Estate Planning is the intersection of many different areas of the law. Of course, an Estate Planning attorney should understand Probate and Trust Law. And, Estate Planning attorneys must understand Estate & Gift taxes, at a minimum. Of course, it is generally expected that they will have somewhat broader knowledge of Tax Law. On the other hand, there are some areas of the law that we certainly are not expected to understand. Criminal Law is a good example of this.

Arguably, Prenuptial Agreements fall in a grey area. They certainly can affect traditional areas of Estate Planning, such as the disposition of assets at death. But, they also tread on traditional areas of Family Law, such as the disposition of assets upon divorce.

The requirements and validity of Prenuptial Agreements vary significantly from state to state. What would work in one state will not work in another.

For example, if you were doing a Prenuptial Agreement for someone, how much information do you have to give to the intended spouse? Must you reveal “expectancies?” The answer depends on the state.

Must both sides be represented by counsel? The answer depends on the state.

There’s a long list of such items that vary by state. And, the requirements in practice may differ somewhat from what a cursory reading of the law might reveal. Certainly, an Estate Planning attorney must learn such things before being able to practice competently in the drafting of a Prenuptial Agreement.

Do most Estate Planning attorneys draft Prenuptial Agreements? Some attorneys have told me that they do so routinely. Others do not feel comfortable doing so.

What about you? Do you think Estate Planning attorneys should draft Prenuptial Agreements? Do you draft such agreements?

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Ave Suite 300
San Diego, CA 92123
858-453-2128
www.aaepa.com

How does the law treat human remains? It’s not a common topic of conversation, and the answer may be surprising. In most situations, you have more control over what happens to your property after you die than you have over the final destination of your own body.

American law on this topic, as in other areas, is based on English common law. Historically, under English common law, there were no property interests in corpses. The reason for the rule can often be illustrative. If there were property interests in corpses, then those property interests could allow people to bring the dead with them from town to town and repeatedly exhume loved ones. Certainly, the lawmakers in Britain wanted to avoid this gruesome prospect. Eventually, under American common law, a quasi-property right was established. Essentially, the “next of kin” have a limited property right in the remains of a deceased person, but only for the purpose of burying or otherwise disposing of the body.

Who exactly qualifies as “next of kin?” That question has spawned its share of lawsuits. Perhaps the most memorable example from the recent past was the fight over where to bury Anna Nicole Smith’s body. In that case, Howard K. Stern, her long-time companion, argued, as executor of her will, that she should be buried in the Bahamas, next to the grave of her son. Smith’s estranged mother, on the other hand, argued that she was next of kin and thus had the right to bury Smith’s body in Texas, where she grew up. Ultimately, the case was resolved with Anna Nicole Smith’s body being buried in the Bahamas, but only after the fight over who should have control of her remains raged for nearly a month.

What’s the bottom line when it comes to control of a decedent’s remains? Preference is generally given to the decedent’s wishes. However, no one has an absolute right to dictate what will happen to his or her own remains. Because of their quasi-property rights, the decedent’s next-of-kin can overrule the decedent’s wishes and make the final decision; unless, of course, the court denies those wishes based on public health concerns or the norms of society.

What do you think? How should the law develop in this area?

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd., Ste. 240
San Diego, CA 92124
858-453-2128
www.aaepa.com

What would a permanent repeal of the estate tax do to the nonprofit sector? At first blush, it might not seem like estate taxation and philanthropy have much of a link. But there’s a strong connection.

Built in to the federal estate tax is a deduction for charitable bequests. Plus, charitable donations made during a person’s lifetime reduce that person’s taxable estate, also reducing the ultimate estate tax bill.

Study after study has found that, because of the way charitable contributions are treated within the framework of the estate tax, the tax actually increases the rate of charitable giving. The converse also appears to be true; a permanent repeal of the estate tax would reduce the rate of charitable giving.

According to a 2003 Brookings Institution report:

We find that estate tax repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion per year. Previous studies are consistent with this finding, and also imply that repeal would reduce giving during life by a similar magnitude in dollar terms. To put this in perspective, a reduction in annual charitable donations in life and at death of $10 billion due to estate tax repeal implies that, each year, the nonprofit sector would lose resources equivalent to the total grants currently made by the largest 110 foundations in the United States.

http://www.brookings.edu/articles/2003/0617taxes_bakija.aspx

According to the National Center for Charitable Statistics, there are over 1 million public charities in the United States in additional to the countless private foundations and other charities. Without an estate tax, nonprofits would suffer a catastrophic blow.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Road, Suite 240
San Diego, CA 92124
858-453-2128
www.aaepa.com

Last week, Judge Joseph Tauro of the Massachusetts federal district court ruled that the Defense of Marriage Act (DOMA) is unconstitutional on Tenth Amendment and Equal Protection grounds.

