1. Estate Planning Seminar
Simplifying Your Estate Plan
October 22, 2013
Presented by
Dana B. Perry • Gregory D. Willett • Ryan Barry • Leah M. McElmoyl
© 2013 Chambliss, Bahner &
Stophel, P.C. All Rights Reserved.
Chambliss, Bahner & Stophel, P.C.
Liberty Tower • 605 Chestnut Street, Suite 1700 • Chattanooga, TN 37450
chamblisslaw.com

2. Today's Topics
• An Opportunity to Simplify Your Estate Plan –
Resulting from:
– "Permanency" of Federal Gift and Estate Tax
Exemption ($5 million +)
– "Portability" of unused Federal Gift and Estate Tax
Exemption to surviving spouse
– Elimination of Tennessee Gift Tax
– Phase-out of Tennessee Inheritance Tax
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3. Today's Topics
• Changing the Unchangeable – Modifying
irrevocable trusts
– Techniques used to modify or terminate
irrevocable trusts
• Trust modification agreements
• Nonjudicial settlement agreements
• Decantations
– Tax implication and other consequences of trust
modification or decantation
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4. Principles of Estate, Inheritance &
Gift Taxation
4

5. Transfers Exempt from Tax Due to
the Value of the Transfer
• Lifetime transfers:
– Annual Exclusion: When value transferred to a
beneficiary during a calendar year is less than the
annual gift tax exclusion amount (federal annual
gift exclusion amount is currently $14,000 per
donee)
– Amount in Excess of Annual Exclusion: Use of
Federal Unified Credit during life for amounts in
excess of annual exclusion
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6. Transfers Exempt from Tax Due to
the Value of the Transfer
• Transfers at death:
– When value transferred is less than the decedent's
remaining Unified Credit amount (Federal Unified
Credit amount is currently $5.25 million(2013)) –
may be increased if a predeceased spouse did not
fully utilize his/her exemption
• NOTE: The Tennessee Inheritance Tax exclusion is
currently only $1.25 million, but it is set to increase
over the next few years ($2 million in 2014, $5 million
in 2015, and repealed in 2016).
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7. Transfers Exempt from Tax Due to
Recipient of Transfer
• Exempt Recipients:
– Spouse (outright and qualified marital trust)
– Charity
– Medical care provider for the care of another
– Educational Institution for the education of another
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8. History and the Current State
of the Federal Estate & Gift
Tax Structure
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9. Federal Estate, Gift & GenerationSkipping Transfer
Tax Exemption History
6,000,000
5,000,000
4,000,000
Estate
3,000,000
Gift
GST
2,000,000
1,000,000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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10. Maximum Federal Estate, Gift & GST Tax
Rate History
Maximum Federal Estate and Gift Tax Rate
60%
50%
40%
30%
Max Rate
20%
10%
0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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11. Recent Progression of Federal
Estate & Gift Tax Exemption
• 2011: A $5.0 million Unified Credit amount that
can be used during life, at death, or in
combination
• 2012: Inflation adjustment increased the Unified
Credit increased to $5.12 million
• 2013 and beyond: $5.0 million Unified Credit
made "permanent" and adjusted for inflation for 2013 there was a $130,000 increase to $5.25
million
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12. 12

13. Portability of Unused
Unified Credit
• Pre-2010: For deaths occurring prior to 2010,
each spouse's Federal Unified Credit was not
portable – "use it or lose it"
• 2010 – 2012: For deaths occurring in 2010 –
2012, the Unified Credit was "portable" between
spouses – a decedent's unused Unified Credit can
pass to his or her surviving spouse
• 2013 and after: For deaths occurring in 2013 and
beyond, portability of the Unified Credit has been
made "permanent" – can result in a surviving
spouse having up to $10.5 million Unified Credit
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14. Portability of Unified Credit
Example:
Husband has assets of $4 million and wife has
assets of $8 million. At husband's death in 2013,
husband's estate applies $4 million of his $5.25
million Unified Credit to his assets, files a federal
estate tax return (Form 706), and the remaining
$1.25 million passes to wife. At wife's death, her
Unified Credit will total $6.5 million (her $5.25
million plus husband's unused $1.25 million).
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15. Portability of Unified Credit
• Caveats:
– Can not accumulate Unified Credit amounts from
multiple deceased spouses – but can "spend-down"
deceased spouse's exemption through lifetime gifts
first, before using your exemption
– Does not apply to generation-skipping transfer
("GST") tax exemption
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16. History and Current Status of
Tennessee Inheritance &
Gift Tax Structure
16

