirknen, Ed Smith, Victoria Tillman, Anne McKinney, and Matthew Thornton. I would also like to thank Paul Hayes for chairing the Legislative Sub-Committee, which provides comments and recommendations regarding pending legislation. Special thanks also goes out to Jennifer Kent for editing the newsletter. Finally, I would like that thank John Burns for representing our Section on the panel that discussed the Tanner decision at the TBA teleconference CLE held in the Fall.

I encourage you to contact Christy Gibson or me with any comments or suggestions regarding ways the Section can enhance your TBA experience. Also, I would like to have your ideas on topics for the Forum, for teleconferences and for future e-newsletters.

Angelia Morie Nystrom
Baker, Donelson, Bearman, Caldwell
& Berkowitz, P.C.
265 Brookview Centre Way, Suite 600
Knoxville, TN 37919
Telephone: (865) 971-5170 (direct)
Facsimile: (865) 329-5170
anystrom@bakerdonelson.com

Make plans to attend the Fifth Annual Estate Planning and Probate Forum, which will be held on Friday, February 26, in Nashville at the Doubletree Hotel. Hear some of the State's top estate planners and probate practitioners share their knowledge on estate planning developments and topics of importance to Tennessee practitioners. This information-packed, full day program will provide 6 general hours and 1 dual hour of concise and practical CLE.

Topics will include estate planning for the business owner, current issues in probate practice, elder law issues for the estate planner, impact of estate tax repeal, a general estate planning update, and ethical issues confronting the estate planner.

Speakers include Al Secor, Bob Marquis, Hon. Robert Benham, Hon. Lee Akers, Matt Frere, Kelly Guyton Frere, Anne McKinney, Angelia Nystrom, John Burns, Chris Coats, and Brian Faughnan.

Lunch will be provided for all attendees, and Anne McKinney will educate and entertain you during the lunch hour.

If you have not already signed up, please go to www.tba.org and click on the link for TennBarU or call Kaisha Bond or Christy Gibson at the TBA offices at (615) 383-7421. This year's program promises to be something you don't want to miss.

by Angelia Morie Nystrom and Michael S. Evans
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.
*** Portions of this article first appeared in the February 2010 edition of DICTA, a publication of the Knoxville Bar Association.

Congress adjourned in December 2009 without addressing the repeal of both the federal estate tax and generation-skipping transfer (GST) tax. The repeal of the federal estate and GST taxes, effective January 1, 2010, has caused a great deal of uncertainty that encompasses both existing estate tax plans and future estate planning. The federal gift tax continues in 2010 with a rate reduced from 45% to 35%, adding to the uncertainty produced by Congress's allowance of the repeal.

The origins of the present uncertainty lie in the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). EGTRRA offered eight years of favorable climate for estate planning, incrementally increasing the estate and GST tax exemptions from $1 Million to a peak of $3.5 Million in 2009, while simultaneously reducing the tax rate from 55% to 45%. When enacted, EGTRRA provided for dramatic changes to the estate and gift tax laws in 2010 and 2011. While most people anticipated that legislation would be passed that would keep the changes from occurring, Congress failed to act, instead allowing a dramatic change in the tax scheme to occur. This has made estate planning uncertain and more complex than ever before.

Effective January 1, 2010, EGTRRA repealed the federal estate and GST taxes and the basis step-up on appreciated property owned by a decedent at death, replacing them with a modified carry-over basis regime. Then, on January 1, 2011, EGTRRA sunsets, and the estate and gift tax system returns to its pre-2001 condition that includes a $1 Million estate and GST exemption with a maximum 55% tax rate and an additional 5% surtax on certain large estates whose values are between $10 Million and $17,184,000, as well as a return of the step-up in basis at death.

Congress's failure to prevent repeal of the estate and GST tax affects many aspects of estate planning. The most significant aspects include the change in the way basis is treated for tax purposes and the effect of the repeal on existing formula provisions. Also, Tennessee estates will be particularly affected.

Effective January 1, 2010, EGTRRA added carryover basis rules that change the way executors and beneficiaries determine the income tax basis of property acquired from a decedent. Previously, beneficiaries of an estate received a step-up in basis in inherited property as of the date of the decedent's death (or the "alternate valuation date," which is six months from the date of a decedent's death). Under the current law, however, the basis will be the value as of the date of death or the decedent's basis in the property, whichever is less. The result is that many estates will include assets with a basis lower than value. Accordingly, unrealized appreciation in these assets will become a taxable capital gain upon sale by either the executor or by a beneficiary. Determining the decedent's basis in property so that the gain can be measured will often be extremely difficult, particularly when the property has been held for a long period of time or has been depreciated or amortized.

As somewhat of a substitute for the estate tax exemption, each decedent's estate will be eligible for a $1.3 Million basis step-up, which means that an executor may allocate individual assets to eliminate up to $1.3 Million of unrealized appreciation. Additionally, assets passing outright to a surviving spouse or a QTIP trust for the surviving spouse's benefit are eligible for an additional $3 Million basis increase. The $1.3 Million and $3 Million amounts will be indexed for inflation after 2010. This means that executors will face difficult decisions involving the allocation of the basis increases, and such allocations will likely be a major source of dispute among beneficiaries with competing interests.