DOMA is the 1996 federal law that defines marriage as the legal union exclusively between one man and one woman. It also prohibits the federal government and its agencies from extending the benefits of marriage, which are available to married heterosexual couples, to married same-sex couples. Examples of the benefits for which married same-sex couples are ineligible under DOMA include social security survivor benefits and IRS joint tax filing status.

Judge Tauro struck down the portion of DOMA that deals with the denial of benefits to same-sex couples, agreeing with the Plaintiffs that:

• “The federal government, by enacting and enforcing DOMA, plainly encroaches upon the firmly entrenched province of the state, and in doing so, offends the Tenth Amendment.”

• The Act violates the Equal Protection Clause of the Fourteenth Amendment. The judge found no rational basis for the federal government’s denial of federal benefits to married homosexual couples while granting the same benefits to similarly situated married heterosexual couples.

Possible Implications

As it stands, the ruling is limited to Massachusetts. However, the Department of Justice is likely to appeal the ruling to the First Circuit Court of Appeals. So far, six states (CA (as to marriages from June 16, 2008 – November 5, 2008), CT, IA, MA, NH, and VT) and the District of Columbia recognize same-sex marriage. As the case works its way up the ladder of appeals, the implications may broaden.

This case is worth watching because of the potential implications it has for our same-sex clients with regard to a broad range of federal programs and issues.

• Social Security.  Currently, surviving same-sex spouses are not eligible for social security survivor benefits.

• Federal Income Tax.  Currently, same-sex married couples are not eligible to use the married filing jointly status on their federal income tax returns.

• Federal Gift Tax.  Currently, same-sex married couples are not eligible for the unlimited gift tax marital deduction allowed to other married couples.

• Federal Estate Tax.  Currently, same-sex married couples are not eligible for the unlimited estate tax marital deduction allowed to other married couples.

But, there could be some disadvantages for married same-sex couples, as well. The federal ban on recognition of same-sex marriage embodied in DOMA has provided some planning advantages for married same-sex couples which would disappear. For example, Grantor Retained Income Trusts (GRITs) may not be done if the donor and beneficiaries are “related.” Same-sex married couples are not “related” for federal estate and gift tax purposes and currently can do GRITs for each other. If the marriages of same-sex couples are recognized under federal law, GRITs would no longer be available to these couples.

Stay tuned as we see whether the Department of Justice appeals this case.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Road, Suite 240
San Diego, CA 92124
(858) 453-2128
www.aaepa.com

Attorneys routinely get themselves in trouble by dabbling in practice areas about which they know little.  Estate Planning and Elder Law are complicated areas with much to stay on top of.  2010 is a great example of that.  The rules have changed completely and there is much uncertainty.  There is no estate tax.  But, the basis “step-up,” long a mainstay of Estate Planning, has been replaced, temporarily, by a carryover basis regime.  It’s enough to make even dedicated estate planners heads’ spin!

Let’s look at a couple with $2 million in zero basis assets, all owned by the wife.  She is on her death bed and will die in 2010.  What would you advise them to do?  A “dabbler” might either tell her to 1) put all her assets in a bypass trust (because there is no estate tax in 2010), or 2) send all the assets to her husband.  The first strategy could be problematic from an income tax basis perspective.  The wife’s executor could only allocate $1.3 million of basis increase to the bypass trust.  Thus, the bypass trust would have $2 million in assets and a $1.3 million income tax basis.  The second strategy could be problematic from an estate tax perspective.  Assuming the surviving husband will live into 2011, the current estate tax law provides for only a $1 million applicable exclusion.  Thus, at the survivor’s later death, their heirs would face a tax of $435,000 on the balance of the $2 million inheritance.

Perhaps the best result would be a third option.  Leave $1.3 million of assets to the bypass trust to which the executor could allocate $1.3 million of basis increase.  Leave the remaining $700,000 to the surviving spouse.  The surviving spouse qualifies for an additional basis increase of up to $3 million.  So, with this third option, the surviving spouse ends up with $700,000 with a fair market value basis and does not have a taxable estate.

What would you do?

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys
(858) 453-2128
www.aaepa.com