With the recent increase of the federal estate tax credit shelter to $5,000,000 and a provision allowing the first spouse who dies to transfer the benefit of any unused credit shelter to the surviving spouse, the use of non-probate transfers and particularly joint ownership with right of survivorship can be extremely helpful.  Maine’s scheduled increase in the Maine estate tax credit shelter to $2,000,000 in 2013 will also make the use of joint ownership arrangements more attractive.  However, because the Maine state estate tax does not provide for a transfer of unused credit shelter, in larger estates you need to think carefully about non-probate or joint tenancy arrangements. There are disadvantages to non-probate transfers.  They stem principally from intra-family dynamics, but also relate to estate tax and creditor’ claim issues.

The advantages and disadvantages of non-probate transfers are discussed below in the context of the two most common forms of non-probate transfers: (1) joint tenancy of land, and (2) joint bank accounts.

Joint Tenancy of Land is a common form of non-probate transfer. One of the more common forms of non-probate transfer of land is joint tenancy, with right of survivorship, where title is held with another individual, and upon one of the owners’ death, the other owner automatically becomes the sole owner.  This form of ownership is not limited to spouses, although such ownership arrangements are quite common for married couples.  In Maine, a joint tenancy in real estate can help protect the surviving spouse from creditors’ claims against the deceased spouse.

In some states, there is a special form of joint ownership between spouses called “tenancy by the entireties”.  The principal distinguishing factor is that, by agreement, the spouses can unilaterally terminate their joint tenancy with right of survivorship and convert it into a tenancy in common, where each has a separate ownership share in the property.

The disadvantages of joint tenancy ownership of land relate principally to estate taxes and family dynamics:

• In large estates, joint tenancy may not be the best option for minimizing estate taxes:  separate ownership can assure effective use of both parties’ available estate tax credit shelters;
• Joint tenancy in real estate may create awkward family dynamics with second or subsequent marriages; and,
• The parties may not wish or intend for the entire interest in property to pass to his or her surviving spouse.

A joint bank account is another form of non-probate transfer.

Another common non-probate arrangement is the joint bank account.  A joint bank account can be useful if you are married or in a domestic partnership, as this allows funds to be readily available to your surviving partner.  However, multi-party accounts are often difficult to deal with because many folks don’t maintain records of their respective contributions to the account, so it can become difficult, in an estate settlement or divorce or other contentious situation, to ascertain the respective contributions of the parties. Also, the terms of the deposit account frequently authorize one or more persons to have withdrawal rights over the entire account without regard to their contributions.

In Maine, the relationship between joint bank account owners and banking institutions is regulated both by the Maine banking statutes in 9-B M.R.S.A. Section 427 and by the Maine Probate Code, 18-A M.R.S.A. VI, Part 1, Section 6-101 et seq.

Under the Maine Probate Code, there are three types of multi-party accounts:

1. a “joint account” which is an account payable to one or more of two or more parties, whether or not there is a right of survivorship.  During the lifetime of the joint owners, a joint account is considered to be owned by the parties to that account in proportion to their contributions to the sums on deposit, unless there is clear and convincing evidence of a different intention. A joint account may, but is not required to, have a right of survivorship.  Whether or not there is a right of survivorship is defined by the deposit agreement with the bank but it is presumed that a “joint account” will be payable to the surviving owner or owners unless there is clear and convincing evidence that a different result was intended at the time the account was created.
2. a “P.O.D.” (payable on death) account which is payable to one or more persons during lifetime and at death to one or more designated P.O.D. payees or beneficiaries after the death of all of the lifetime owners. A P.O.D. account is considered to belong to the lifetime payee or payees during lifetime and not to the P.O.D. payees.  If there is more than one lifetime payee, the account belongs to the payees in proportion to their contributions unless there is clear and convincing evidence of a different intention; and,
3. a so-called “trust account”  which is an account in the name of one or more parties as trustee for one or more beneficiaries where the trust relationship exists due to the form of the account and deposit agreement with the banking institution and not under a formal trust agreement.  The “trust account” is in some places called a “Totten trust.”  In a trust account, the rights of the parties are governed by the terms of the deposit contract.  If the account is not clear, then the account is presumed to belong to the designated “trustee” or “trustees” during lifetime unless there is clear and convincing evidence to the contrary.

There can be pitfalls with joint bank accounts, particularly in cases involving parents and children, such as unauthorized withdrawals, or estate and gift tax issues.  These pitfalls are described below.

Joint accounts carry a risk of unauthorized withdrawals. One complication with a joint bank account is the unauthorized withdrawal.  A very common manifestation of this is with an elderly parent and an exploitive child.

Joint accounts carry a risk of unauthorized closing: In a fraying marriage or domestic partnership one party may seek to close out the account without the permission or notice to the other party, in order to obtain an economic advantage.

