By: Martin M. Shenkman, CPA, MBA, JD
What can you do while the status of the estate tax is uncertain?
Money Matters Radio with
Estate Repeal Practical Planning Checklist
Introduction/Overview: Estate tax repeal is real, well maybe. The fate of the estate tax and its possible 1 year (or longer?) replacement tax system called “carryover basis” remains uncertain. What can you do now?
Consider the following items:
√ Letter: Write a letter explaining the intent of your will/living trust.
Many wills are written with technical tax language that may not really clarify what you want done. Write a letter of explanation. Even if not 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. Example: Your will leaves “the maximum amount that won’t create an estate tax” to a family for the benefit of your new spouse and kids from a prior marriage. Is that because your focus was the kids? Saving tax regardless? Or perhaps you really wanted as much of your estate as possible in a family trust so your trusted brother could do what was best for everyone. Vastly different results could follow. Clarify your intent. Better yet, look at the next step!
√ Revise Wills and Living Trusts: Revise your will/living trust to flexibly address all circumstances: estate tax repeal; reinstated estate tax, etc. 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 upheaval caused by the recession.
√ Tenants in Common: The pretty standard approach for many couples was to split assets 50/50 by value so whoever died first assets would be available to fund a bypass trust to protect some or all of the estate tax benefit of assets that could be passed without an estate tax. As of January 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 which have appreciation, not 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 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: Buy a term life insurance policy. If you have a 10 year term policy you can perhaps cheaply cover the cost from having your estate set up wrong. When the law finally sorts itself out you can cancel the policy if you don’t need. This might be the least complex way of hedging your bets. Just review with your advisers who should own the policy.
√ 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.
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