17. Tennessee Inheritance and Gift Tax
Exemption History
Inheritance Tax Exemption
$6,000,000
$5,000,000
$4,000,000
$3,000,000
Exemption
$2,000,000
$1,000,000
$-
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18. Tennessee Inheritance Tax Rates
Tennessee Inheritance Tax Rates
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
Rate
4.0%
3.0%
2.0%
1.0%
0.0%
< $40,000
$40,000 - $240,000
$240,000 - $440,000
> $440,000
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19. Tennessee Gift Tax
2013 and Forward
• Tennessee repealed its gift tax, retroactive to
January 1, 2012
– NOTE: Gifts within 3 years of death are included in
a decedent's taxable estate for Tennessee
inheritance tax purposes – legislation is pending to
repeal this law
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20. Tennessee Inheritance Tax
Exemption 2013 and Forward
• Tennessee is phasing out its inheritance tax by
increasing the exemption amount:
– 2013 - $1.25 million
– 2014 - $2 million
– 2015 - $5 million
– 2016 and after – complete repeal of Tennessee
inheritance tax
20

21. Tennessee Inheritance Tax
Exemption Tax Trap for
2012 - 2015
• Tennessee Inheritance Tax Exemption
– For 2012 to 2015, overfunding a "Credit Shelter
Trust" under a Last Will by using Federal Unified
Credit can trigger unexpected Tennessee
Inheritance Tax on death of the first spouse
– Overfunding can be solved with a formula clause in
creating a trust - and through the use of a
Tennessee Gap Trust
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22. How We Previously Planned
Around Taxes
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23. Gifting
• Heavy focus on use of various gifting techniques
to reduce the value of one's estate:
– Annual per donee exclusion gifts
– Gifts for medical and educational expenses
– Gifts and sales of assets expected to appreciate –
estate freeze techniques
23

24. Complicated Estate Plans
• Last Wills: Incorporated multiple levels of trusts
– $1.25 million (2013) - Credit Shelter Trust (for
family)
– $4.0 million (2013) - Tennessee Gap Trust (for
spouse)
– >$5.25 million (2013) – Outright or in a Marital
Trust for surviving spouse
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25. Complex Estate Plans
• Segregation of Assets: Ensure both spouses
utilize their Federal Unified Credit and Tennessee
exemption amounts – "portability" of exemption
had not been an option
• Goal: Delay taxes to the extent possible
• Irrevocable Life Insurance Trusts: Designed to
help fund payment of estate/inheritance taxes
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26. Gifts to Descendants or Trusts
• Make large outright gifts to children and
grandchildren
– Use the Federal Unified Credit while available,
including a deceased spouse's exemption, if
available
– Move future appreciation on gifted assets out of
the taxable estate
– Tennessee gift tax no longer an issue on the
transfer – maybe an issue if grantor dies within 3
years of gift (legislation pending)
• Create multi-generational "dynasty" trusts to
avoid future estate and inheritance tax on those
assets – can last up to 360 years in Tennessee
26

27. Spousal Lifetime Access Trusts
("SLATs")
• Irrevocable trust for the benefit of spouse
• Details …
– Trustee: During spouse's lifetime, an independent party
may serve as trustee or the spouse may serve as trustee
(alone or with a co-trustee)
– Distributions: Income and principal to spouse under an
ascertainable standard (health, education, maintenance
and support)
– Spouse's death: At spouse's death, the assets remaining
in the trust may pass to the children and/or
grandchildren without incurring any tax (assuming GST
tax exemption was properly allocated to trust
contributions). Spouse may also have a limited power
of appointment.
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28. Simplification of Estate Plans
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29. Fewer Estates are Taxable
• The "permanency" of portability and the $5
million Unified Credit ($5.25 for 2013) places
estates under $10 million outside of estate tax
issues ($10.5 million for 2013)
• Tennessee is phasing out its inheritance tax
completely by 2016
• CONCLUSION: Most estates no longer need
complex planning for the sole purpose of tax
avoidance
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30. Simplifying Last Wills
• Fewer last wills need complex trust planning for
the purpose of tax avoidance – eliminate the 3
trust approach
• Consider drafting new last wills that focus on
how you want your property to pass instead of
how to avoid taxes
– Will likely result in removing many of the trusts
from your last will
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31. Simplifying Last Wills
• Example: Husband and wife have less than $10
million in their combined estate:
– Last Will:
• All outright to spouse;
• If spouse is deceased, in equal shares (outright or in
trust to children)
– Estate Tax Return: Would require filing of estate
tax return on first spouse to die to elect portability
of Unified Credit
– Estate and Inheritance Tax: No tax due if surviving
spouse dies after 2015
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32. Pros and Cons of Simplification
• Advantages:
– Simple
– No need to retitle assets
• Disadvantages:
– No control of assets distributed outright to surviving
spouse
– Remarriage, creditor protection, increase in value of
assets?
• Alternatives:
– Instead of outright distribution to spouse, consider use
of Marital Trust for the surviving spouse – may require
retitling of assets on death of first spouse to die
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33. Reasons Other Than Taxes to Use
Trusts Under Your Plan
• Although deemed permanent, the current rules on
portability and the Unified Credit could change
– Example: Obama proposed reduction of unified credit to $3.5
million
• Trusts, if drafted properly, provide creditor
protection for the beneficiaries thereof (think
divorce, lawsuits, etc.)
• Trusts delay large inheritances to young beneficiaries
so they may mature first
• Portability doesn't extend to multi-generational
trusts (GST exemption)
33