Joint accounts carry a risk of gift and estate taxes. Another technical complication arises from the gift and estate tax implications of joint accounts.  Although the current gift and estate tax credit shelter amounts are sufficiently high that very few people actually have to worry about paying a gift or estate tax, a number of complications may arise if someone withdraws amounts in excess of their contributions to the account.

Simply setting up a joint account does not constitute a gift transfer, even if only one party contributed to the account and even if both parties have the right to withdraw.  However, technically, if the second party makes a withdrawal there has been a gift transfer from the original owner.  Or if the original contributor dies and the account becomes payable to the survivor, there has been a transfer for estate tax purposes.

For most married couples who are U.S. citizens and resident aliens, there is really no practical problem since transfers from a U.S. person to a U.S. spouse would qualify for the gift tax and estate tax marital deductions in any event.  Indeed, for estate tax purposes, it is presumed that spouses contributed equally to the joint account.   For unmarried persons, however, or non-resident alien spouses, there are some theoretical gift and estate tax reporting issues if the amounts at issue exceed the annual giving amount (currently $13,000 per donee per year).  For a single person, for estate tax purposes, the individual’s ownership of a joint account requires a determination of that person’s contributions to the account, which is not always easy to ascertain.

Joint accounts owned by an elderly parent and child carry a risk of family misunderstandings and conflict.  Many aging parents often want to have one of their children, perhaps one who lives nearby, assist them with their banking business and help in paying their bills.  Often these folks find it convenient and easy to place their accounts in joint name with the favored child, assuming that any funds remaining at death will be shared with the other children.

This approach works well during lifetime, but, at death, the result of the statutory presumption is that the entire remaining account balance will be paid to the surviving child and will not become part of the parent’s probate estate to be paid out to all of the children under the Will.

Regrettably, it is all too common in this situation for the caregiver child to take the position that he or she should be entitled to keep the account in consideration for all of the caregiving assistance provided.  This scenario almost always leads to unhappiness among the siblings and not infrequently to litigation, typically asserting arguments of fraud, duress, undue influence, mistake, or interference.  These can be quite painful for the family.

The issue whether the account is payable to the survivor is based upon circumstances existing at the time the account was opened.  There must be clear and convincing evidence at the time the account was created that the parties intended a result other than survivorship.  A subsequent statement or declaration, even a statement in a subsequent Will that the joint account should be distributed under the Will, may not be sufficient to rebut the presumption.

Use of durable power of attorney as an alternative to elderly parent and child joint bank accounts: Rather than creating a joint account, the use of a durable financial power of attorney to enable the child to access the account may be a desirable alternative to avoid the question of right of survivorship, and potential tax consequences.

Joint accounts owned by an elderly parent and child carry a risk that the account may become subject to claims of the child’s creditors.  This can often come as a shock to a parent if a child has financial difficulties or becomes involved in an accident.  A prejudgment attachment on trustee process may end up freezing the joint account, at least until the respective ownership rights of the parties can be ascertained, and people sometimes have difficulty in documenting their respective contributions.

Joint accounts only partially shield funds from creditor claims.  Another feature of joint accounts is the extent to which the joint account can insulate money from creditors’ claims.  Because a joint account is payable directly to the survivor and avoids the probate court process, many assume that the account can be protected from the claims of creditors. This is only partially true.

The governing law in Maine, 18-A M.R.S.A. Section 6-107, provides that a joint or payable on death account or a “trust account” is not effective against the estate of a deceased party to transfer to the surviving party sums needed by the estate to pay debts, taxes, expenses of administration, including statutory allowances for the surviving spouse and minor or dependent children, if other assets of the estate are insufficient.  The surviving party, P.O.D. payee, or trust beneficiary is liable to account to the personal representative of the deceased party for the amounts that the decedent was deemed to own immediately prior to death to the extent necessary to enable the personal representative to pay debts and claims.  Such a claim must be asserted within 2 years of death.

The good news is that although the Maine statutes technically permit this right of recovery, in very few cases has it been reported that creditors have attempted to pursue claims into the hands of surviving joint owners or P.O.D. beneficiaries.

A payable on death account may be preferable to a joint account: For persons who simply want to be sure that an account passes to an intended beneficiary at death, the P.O.D. beneficiary designation has advantages over the joint account. The so-called “Totten trust” account was originally a feature of the law of New York and has not been that commonly used in Maine where the joint or P.O.D. account has been considered more useful.

A payable on death approach is also available in Maine for transactions involving investment securities and security accounts.  Maine has adopted the Uniform Transfer on Death Security Registration Act which appears in Title 18-A M.R.S.A., Article VI, Part 3.  The law allows individuals to hold investment securities and brokerage accounts as joint owners with right of survivorship and to designate a payable on death beneficiary. The security will be payable to the designated party and will not become part of the probate estate or governed by the Will.

