Document Changes

Summary: The 2010 Tax Act is a game changer. Here’s some thoughts on how some of your existing documents might change. But the bottom line is everyone (yeah really, this isn’t an advertisement for your estate planner, it’s intended to help you), needs to revise their documents.


Power of Attorney: Review the gift provision. In an old document you may have given broad powers to make gifts to reduce an estate that was taxable then, but which is not now. Perhaps you view the likelihood of tax sufficiently remote that you would prefer the protection of prohibiting your agents from making gifts. What if 2013 really brings a $1M exemption? Should you tailor a specific provision to grant your agent the authority to make gifts if the exemption declines to $1M? What about $3.5M?

Will/Living Trust: You’ve probably heard it 100 times but most folks still have not dealt with it. Wills and living trust almost always included formula clauses: “Leave the largest amount that won’t create a federal estate tax to my kids.” Whatever clause you have, it has to be reviewed and revised. You have to address with your adviser what you would want under each of the 2013 scenarios listed in the lead article above. You need more personal direction, more flexibility and options. If your will included a charitable lead trust (“CLT”) to reduce estate tax perhaps you want to eliminate it if you won’t face a tax now.  But what about state estate tax? What if 2013 brings a $1M exemption? Perhaps you should include say a $500,000 CLT if you reside in a state with a state estate tax on your death, and a $1M CLT if the federal exclusion drops to $3.5M or lower.

Insurance Trusts: More affectionately referred to by the acronym “ILIT” (irrevocable life insurance trust, should be reviewed for a host of possible changes. If you had large value life insurance policies that you wanted to transfer to the ILIT but could not under prior law because of the limited annual gift exclusions. Now, with the Super Size Me exemption you might simply gift a fat policy to your ILIT. Other folks might want to cancel life insurance since they no longer think they need it to pay the federal estate tax that it was bought to address. But Hold your Horses! The tax may be back in 2013, you might face state estate tax, a good policy might be viewed as a ballast in your investment asset allocation model, etc.

Guarantee Agreements: If you sold assets to a family trust for a note, you may have opted to have some portion of the note supported by a guarantee from another family member, entity or trust. With the new $5M gift exemption you can gift more assets to the trust and perhaps lower or even eliminate the guarantee. This will require a review of the governing documents to determine what is permissible and required to accomplish this.

Split-Dollar Agreement:  If you used a split-dollar agreement to finance costly insurance purposes you might wish to unwind that agreement. Your exit strategy in the past may have been a loan from a dynasty trust, rolling GRATs (which you can still do), or if you want to spend less bonding time with your estate planner, you might just pay the puppy off and unwind it.

Grantor Trust: A common planning strategy was (and in many cases remains) transferring assets into trusts that remain taxed to the grantor/donor senior family member. By dad continuing to pay the income tax on income earned by a trust the assets of which inure to Junior and not dad, that tax burn continues to deplete dad’s estate every year. Well if dad’s estate is below $5M he might just prefer to Solarcaine that tax burn by toggling off the grantor trust status of the trust. So all grantor trusts should be revisited and reviewed.

Self-Settled Domestic Asset Protection Trust: If you don’t have one, now might be the time to grab one! These cuddly characters are referred to be their acronym “DAPT.” But whatever ya call ‘em, and recognizing some of the still meaningful uncertainties about their use, consider the following. The gift exemption today is $5M. In 2013 it might be $1M. If you are worried in the least about asset protection (malpractice claims, divorce, etc.) why not (subject to all the appropriate due diligence to minimize the likelihood of a fraudulent conveyance problem) set one up now and pump non-protected assets into it? In 2013 the opportunity might be gone! Until this year the $1M gift exemption constrained this planning. Now it doesn’t.  If you always wanted a great excuse to go salmon fishing in Alaska, now might be the time. (But ask your CPA if you can write off the travel costs).

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