34. Changing the Unchangeable
Modification of
Irrevocable Trusts
34

35. Techniques
35

36. Ways to Modify Irrevocable Trusts
• Modification and Amendment: Irrevocable trusts
are actually not "irrevocable." Instead, there are
several ways to amend or terminate such trusts
under the Tennessee Uniform Trust Code:
– Non-judicial settlement agreement
– Trust modification
– Trust decantation
• Qualified Beneficiaries of the Trust: These are
the primary and secondary beneficiaries of the
trust and are generally involved in these
processes
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37. Non-Judicial Settlement
Agreements
• Purpose: To address nonmaterial matters involving a
trust – agreement cannot violate a material purpose
of the trust and must include provisions that could be
approved by a court – generally can not alter an
income or principal interest
• Parties: Trustees and qualified beneficiaries – note
that settlor is not a required party
• Court Involvement: None
37

38. Non-Judicial Settlement
Agreements
• Examples:
• Interpretation of trust terms
• Approval of trustee's accounting
• Direct trustee to refrain from or perform a specific
action
• Resignation or appointment of a trustee – note that
removing a trustee (unless provided in the trust
agreement) can not be achieved by a nonjudicial
settlement agreement, but would require a court
action – unless trustee elects to resign
• Transfer of trust's place of administration
38

39. Trust Modification - Generally
Settlor is Alive
• Purpose: To modify or terminate a trust even if
those actions are inconsistent with a material
purpose of the trust, provided that settlor does
not object and certain tax attributes are not
violated
• Parties: Trustee with the consent of the qualified
beneficiaries – 60-day prior written notice must
be given to settlor
• Court Involvement: Only if qualified beneficiaries
don't consent, or settlor objects
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40. Trust Modification – Generally
Settlor is Deceased
• Purpose: To modify or terminate a trust so long
as those actions are consistent with a material
purpose of the trust, provided certain tax
attributes are not violated
• Parties: Qualified beneficiaries – trustee is not
mentioned as a required party
• Court Involvement: Required
• When Used:
– When NJSA is not an option – material, nonadministrative changes
– When qualified beneficiaries to an NJSA can't agree
40

41. Trust Modification – Unintended
Consequences
• Purposes: To modify the administrative or
dispositive provisions of a trust if due to
circumstances not anticipated by the settlor,
modification or termination of the trust furthers
the purposes of the trust
• Parties: Settlor, Trustee, and beneficiaries
• Court Involvement: Required
• Examples:
– Unanticipated economic change to beneficiary
– Incapacity of beneficiary
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42. Trust Modification – Cy pres
• Purposes: To achieve the settlor's purpose for a
charitable trust and modify or terminate a trust
fulfill the settlor's charitable intent
• Parties: Trustee, beneficiaries, and settlor, if
possible
• Court Involvement: Required
• Examples:
– Named charity in a charitable trust ceases to exist
and leaves no successor-in-interest
– Timing for distributions to the named charity are
uneconomical or ineffective
42

43. Trust Modification – Termination
of Uneconomical Trusts
• Purpose: To terminate small trusts (less than
$100,000 in assets) that are no longer
economical to maintain
• Parties: Trustee and qualified beneficiaries
• Court Involvement: Possible - if necessary to
modify or terminate a trust, or to replace a
trustee, if the court determines that the value of
the trust is insufficient to justify the cost
• Beneficiaries on Termination: Must take into
account current and remainder beneficiaries
43