In addition, just as joint and payable on death bank accounts may be subject to creditors’ claims if the probate estate is insufficient, there is a comparable statute that makes the recipient of a joint or payable on death security registration accountable to the personal representative for amounts necessary to satisfy administrative expenses, debts, taxes, claims and allowances.

Conclusion: Non probate transfers can be very valuable in structuring your estate arrangements but you can best serve yourself, your spouse and loved ones by understanding what your alternatives are, and their advantages and disadvantages.  Your attorney can help you create a plan that works best for your circumstances.

Data security breaches affect organizations of all sizes.  Whether it is Zappos.com with its 24 million customer accounts[1] or your local Subway franchise,[2] no business is immune from the threat of a data security breach.  Breaches occur in all manners — from sophisticated hacking intrusions to simple thefts of laptops and cell phones.[3] Therefore, all organizations should plan for the possibility of a data security incident.

Organizations must be able to respond in a timely manner in order to contain costs, mitigate public relations harm, and comply with applicable state and federal laws.  The financial, business and legal considerations are often complex and should not be put off until an event occurs.  Planning ahead is necessary in order to comprehensively address all the issues your organization will face should a data security breach occur.  A data incident response plan can provide your company with a playbook to successfully navigate a potential incident.

In creating a data incident response plan, your organization should:

1.  Create an incident response team.

Your organization should create a team of individuals that will convene in the event of a significant data security breach.  The team should include at least one member of your organization with broad decision making authority so that decisive action can be accomplished in a timely manner.  Further members should include persons trained or experienced in media relations, persons with access and authority to key systems for analysis and back-up, persons with an understanding of the legal requirements relating to a breach, and persons designated as “first responders” who are available 24/7 in the event of a data security breach.

In addition, your organization should decide whether the response team will include third-party service providers such as outside legal counsel, who can assist you with legal and regulatory compliance, and data forensic experts, who can assist you with investigation and mitigation of the breach.

2.  Create an incident response plan.

Your organization should be prepared, in advance of a data security breach, to respond in an efficient and effective manner.  In order to ensure an organized response, a response plan should address:

• How data security breaches are reported internally;
• How data security breaches are investigated internally;
• When law enforcement, if applicable, must be notified; and
• When and how the breach will be communicated to customers and/or the public.

A comprehensive response plan should also ensure that, in the event of a breach, an assessment is made regarding:

• The scope of the breach;
• The types of data lost or exposed;
• The sensitivity of the data lost or exposed;
• Number of individuals affected;
• Places of residence (e.g. state or country) for individuals affected;
• Likelihood that data may be used to cause harm; and
• Ability of the organization to mitigate harm.

Finally, a response plan should determine which members of your organization have final authority regarding important decisions.  Roles within the incident response team should be clearly defined so decisions can be made quickly and efficiently.

3.  Determine notification requirements.

All but four states[4] have laws related to data security breach notification.  Unfortunately, these laws are not uniform and each imposes its own notification requirements.  Different states may impose different definitions of protected data, covered entities, notification deadlines, safe harbors, and penalties.

If your organization has customer data, chances are your organization also has data relating to individuals residing in states outside of your own.  Therefore, your organization is likely governed by notification laws of several states.  Federal law may impose additional notification requirements depending on your organization’s industry.[5] Finally, if your organization holds information of customers living outside the United States, notification of those persons may be required under their countries’ own laws.

In short, notification requirements may be exceedingly complex for a given breach incident.  Regulations and laws are overlapping and often times conflicting.  Therefore, it is prudent to establish and understand these requirements prior to an event.  Your organization does not want find itself grappling with these complex issues for the first time in response to an actual data security breach.

4.  Draft appropriate responses and determine how they will be communicated.

Customers and clients may lose confidence in an organization when there is a data security breach.  Prompt notification regarding any problems, however, may mitigate damage in this area.  In the event of an incident, your communications to customers should include:

• A brief description of what happened;
• A description of the types of personal information that were involved in the breach (e.g., full name, social security number, home address, account numbers, zip codes, email address, passwords, etc.);
• A brief description of what your organization is doing to investigate the breach and mitigate potential harm;
• Contact information (e.g. toll-free phone numbers, email addresses, website address, and postal address) for affected/concerned customers who have questions regarding the breach;
• Steps individuals should take to protect themselves from identity fraud; and
• (If applicable) A description of the services your organization is offering in order to assist affected customers.

The manner of your communications may, in part, be governed by applicable notification laws.  For instance, notification has to be made by certain methods (e.g., written, electronic, telephonic, etc.).  Yet, regardless of the method or form of your notice, your organization should draft sample communications, prepared in advance, to be utilized in responding to an actual breach.

