Due to Congressional inaction in the last 2 weeks of 2009, the estate tax and the generation-skipping tax have been repealed for individuals dying during 2010 and for generation-skipping transfers made in 2010. Please note that the gift tax laws will not change except as to certain specialized trusts.

It is now appropriate to determine, if you have prepared estate planning documents, whether such documents should be amended. Wills or trusts which refer to the marital deduction, the applicable credit amount, the federal estate tax, the unified credit, the estate tax exclusion amount, and/or the generation-skipping transfer tax, should be reviewed promptly. In many cases, a simple amendment is all that will be necessary; however, in some cases, more significant revision may be appropriate.

As an example, for married clients, the estate planning documents may divide the estate of the first spouse to die into two broad portions—one portion is equal to the deceased spouse's unused estate tax exemption amount. The other portion is equal to what is called the "optimum" marital deduction. Typically, neither portion will be subject to estate tax when the first spouse dies even if there is an estate tax—the estate tax exemption portion (sometimes called the "credit shelter," "bypass" or "Family Trust" portion) escapes tax because it takes advantage of the estate tax exemption of the spouse dying first. The marital deduction portion is not subject to estate tax when the first of the married couple dies, but is subject to estate tax when the surviving spouse dies. If a spouse dies in 2010 is the exemption amount limited to the 3.5 million or is the exemption amount the entire estate? These uncertainties raised by the estate tax repeal (and next year's scheduled resetting of the applicable exclusion amount to $1 million) indicate that a brief estate planning document checkup is appropriate.

Another complication is that effective now and for the rest of 2010, assets passing to an estate or to trust beneficiaries will not have their income tax cost basis adjusted to date of death values. There is no planning which can avoid this result.

Further, Congress may amend the tax laws in 2010 by re-enacting them possibly retroactive to January 1, 2010. As a result of observing the Congress in December 2009, it is not possible to predict its conduct, especially as to taxes. Now may be an appropriate time to send a letter to your clients explaining this situation and to recommend that they review their documents. Further your clients need to know that their financial records should NOT be thrown away because of the carryover basis rules.

In a recent court decision, Ernest W. Willis (Bktcy Ct FL 8/6/2009), 104 AFTR 2d ¶ 2009-5195, the Bankruptcy Court determined that the funds of two individual IRAs were not exempt from the bankruptcy estate. The individual filed for relief under Chapter 7 and claimed the exemptions under the bankruptcy code. The bankruptcy trustee objected to the exemptions and based his objection on actions the taxpayer took with respect to the IRAs.

Under bankruptcy law an individual may exempt IRA funds from a bankruptcy estate and such funds are presumed exempt if the IRA has received a favorable determination from the Internal Revenue Service (“IRS”). The taxpayer argued that the presumption of exemption was not rebuttable but the court determined that rebuttable evidence could be entered to establish the IRA was improperly operated. The taxpayer engaged in prohibited transactions with the IRA such as lending money, extension of credit and other actions. The IRA was a self-directed IRA and the taxpayer was responsible for managing its investments and therefore he was a “disqualified person” to which the prohibited transaction rules applied. The court determined that the IRA was not exempt. Generally under Florida law IRAs are exempt from bankruptcy. However, if you engage in prohibited transactions, such as lending money, borrowing money, etc. with an IRA the protection may be lost.

In a recent case, Robertson v. Deeb, 2009 WL 2476529 (Fla. App. 2 Dist.) the court said No! Section 222.21(2)(a) of the Florida Statutes provides “any money or other assets payable to an owner, a participant, or a BENEFICIARY” (emphasis added)… from a “fund or account is exempt from all claims of creditors of the owner, BENEFICIARY, or participant.” (emphasis added) Unlike the above discussion this IRA plan was operated properly so the only issue was whether the IRA which was inherited by the beneficiary was subject to the beneficiary’s creditors. The court stated that the protection did not apply to inherited IRAs because the “plain language” references the original “fund or account” and the tax consequences of inherited IRAs render them a completely separate “fund or account.”

This author and the majority of members of the IRA committee of the RPPTL strongly disagree with this holding. The intent of the statute, as discussed with the original drafters, is that the exemption inures to beneficiaries as evidenced by the plain meaning of Section 222.21(2)(a) of the Florida Statutes. Further Section 222.21(c) specifically provides that money that is exempt under (a) does not cease to qualify for exemption by reason of a rollover that is excluded from gross income under I.R.C. § 402(c) which refers to inherited retirement plans I.R.C. § 402(c)(11). It appears this is the first Florida case regarding this issue. In another District the holding may be different.