44. Trust Modification – Other
Reasons
• Purposes:
– Reformation to correct a mistake
– Modification to achieve settlor's tax objectives
• Parties: Trustee, qualified beneficiaries and
settlor, if available
• Court Involvement: Required
• Beneficiaries on Termination: Must take into
account current and remainder beneficiaries
44

45. Trust Decantation
• Purpose: The trustee's ability to transfer assets
from an existing trust to a separate trust for the
same beneficiary – can be a new trust created by
the trustee or an existing trust
• Parties: Trustee acting unilaterally to carry out
discretion granted to trustee under trust
agreement – beneficiary
• Court Involvement: None
• When to Use: Often used when an NJSA or
modification will not work due to lack of consent
from one or more of the qualified beneficiaries
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46. Trust Decantation
• Requirements to Decant:
– Trustee must have power to invade principal for a beneficiary
of the trust
– Trustee exercises the power in favor of a new trust for the
beneficiary
– Trustee can not through the decantation reduce a
beneficiary's fixed income interest
– Decantation must be made in writing (notarized) and can not
extend the perpetuities period of the original trust
– Beneficiary can be granted a power of appointment over the
assets in the new trust
– New trust can not violate certain tax attributes of the original
trust
46

47. Tax Implications
and Other Consequences
47

48. Income Tax
• Grantor Trusts: Consider whether modification
will change the grantor status of the trust.
• Uncertainties as to Decanting: There are several
open issues regarding income tax treatment of
second trust.
– Is distributable net income carried out to the
second trust?
– Does distribution of appreciated assets to the
second trust cause any part to recognize capital
gain?
48

49. Gift and Estate Tax
• Beneficiary Consent: Beneficiary must be careful not
to consent to a modification that results in a transfer
of all or some of his beneficial interest to another
beneficiary.
• Example: If a trust provides for mandatory income
distribution to Dad with the remainder distributed to
Child at Dad's death, Dad's consent to a modification
making the distribution of income discretionary could
be considered a taxable gift.
• Settlor's Consent: Settlor's consent to a modification
is not a retained power over the trust to render it
includable in his estate.
49

50. Generation-Skipping Transfer
("GST") Tax
• Always consider the character of the trust for
GST tax purposes prior to modification or
decantation.
• A trust modification or decantation may not:
– Shift a beneficial interest in the trust to any
beneficiary who occupies a lower generation than
the person(s) who held the beneficial interest
previously; or
– Extend the permissible period for the rule against
perpetuities that applies to the trust.*
*See Treas. Reg. § 26.2601-1(b)(4)(i)(D)(1).
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51. Creditor Protection
• Consider whether a beneficiary's consent to a trust
modification or decantation will cause the trust to
lose creditor protection.
– Example: Grantor and Beneficiary wish to enter into a
trust modification agreement to extend the term of a
trust (which is currently set to distribute outright to
Beneficiary at age 25) to last for the Beneficiary's
lifetime. Beneficiary's creditors might argue that the
trust is essentially a "self-settled" trust after the
Beneficiary attains age 25, and therefore, is not
protected from Beneficiary's creditors after age 25.
– Solution: Use a trust decantation instead and avoid the
need to obtain Beneficiary's consent.
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52. 52

53. Pet Trusts
• Authorized by statute
• Trust can continue for the life of the pet, or the last of
several pets to die – but trust may not be enforced
for more than 90 years
• Trust can be enforced by the trustee, trust protector,
or a person authorized by the court
• Court can determine whether amount in trust is
excessive
• Excessive funds distributed to successor's estate
53

54. Questions?
Dana B. Perry
dperry@chamblisslaw.com
(423) 757-0228
Gregory D. Willett
gwillett@chamblisslaw.com
(423) 757-0224
Ryan Barry
rbarry@chamblisslaw.com
(423) 757-0247
Leah M. McElmoyl
lmcelmoyl@chamblisslaw.com
(423) 757-0294
54

55. Disclaimer
This presentation is provided with the understanding that the
presenters are not rendering legal advice or services. Laws are
constantly changing, and each federal law, state law, and regulation
should be checked by legal counsel for the most current version.
We make no claims, promises, or guarantees about the accuracy,
completeness, or adequacy of the information contained in this
presentation. Do not act upon this information without seeking the
advice of an attorney.
This outline is intended to be informational. It does not provide
legal advice. Neither your attendance nor the presenters answering
a specific audience member question creates an attorney-client
relationship.
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