In addition, your organization should designate a spokesperson to handle any inquiries from the media.  Others in the organization should be instructed to refer media inquiries to the designated spokesperson.

5.  Determine if remedial measures are necessary.

A data incident plan should evaluate whether remedial measures should be offered to affected individuals.  If there is substantial risk of identity theft or other harm to customers and/or clients, your organization may wish to offer to pay for services such as identity theft protection and credit monitoring for a designated period of time (commonly 1 year) on behalf of those individuals.  Moreover, even if the risk of harm is minimal, your organization may still wish to provide these services in an effort to offset any inconvenience and anxiety experienced by customers.  These measures may assist in preserving customer loyalty and reducing potential liability related to the breach.

By establishing a planned response in advance of a potential data security breach, your organization will be prepared to handle the myriad of complex business and legal issues that accompany each event.  More importantly, your organization will be able to mitigate potential harm and losses effectively.  Given the rise of data security breaches in today’s environment, the importance of this planning should not be overlooked.

If you would like to talk with someone in more detail about what steps your organization should consider taking in the event of a security breach, please feel free to contact David McConnell or Joe Talbot directly 1-866-774-2635 or dmcconnell@perkinsthompson.com or jtalbot@perkinsthompson.com.

[1] See http://blogs.zappos.com/securityemail (alerting consumers of a data security breach).

[2] See Sean Gallagher, How hackers gave Subway a $3 million lesson in point-of-sale security, http://arstechnica.com/business/news/2011/12/how-hackers-gave-subway-a-30-million-lesson-in-point-of-sale-security.ars (last visited Jan. 30, 2012).

[3] Online Trust Alliance, 2012 Data Protection & Breach Readiness Guide 5 (2012).

[4] As of December 1, 2011.

[5] See e.g. HITECH notification requirements, 45 C.F.R. § 164.404 (2011); FTC notification rule, 16 C.F.R. § 318 (2011).

As we head into a new year, the good news is that inflation adjustments kick in and the federal gift and estate tax exclusions are increased from $5,000,000 to $5,120,000.

But the Exclusions May be Repealed or Amended for 2013

The future of the gift and estate tax is uncertain and will likely be a campaign issue in the 2012 elections.   What happens in 2013 will likely be decided at the last minute by a lame duck Congress.

The proposals in Congress run the gamut from a total repeal and abolition of the gift, estate and generation skipping transfer taxes (proposed by Republican House members) to allowing the gift and estate tax credit shelter exclusions to fall back to $1,000,000 on January 1, 2013 with a 45% maximum rate.  In between, the Obama 2012 proposed budget calls for  a $3,500,000 credit shelter and a 45% maximum rate.

The Senate has proposed compromises in the middle ground, retaining the $5,000,000 credit shelter but adopting the higher 45% maximum rate.  The “Super Committee” considered scaling back the estate tax credit shelter to $3,500,000 as it was in 2009, scaling back the gift tax credit shelter to $1,000,000, and imposing a 45% rate.

None of these proposals attracted a consensus in 2011.

If You Have an Estate over $1 Million, Consider Taking Advantage of the $5 Million Gift Tax Exclusion Now

If you have an  estate over $1,000,000 in 2012, the question is whether you should  take advantage of the $5,000,000 gift tax exclusion which is currently available and which may not be available in 2013 and on into the future.  Certainly there are some circumstances where large gifts will make sense from a transfer tax and family succession planning standpoint.  If you own a  family farm or family business, now may be the time for you to transfer substantial portions of  family wealth to the younger generation without incurring a transfer tax.  Likewise, this may be a particularly good time to consider transferring your family vacation property or residence to the younger generation, particularly if there are no future plans to sell.

Be Aware, however, of Potential Future Capital Gains Taxes

A principal drawback to a plan to transfer a substantial portion of your family wealth to the younger generation from a tax planning perspective would be the potential future capital gains tax issues that might arise from the carryover basis which results from a lifetime gift.    By making a lifetime transfer, the potential gain on the property will be locked in and the possibility of obtaining a basis step up at death will be lost.  If Congress decides to retain the current $5,000,000 estate tax credit shelter exclusion, using the gift tax exclusion now might lead to unnecessary future estate taxes.

Substantial gifts may take some time to implement.  If you are interested in taking advantage of the currently available gift tax exclusion, it would be wise for you to begin planning now.

Recent court decisions suggest a change in the tide. Last month the United States Court of Appeals for the First Circuit (which includes Maine) overturned the lower court’s dismissal of a suit against Hannaford Bros. where hackers stole up to 4.2 million credit and debit card numbers leading to approximately 1,800 fraudulent charges on those accounts worldwide. The federal court ruled that consumers could recover money they spent on fees to replace their exposed credit and debit card accounts and to obtain identity theft insurance and credit monitoring services as reasonable “mitigation costs.”

