We have been so busy with estate and tax planning work, we didn't send a Spring issue of the Newsletter. To assist in your planning, we offer this summary of certain recent developments, along with some reminders of important and continuing concerns. We cannot pretend to cover all issues, but the following are noteworthy:

1. New income tax rates on estates and trusts. Under legislation enacted this year, Trusts & Estates will now be taxed at 39.6% on income in excess of $7,500. Among other things, this may encourage trustees and executors to be more liberal and frequent in making distributions.

2. Investment obligations of trustees. This issue is something of a "sleeper." Trustees of family and other trusts should be thinking about their investment strategies and how they will affect all present and future beneficiaries. Liability may arise where, for instance, a surviving spouse is trustee of a trust for his or her own lifetime benefit, invests with only current income in mind, and overlooks the duty to "grow" the trust principal for future beneficiaries.

3. Gifts from living trusts. This affects those who have revocable living trusts and are making gifts to children or others to reduce estate taxes. There is a quirk in the tax law which treats gifts from living trusts less favorably. Thus gifts should be made of assets held outside the living trust (e.g., an account held personally and not in the name of the trust).

4. Gifts (cont'd): partial interests and family partnerships. Tax-saving gifts may be made with assets other than cash. Gifts of partial interests in real estate have become more popular in recent years, in part because of "valuation discounts" which allow the giver to compress more value into the gifts. A similar effect may be achieved by forming a family partnership to hold real estate, and giving away interests in the partnership.

5. Gifts (cont'd): personal residence trusts. The personal residence trust, previously described in our Fall 1991 Newsletter, continues to be a smart vehicle for lessening estate taxes. By this device, a person (or couple) transfers a principal or secondary residence into a trust, and retains the right to use it for a stated number of years. After the period of years has ended, ownership of the residence passes to children (or other beneficiaries). Due to the procedure for calculating the value of the gift, this sort of transfer makes highly beneficial use of tax exemptions in the right instance.

6. Nonprobate arrangements. When one makes a Will, one often (and understandably) thinks the disposition of the entire estate has been determined. This thinking is usually wrong. There are certain types of "nonprobate" assets, the disposition of which is not governed by a Will. Insurance proceeds and retirement benefits, for instance, are paid per the applicable beneficiary designation. If some assets (such as stocks, bank accounts, or real estate) are held as joint tenants with right of survivorship, these will pass directly to the surviving "tenant" and not under the Will. If there is a Community Property Agreement, it will likely override the Will. These nonprobate arrangements should be reviewed to see whether they are consistent with the Will, and changed if they are not.

7. Nonprobate arrangements (cont'd). Another common misconception is that nonprobate arrangements are not subject to estate tax. This is not the case. Current Federal law taxes estates which exceed $600,000 in value. When determining the value of one's estate for tax purposes, life insurance, retirement benefits, and jointly held assets should be included. Life insurance proceeds, for instance, may pass outside of "probate" but they are included in the owner/insured's "estate" for tax purposes.

If you would like to consider any of these issues further, please call the lawyer with whom you work, Larry Ghilarducci, Eileen Peterson, Al Falk or Alan Macpherson of our Tacoma office, or Larry Brown of our Seattle office.