The estate tax repeal will also affect existing formula provisions. Many existing wills and trusts include references to the Internal Revenue Code (the "Code") and use terminology tied to the definitions therein. Often, bequests under these documents are defined in terms of tax-planning concepts such as "unified credit amount" and "maximum marital deduction." If the terminology used in the formula to define the size of the bequest is no longer applicable under the Code, then there will likely be a change in the manner in which property passes under the existing will or trust. For example, language contained in a will which leaves a beneficiary "…the minimum amount needed to reduce federal estate tax to zero…" now can be construed to mean that the beneficiary receives nothing since there is no federal estate tax. Thus, an intended beneficiary may be left out when it is time to distribute an estate. Conversely, language contained in a will which leaves a beneficiary "…the maximum amount that can pass free of federal estate tax…" can be construed to mean that the beneficiary receives the entire probate estate since an unlimited amount can now pass free of federal estate tax. Clearly, the result in those situations can defeat the intent of the testator.

Also, many documents contain formula marital bequest provisions that are tied to the estate and GST exemptions. For a married couple with a large estate, it is customary for the will of the first to die to create a Marital Trust and a Family Trust (sometimes called an A-B Trust, a Credit Shelter Trust, or a Bypass Trust), which use a formula whereby the Family Trust is funded with the deceased spouse's unused exemption and the Marital Trust would receive the balance of the estate. A typical formula would fund the Family Trust first, using a fraction and contain language such as "…the largest value of the Trust Assets that can pass free of federal estate tax by reason of the unified credit (which is also known as the "applicable credit amount")…." in arriving at the numerator. The fractional formula language often defines the denominator of the fraction as "…the value of the trust assets as determined for federal estate tax purposes." With the repeal, there is no federal estate tax; thus, it is impossible to fund the trusts as originally intended using the fractional formulas.

The federal estate and GST repeal will also specifically impact decedents dying in Tennessee. Before EGTRRA, Tennessee, like most every state, imposed an estate tax equal to the federal state death tax credit available under Code Section 2011. In addition, Tennessee had a separate inheritance tax. EGTRRA phased out the state death tax credit, replacing it with a deduction under Code Section 2058, which resulted in the elimination of tax revenue to states like Tennessee. Tennessee retained its inheritance tax. Under EGTRRA, the state death tax credit is scheduled to return in 2011, which means that Tennessee will see the return of the estate tax, which is in addition to the inheritance tax.

Because most estate planning and tax professionals believed that Congress would act before the end of 2009, many documents drafted after 2001 do not contain provisions addressing the possibility of repeal. Likewise, most pre-2001 documents do not address repeal. Accordingly, the impact of repeal may very well cause existing estate planning documents to no longer meet a client's objectives and goals.

For an expanded discussion of this issue, please make plans to attend the Estate Planning and Probate Forum on February 26.

NOTICE: The information available in this newsletter includes basic legal information and is not a substitute for legal advice or professional alternative dispute resolution advice. The information is provided for general information only. It should not be considered legal advice or other professional advice. You should consult an attorney if you have questions concerning any specific situation.

Angelia Morie Nystrom
Chair
Baker Donelson Bearman Caldwell & Berkowitz PC
(Knoxville)
(865) 971-5170
anystrom@bakerdonelson.com

Michael Parham
Immediate Past Chair
Parham Estate Planning
(Memphis)
(901) 271-5580
mike@parhamestateplanning.com

Jennifer Kent
Newsletter Editor
Spears Moore Rebman & Williams
(Chattanooga)
(423) 756-7000
jlk@smrw.com

Jay Cloud
Middle TN Delegate
Bradley Arant Boult Cummings
(Nashville)
(615) 252-2318
jcloud@babc.com

Paul Hayes
Middle TN Delegate
Waller Lansden Dortch & Davis LLP
(Nashville)
(615) 850-8466
paul.hayes@wallerlaw.com

David Heller
Middle TN Delegate
Drescher & Sharp PC
(Nashville)
(615) 425-7118
dheller@dsattorneys.com

David Parsons
Middle TN Delegate
Baker Campbell & Parsons
(Nashville)
(615) 760-2376
dparsons@bcp-law.com

Anne McKinney
East TN Delegate
Anne M. McKinney PC
(Knoxville)
(865) 525-8700
amckinney@ammtaxlaw.com

Darsi Sirknen
East TN Delegate
Woolf McClane Bright Allen & Carpenter PLLC
(Knoxville)
(865) 215-1000
dsirknen@wmbac.com

Ed Smith
East TN Delegate
Holbrook Peterson & Smith PLLC
(Knoxville)
(865) 523-2900
edsmith@hpestatelaw.com

Victoria Tillman
East TN Delegate
Anne M. McKinney PC
(Knoxville)
(865) 525-8700
vtillman@ammtaxlaw.com

Matthew Thornton
West TN Delegate
Bourland Heflin Alvarez et al.
(Memphis)
(901) 683-3526
matthewthornton@bhammlaw.com

By: Victoria Tillman

It’s almost that time again, and I am NOT talking Tennessee football. It is almost time for the 5th Annual Estate Planning Forum sponsored by the Tennessee Bar Association, Estate Planning Probate Section. The Forum is held every year in Nashville, Tennessee, and it is an excellent source of practical information for any practitioner in Tennessee who is practicing in or interested in practicing in the areas of estate planning and probate.

Last year’s panel discussion on probate brought together probate judges and Clerk and Masters from all over Tennessee; they shared with us tips and tactics and items of concern for all attorneys involved in the administration process. We will have a similar panel discussion at this year’s Forum. Additionally, I can’t wait to hear the discussion on the tax repeal and what we practitioners need to be doing about it.

The 5th Annual Estate Planning Forum will be held on February 26, 2010 at the Doubletree Hotel. It is an excellent way to earn CLE hours while meeting with other attorneys from across the state who are interested in and practicing in the areas of estate planning and probate.