Consumer mitigation costs were also recognized as a basis for compensation by the federal Ninth Circuit Court of Appeals last year in a case against Gap, Inc. Although the consumer failed to ask for compensation for his time and money spent on obtaining credit monitoring services, the court said that, had he requested it, it would have at least considered those costs as recoverable.

In a more novel approach, in April of this year, a federal district court in California declined to dismiss a consumer’s suit against Rockyou, Inc. The court tentatively recognized that the plaintiff had a “property right” in his personal information and that unauthorized exposure of that information “caused him to lose some ascertainable but unidentified ‘value’ and/or property right inherent in the [personal information].” Following the court’s ruling, Rockyou, Inc. agreed to pay the consumer and his attorney $292,000.00.

New statutes are also being enacted or considered for enactment at both the state and federal level. Massachusetts, Rhode Island, and Connecticut have enacted state legislation requiring companies to implement data security policies and measures to protect consumers’ personal information, subject to fines for failing to comply. Recently, a Massachusetts restaurant group was fined $110,000.00 for failing to take reasonable security measures to protect its customers’ credit card information. No fewer than seven proposed statutes have been introduced in Congress this year seeking to establish mandatory data security standards.

The First Circuit Court’s ruling in the Hannaford Bros. case is the most recent sign of a shift in the data security landscape. Companies that have been victimized by data security breaches have, until recently, largely been able to avoid liability, but this may no longer be the case. Companies are well advised to be prepared and put in place cyber-data security policies and practices to protect both their customers and themselves.

David McConnell and Joseph Talbot are attorneys at Perkins Thompson, P.A.

One of the most difficult problems facing families with an aging loved one is planning for the possibility of long term care in a nursing home or assisted living facility or planning for home care to enable the individual to be cared for in the home.

The 2010 Obama Health Care legislation includes a voluntary long term care insurance program known as the CLASS Act to enable individuals to buy coverage for community living services and support if they become disabled.

It is intended to help qualified working adults with physical or cognitive limitations to plan for their future long-term care needs with a basic cash benefit. It is also designed to help individuals with physical or cognitive limitations remain in the community by purchasing non-medical services and support such as home health care and adult day care. While the CLASS ACT benefit is not designed to cover the entire cost associated with long-term care needs, it is intended to help offset the costs incurred by millions of adults with chronic and disabling conditions. The CLASS Act has a goal of reducing the costs incurred by Medicaid in providing long term care services by providing these long term care services through insurance rather than under the Medicaid program.

As originally enacted, benefits would not commence until 5 years after the commencement of premium payments. Benefits were not intended to cover all costs of long term care but to provide families with assistance in meeting these costs.

Implementation of the CLASS Act is delayed indefinitely

The CLASS ACT was scheduled to become effective on January 1, 2011 but the Secretary of Health and Human Services was given until October 2012 to develop specific details including benefits and premium structures.

However, it now appears that implementation will need to be delayed indefinitely. The Department of Health and Human Services has indicated that the plan will not be implemented unless an actuarially sound design of premiums and benefit structures can be established. The challenge for DHHS is to design a premium and benefit structure that will be self sustaining and not require subsidies from taxpayers. So far, the actuaries in the Department of Human Services have not been able to come up with a satisfactory premium schedule.

Alternatives for long term home and community assisted living care

Even if federal assistance becomes available to help with the cost of long term home and community assisted living care, you will want to plan ahead for these long term care options for you or your loved one. Alternatives include private long term care insurance, long term disability insurance, planning for home care, and planning for Medicaid eligibility.

We recommend that you plan now. There are steps you can take today that will help with long term care– and its costs — tomorrow. Call me at 207-774-2635, or e-mail me at phunt@perkinsthompson.com, if you would like more information, or legal assistance with your planning.

By establishing reasonable electronic data security practices, your company can better protect its data and reduce its risk of liability should a data breach occur.

Below are 10 tips to enhance your company’s cyber-security:

1. Adopt “commercially reasonable” data security measures.

In Patco Construction Co. v. People’s United Bank, the United States District Court for the District of Maine held that a company’s data security measures do not have to be perfect or the best practices available, but they do have to be “commercially reasonable.” At minimum, your company should:

• Assess its vulnerability to commonly known or reasonably foreseeable attacks;
• Implement low-cost, simple, and readily available defenses;
• Implement further measures that are reasonable given your company’s resources and capabilities:
• Keep up-to-date on security standards in your industry (these may be used to establish that commercially reasonable measures were taken in the event of a data breach);
• Make sure that default passwords and default user IDs are NOT used to secure sensitive data;
• Make sure that simple or obvious passwords and user IDs are not used to secure sensitive data;
• Make sure that all sensitive data is encrypted; and
• Develop systems to detect unauthorized access to your company’s sensitive data.

