By: Randall A. Denha, Esq.
Some say we will never have a return to the estate tax system. Others say simply give Congress time to restore the system that once governed. Regardless of which school of thought you subscribe to, estate planning is still alive and well. Consider the following items:
Written Letter: You should write a letter outlining the intent of your estate planning documents which will explain the intent of your wills and living trusts (referred to collectively as “estate plan”.) Many of these documents are written with technical tax language that may not really clarify what you want done. Write a letter of explanation. Regardless of whether its admissible in court, it may help those involved understand your real wishes, independent of the tax considerations. That may be enough in most cases to help guide and encourage family and other heirs to resolve the matter. Many estate planning documents use tax formulas and language that may NOT work any longer. Be very careful as what once worked now no longer may do so!
Revise Wills and Living Trusts: Visit with your estate planning professional to revise your estate plan to flexibly address all circumstances such as estate tax repeal; reinstated estate tax, carry-over basis. Be sure to include statements of what your goals are apart from taxes. This way, whatever the state of the estate tax your intent will be clear. Consider giving broad and flexible powers to your fiduciaries to address the more likely tax and other scenarios. Most likely you need to do this in any event because of the massive reversal many have experienced due to the recession.
Tenants in Common: In the past, the standard approach was for many couples to divide assets equally by value so whichever spouse died first, these assets would be available to fund a family trust in order to protect some or all of the estate tax benefit of assets that could be passed without an estate tax. As of January 1, 2010 the law provides for carryover basis. No estate tax. But each person who dies can eliminate unrealized appreciation of up to $1.3 million (and an additional $3 million on qualifying transfers to a spouse). That means you can eliminate up to that much capital gains tax your heirs would pay in lieu of your estate having had to pay estate tax. But this system requires assets be divided by those that have appreciated and only by value. How can you do both given the uncertainty? In many situations you can change brokerage accounts (not retirement plan accounts) and your house to “tenants in common” to split assets between spouses based on whichever tax system prevails. But remember, in planning there are always exceptions which is why meeting with your advisers is always the safest approach.
Insurance: Consider buying a term life insurance policy. If you have a ten (10) year term policy you can cover the cost from having your estate set up wrong. When (and if) the law sorts itself out you can cancel the policy if you no longer require the insurance. Alternatively, if you do require the insurance, you can always convert the policy to a more permanent policy and continue the coverage. This might be the least complex way of hedging your bets. Just review with your advisers as to who should own the policy. In this instance, an irrevocable life insurance trust is usually the preferred vehicle for ownership.
Power of Attorney: Update your power of attorney to reflect your real intent for gifts. Be sure to address whether your agent can convert to a Roth IRA and reconvert (it may change who benefits).
People, it’s about people: Remember that estate planning is first and foremost about people not taxes. Make sure your personal goals are really protected.