The IRS has released the new applicable federal rate tables for March 2012, and they remain the same as they were in February.  The Short Term (0-3 years) rate is .19%, the Mid-Term (3-9 years) rate is 1.8% and the Long Term (9+ years) rate is 2.65%, with annual compounding. The I.R.C. § 7520 Rate, used to calculate the value of annuities, life interests, and remainders, remains at 1.4%See Rev. Rul. 2012-9.

It continues to be a favorable environment for Federal Estate, Gift, and Generation-Skipping Transfer tax planning, as the use of many common estate freeze techniques including grantor retained annuity trusts (GRATs) and installment sales to grantor trusts (IGTs) work best when interest rates are low.

It is not a happy topic, but divorce happens. And, January apparently has the greatest number of divorce filings. When going through a divorce a person’s entire life is rearranged, and there is often a complete reorganization of personal and financial affairs.

One important, but sometimes overlooked, part of that reorganization is updating the estate plan in light of changed circumstances. A new Will, Power of Attorney, and Living Will are essential, but just as essential are updates to any beneficiary designations on life insurance and retirement accounts.

While not a reason to delay updating an estate plan, the good news is that both Pennsylvania and New Jersey have laws providing that an ex-spouse’s interest in a decedent’s estate is nullified. The bad news is that these laws do not apply to plans and benefits governed by the Employee Retirement Income Security Act, commonly known as “ERISA”. This means if your 401(k) or 403(b), or your employer provided life insurance names an ex-spouse as beneficiary, the plan administrator is required to pay the money or benefits to the ex-spouse. This has, and will continue to, cause disputes among family members. Particularly, where there are children from different relationships involved.

The United States Supreme Court ruled on this issue in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), and held that ERISA preempted a Washington State statute, which automatically revoked a spouse’s (or domestic partner’s) interest the in life insurance or retirement benefits of the other on dissolution or invalidation of the relationship. The Egelhoff case has been followed numerous times, including other Supreme Court cases, as well as cases in the United States Court of Appeals for the Third Circuit (which includes both PA and NJ), and the Pennsylvania Supreme Court.

In 2009, the Supreme Court decided Kennedy v. Plan Administrator, 555 U.S. 285 (2009), where both a decedent’s ex-wife and the executor of the decedent’s estate (his daughter from a prior marriage) claimed the decedent’s benefits under a company administrated savings and investment plan (SIP). While the ex-wife had waived her interest in the SIP in the divorce, the decedent never changed the beneficiary designation form with his employer; the plan administrator followed the designation on file and paid the benefits to the ex-wife. The Supreme Court held that the ex-wife’s waiver to the benefits was not invalid, but that because the wavier was not part of a Qualified Domestic Relations Order (QDRO), the plan administrator was obligated to follow the plan documents and pay the benefits to the ex-wife. In a footnote, the Court stated that it was not opining on whether, and left open the possibility that, the Estate could bring an action directly against the ex-wife for the benefits received.

And, just this past November the Pennsylvania Supreme Court, in In re Estate of Sauers, held that a Pennsylvania statute, 20 Pa. C.S.A. § 6111.2, which in effect, revokes an ex-spouse’s interest in the life insurance or retirement accounts of a decedent (similar to the Washington statute addressed in Egelhoff), is preempted by ERISA with respect to the plans ERISA governs. Going further, the Pennsylvania Supreme Court found that the right of private action against an ex-spouse for benefits paid by the plan administrator provided by the Pennsylvania statute was also preempted by ERISA and was invalid.

The bottom line, if you or a client has been through, or is currently going through, a divorce estate planning should be at or near the top of the list of priorities. And, when updating an estate plan, beneficiary designations are as important as your Will and other documents.

UPDATED 1/19/2012:

The IRS has released the applicable federal rate tables for February 2012.  The rates remain virutally the same, with the 7520 Rate at 1.4% and the lowest short term rate at .19%.  Check out Rev. Rul. 2012-7. 

AFRs remian low in January ---

The IRS recently released the AFR (applicable federal rate) tables for January 2012. Rates continue at historic lows. The 7520 Rate, which is used to value a taxpayer’s interest in many common estate planning structures, such as the grantor retained annuity trust (GRAT) is only 1.4%. Other rates are similarly low. Certain loans, typically made between family members, can be made at rates as low as .19% without triggering imputed interest income to the lender.

The low interest rate environment means that there continues to be opportunities for wealthy individuals and families to engage in Federal Estate Tax planning.

Check out the January AFR Tables here.

Making a Will is easy.  Doing it right takes planning.

In Pennsylvania making a Will is not complicated. There are only a few techincal requirements. But, having a valid Will and having a Will that works for you and your family are not the same thing.  Many valid Wills (particularly the do-it-yourself kind) create more problems then they solve.  Working with an estate planning attorney is the best way for you to make sure your Will is valid, it actually does what you want it to, and that it works with the rest of your estate plan.

Here are the basic requirements of a Will in Pennsylvania:

1) A Will must be in writing.

You can’t make a video or audio Will. Also, it is generally considered a bad idea to record the signing or reading of a Will. While people think it will make their intentions clear it often has the opposite effect, and in some instances may lead to a disgruntled beneficiary raising questions about capacity or undue influence.

2) A Will must be Testamentary in nature.

Obviously not every written document is a Will. A Will must dispose of your property, and should generally be titled Will or Last Will and Testament.

3) A Will must be signed at the end by the Testator (person making the Will).

All of the terms above the signature are part of the Will. But, if terms are written below the signature those terms are not part of the Will and will not be enforced.

4) Witnessed by two people (well not really, but it is highly recommended).

Technically, there is no requirement in Pennsylvania that a Will be witnessed. However, without witnesses probating the Will becomes more difficult, because the Register of Wills must then hold a hearing where people familiar with the Testator’s signature will have to appear and testify. Therefore, it is highly recommended that people have at least two uninterested persons witness the signing of their Wills.  It is also advisable to have the witnesses execute (sign) what is known as a self-proving affidavit, so that the witnesses don't have to appear before the Register of Wills in order to probate the Will.

Also, if a person lacks the physical ability to sign for him or herself, a Will can be signed by the Testator’s mark, or at the Testator’s direction another person. But, both of these alternative signature methods require two witnesses in order to be valid.

Even if you have a valid Will there are no assurances that it does what you want it to.  Many valid Wills create problems because:

- they fail to dispose all of the Testator's property,

- they do not account for the possiblity that a beneficiary may die prematurely,

- they lack trust mechanisms for minor or incapacitated beneficiaries,

- they give away property the Testator no longer owns,

- or they do not give suffcient authority and discretion to the Executor requiring the Executor to obtain court approval for certain decisions.   

This is just a few of the many ways that a valid Will can create problems during the admininstration of an estate.  Working with an estate planning attorney to make sure your Will contains the right terms and provisions, that it works with the rest of your estate plan to meet your goals, and allows the Executor to admininstrate your estate in the most efficient way possible is a wise investment for you and your family.  

The third week of October has been declared National Estate Planning Awareness Week. 

http://www.ammlaw.com/faq/estates-trusts.html