2. Secure physical access to mobile computing and mobile storage devices.

Not all breaches occur online. Breaches occur in the physical world as well. Theft of mobile devices such as cell phones, laptop computers, USB drives, etc., is a major source of data leaks. These devices often contain sensitive client/consumer information that may be stolen and misused. Companies should carefully monitor custody of these devices and encrypt sensitive data for added protection in the event of a theft or loss.

3. Limit the scope and duration of data retention.

Maintaining excess data or essential data beyond the necessary retention period increases a company’s liability should a data breach occur. In the event of a data breach, the less data that is potentially vulnerable, the better. Properly destroy all data once it is no longer useful to your company, in accordance with your company’s retention policy. If your organization does not already have a written document and data retention policy, work with your lawyer and IT professionals to develop a reasonable policy for your company.

4. Determine if your industry is subject to special duties and requirements.

Under the U.S. Gramm-Leach Bliley Act, “financial institutions” (which, defined by the Act, includes many businesses that may not normally describe themselves as financial institutions) are subject to special “safeguard” rules regarding their customers’ information. Businesses in the medical industry are also subject to special security requirements regarding client/customer information under the U.S. Health Insurance Portability and Accountability Act (HIPAA) and the U.S. Health Information Technology for Economic and Clinical Health Act (HITECH). Check with your lawyer to see if these or any other state or federal data security or information privacy laws apply to your company.

5. Develop procedures to monitor and audit data security in your company.

Implement systems to define suspicious or anomalous activity pertaining to consumer/client data and flag that activity for further investigation. An employee or team of employees should be placed in charge of overseeing and adjusting security procedures on an ongoing basis.

6. Train and educate your employees.

Malware (malicious links and emails) has become a prominent method of intrusion by hackers. Employees should be educated on this risk and trained to avoid opening unknown or unverified emails and links. Inadvertent dissemination of login information is also a common avenue of intrusion by unauthorized third parties. Train your employees to protect their system passwords and user IDs, and to disclose this information only to authorized personnel.

7. Follow your company’s data security policy or agreement.

Failing to abide by one’s own security policies or agreements risks increased liability in the event of a data security breach. Your company’s own policies may set the standard against which any deficient conduct and procedures may be measured in a court claim. Moreover, failure to follow your company’s own policies/agreements may be grounds for breach of contract claims and unfair trade practices prosecution by the U.S. Federal Trade Commission and state authorities. Once your company develops and implements policies, your company should periodically self-audit or bring in an outside auditor to make sure that your personnel are actually adhering to those policies.

8. Carefully select third party providers.

Companies that use third party providers to maintain and store sensitive data should carefully vet and evaluate each provider’s security safeguards and enter into a confidentiality agreement with each provider before sharing data and information. These providers must be capable of complying with any data security obligations to which your company is subject. Check with your lawyer regarding the required content of confidentiality agreements before sharing sensitive data and information with third parties. Your company should also secure contractual indemnification in the event of exposure and liability resulting from a security breach of information held by the 3rd party.

9. Consider cyber-insurance policies.

Many insurance providers offer liability coverage for losses incurred as a result of a data security breach. Typically, coverage requires a security audit by the insurance provider and compliance with the insurance provider’s standards for data security practices. The benefit of these plans is two-fold: they encourage stringent security practices and mitigate damages in the event of a data breach.

10. Develop procedures to quickly respond to a data security breach.

Notification laws are enacted in nearly every state. Generally, these laws require a company to provide notice to affected individuals if there has been a data breach involving their unencrypted data. Maine’s notification law, found at 10 M.R.S.A. § 1348, requires most companies to notify affected individuals if the individuals’ unencrypted personal information has been misused or it is “reasonably likely that misuse will occur.” Notification must be made “as expediently as possible and without unreasonable delay.” Thus, it is imperative that your company develop response procedures to handle post-breach notification requirements under applicable laws.

For more information about data security and how your company can protect itself against data breaches, please contact David B. McConnell at (207) 774-2635 or dmcconnell@perkinsthompson.com.

1. Confirm your “domicile” state to avoid multi-state tax and administrative problems.
2. Execute or update medical authorizations and living wills.
3. Designate an agent on a durable power of attorney.
4. Decide whether to name in writing someone to be your guardian or conservator if the need arises.
5. Review existing assets to determine how title is held. Review retirement plans, IRAs, and insurance policies, and change beneficiaries if necessary or appropriate. Also review bank and investment accounts to determine ownership and succession.
6. Review and update your wills and trusts.
7. Decide whether to create a living trust or to fund an existing but unfunded trust to manage assets. Potential advantages are privacy; avoidance of probate administration; professional management during disability; and continuity of administration.
8. If you have any power of appointment over assets held in trusts created by others, decide whether such powers should be exercised.
9. Estimate potential estate tax liabilities and determine sources of funds to pay such taxes. (The federal estate tax was reinstated in 2011, affecting persons with estates over $5,000,000. Maine estate taxes affect estates of $1,000,000 but the Maine exemption will increase to $2,000,000 in 2013.)
10. Consider annual gifts. (The elimination of the “gift in contemplation of death” rules for assets other than insurance may suggest making lifetime gifts to children and grandchildren under the annual exclusion to shelter gifts of up to $13,000 per donee. There are additional exclusions for direct payment of medical and educational expenses.)
11. Consider marital gifts. (During times when the federal and state estate taxes are in effect, marital gifts may provide a means to assure that you can fully use your available estate tax credit. Marital gifts to your surviving spouse may aid your surviving spouse’s comfort during the period of estate administration.)
12. Determine if you have received any property from a decedent and whether there may be a credit available under Code Section 2013.
13. Consider generation skipping transfers to use the exemption from GST tax.
14. Consider ancillary procedures. (If you have real estate or other property in other jurisdictions that would require ancillary administration, consider gifts or the use of trusts or family liability companies to minimize ancillary administration costs.)
15. Determine the likely needs of your estate for cash to pay debts and expenses of administration and plan for meeting such needs. (Possible considerations include flower bonds, life insurance, sales of business interests or other illiquid assets.)
16. Assure that appropriate arrangements have been made with respect to family business interests including successor management, voting of stock, access to bank accounts and business records, and possible buy sell or other agreements with respect to stock.
17. Decide if you should take any steps to plan for long term care, either through home based care or nursing home care, including the alternatives of long term care insurance and possible qualification for state assistance under the Mainecare program. (If Mainecare eligibility is likely to be an issue, and your spouse will remain at home, consider transfers of assets to your spouse to fund a community spouse resource allowance and to fully fund the community spouse income allowance. Also consider maximizing the use of excluded resources and allowable transfers of assets under existing regulations.)
18. Consider burial or other funeral arrangements, organ donations, and obituary.
19. Consider charitable gifts, such as: lifetime gifts; gifts at death; gift annuities; pooled income funds; charitable remainder trusts; gifts of remainder interests; gifts of life insurance; and gifts of retirement plan benefits.

The big news is that the Maine credit shelter exemption will increase from $1,000,000 to $2,000,000 per taxpayer as of January 1, 2013. A married couple will be able to shelter $4,000,000 from Maine estate taxes.

In addition, the estate tax rate structure has been changed as of January 1, 2013, to eliminate the current “cliff tax” on estates which exceed the credit shelter amount. The rate will be 8% on amounts in excess of $2,000,000 and less than $5,000,000, 10% on amounts in excess of $5,000,000 and less than $8,000,000 and 12% on amounts in excess of $8,000,000.

Technical corrections have also been made to the Maine QTIP marital deduction for persons dying after December 31, 2010 so that Maine estate taxes can be deferred until the death of a surviving spouse.

In addition, the time for audit and assessment of estate taxes has been reduced, enabling estates to be closed and distributed sooner.

These are positive developments which should improve the tax climate for Maine residents. I recommend that you check with your attorney to be sure that your Will and Trust are structured to enable you to benefit from these new provisions. If I can help, you can reach me at phunt@perkinsthompson.com.

• The key feature of the legislation is to provide a $5,000,000 estate tax credit shelter for each person ($10,000,000 for a husband and wife) instead of the $1,000,000 credit shelter that would have become effective on January 1, 2011.  The $5,000,000 estate tax credit shelter is made effective retroactively to January 1, 2010.   The $5,000,000 credit shelter will be indexed for inflation beginning in 2012.
• There will be “portability” of the estate tax credit shelter exemption between spouses if the first spouse to die does not use all of his or her exemption.  In other words, you will be able to leave your entire estate to your spouse together with your unused credit shelter so that the surviving spouse will have $10,000,000 of credit shelter exemption available.
• The maximum estate tax rate will be capped at 35% (instead of the 55% rate which would have gone back into effect on January 1, 2011).
• The gift exemption will remain at $1.0 million for 2010 but will be unified with the estate credit shelter exemption (i.e., $5.0 million) beginning in 2011. The rate on taxable gifts in excess of the credit shelter exemption is the same maximum 35% rate.
• The generation skipping transfer tax rules will apply to 2010 “GST transfers” but the GST tax rate is zero. The GST exemption will be equal to the estate tax exemption, so there will be $5.0 million of GST exemption for 2010 that can be allocated to 2010 transfers.
• Direct skip gifts in trust or “taxable distributions” in further trust for grandchildren or more remote descendants in 2010 will incur no current generation skipping transfer tax and will not create the potential problem of having the GST tax apply to later distributions from the trust to the grandchild.

There is a special transitional rule for the estates of persons who died during 2010.  Such estates may choose to proceed under the new law with a $5,000,000 credit shelter and a full “step up” in basis or the may elect to proceed under the 2010 estate tax repeal which will require a “carryover” basis for estate assets in excess of $1,300,000 (with an additional step up for gifts to a spouse).

The increase of the estate tax credit shelter exemption to $5,000,000 ($10,000,000 for a husband and wife) will eliminate federal estate tax concerns for many readers who may, in the past, have structured their estates to create “credit shelter” trusts rather than make marital gifts to a spouse.  The increase of the “credit shelter” amount may have the effect of eliminating desired gifts to the spouse and readers may wish to change their documents to assure that spousal gifts will be made.

The availability of the opportunity to carry over a deceased spouse’s unused estate tax credit shelter may also eliminate or reduce the need for credit shelter planning for the first spouse to die.  Gifts to the surviving spouse may be more attractive as a planning opportunity.

The increase of the estate tax credit shelter exemption may also alter your perceptions about the desirability of making lifetime gifts.  The increase of the credit shelter exemption and the availability of a step up in the basis of assets passing at death may be an incentive to hold assets rather than transfer them by lifetime gift.

The increase in the generation skipping transfer tax exclusion may make the idea of multi-generational “dynasty trusts” more attractive.

The State of Maine has not at this point increased the Maine estate tax credit shelter to match the new federal exemption equivalent.  Maine will still impose its estate tax on estates in excess of $1,000,000.  Accordingly, you will want to make some provision to use the available Maine exemption.

We recommend that you contact your tax and estate planning attorney as soon as possible to review your current Wills and Trusts and consider whether any changes need to be made. If you do not have an attorney, I would be happy to assist. You can learn more about my work and expertise on my Phil Hunt webpage.

As things currently stand, with less than a month to go in the 2010 tax year, the federal estate tax and generation skipping transfer tax are temporarily repealed by Congress.  However, on January 1, 2011, the federal estate tax and generation skipping transfer tax will be reinstated as they existed in 2001 with a $1,000,000 credit shelter exemption and a marginal effective rate of 41% increasing incrementally to 55% for estates in excess of $3,000,000. If Congress allows this to happen, many people who thought that they were free from estate tax concerns will need to rethink their arrangements to minimize the estate tax impact.  I recommend you set up an appointment with your attorney now to review your current arrangements.

GIVE ANY TAX FREE CASH GIFTS BEFORE THE NEW YEAR

You can reduce your estate by making annual (and sizable) cash gifts to any children, grandchildren or great-grandchildren. Even if major changes happen with estate taxes in 2011, annual gifting remains a cornerstone of good estate planning for 2010. Currently, you can give up to $13,000 to an unlimited number of people, with no tax consequences whatsoever. If you’re married, you and your spouse can each give $13,000 as gifts to your heirs or others, so that’s $26,000 per recipient. All the money you give will be removed from your estate.

MAKE YOUR TAX FREE COLLEGE TUITION AND MEDICAL EXPENSE GIFTS

In addition to the annual giving exclusion, you can make gifts to pay college tuition so long as payments are made directly to the educational institution.  You can also make gifts for payment of medical expenses for your children and grandchildren without gift tax impact.

MAKE YOUR TAX FREE”LIFETIME” GIFTS UP TO $1 MILLION

You can also consider making larger gifts using the $1,000,000 per person gift tax exclusion.  Although lifetime gifts may reduce the estate tax credit shelter exemption available when you die, there may be an advantage to transferring assets which are likely to increase in value in the future.  This strategy may be particularly helpful given the relatively depressed financial and real estate markets.  But remember that for lifetime gifts your beneficiary takes over your “cost basis” in the asset and may be subject to capital gains tax if the asset is sold.

Gifts in excess of $1,000,000 will generate a gift tax at a marginal rate of 35% but event taxable gifts may be advantageous given the higher rates that will apply if the property is held until death and becomes subject to estate tax.  Gift tax rates are scheduled to increase in 2011 to 55%.  And gifts in excess of $1,000,000 may generate an unnecessary current tax if Congress does decide to increase the estate tax credit shelter exemption so caution would need to be exercised in making large gifts.

Because there is no “generation skipping transfer” (GST) tax in effect this year, making substantial gifts to grandchildren and other remote descendants is a particularly attractive strategy this year end.  The GST tax is scheduled to be reinstated next year with a $1,340,000 exclusion (Originally $1,000,000 adjusted for inflation).

ACT NOW–BEFORE THE NEW YEAR!

Time is running out for 2010 transactions so you will want to contact your advisors as soon as possible to complete transactions by year end.