Gumby, that loveable dark green humanoid, known for its being able to be bent into almost any direction or shape, has become the new mascot for estate planning. The tremendous uncertainty about the future of the estate tax, and the economy, requires similar flexibility to keep options open regardless of what happens next. Here are some ideas to Gumby-ize your planning.
You can structure a document with disclaimers so that your heirs have the flexibility to shift assets where it is appropriate, based on the law when you die. For example, you can leave assets outright to your spouse and give him or her the right to disclaim (file a legal document saying that he or she does not want those assets). Those assets will then pass to the next named heir (which can be a trust) under the will or other governing document. Similarly, you can name a spouse as beneficiary if an IRA and he or she can disclaim in favor of the next named beneficiary (which could be a trust of which the spouse is a beneficiary or children). Disclaimers sound seductively simple to deal with uncertainty, and they are quite flexible, but the reality is that too often a surviving spouse is reluctant to give up control, or some benefit has been accepted from the assets making it impossible to disclaim. To make a disclaimer more likely to work involve the heirs who may make the disclaimer in the planning process, so that they understand what is involved.
The newest tax dance since the twist is called the "toggle." You can set up a trust for a child or other heir as a grantor trust. A grantor trust is taxed to the grantor for income tax purposes. Paying income tax on trust income will result in more value being transferred to the heir. However, if estate tax repeal happens, or the exclusion is raised substantially, turn off grantor trust status to eliminate this additional wealth transfer. This can be done, for example, by having a trust protector terminate the power provided in the trust that characterizes it as a grantor trust.
Establish a good comprehensive durable power of attorney with a well crafted gift provision. This way you can avoid making large estate tax planning transfers today but still have the ability to move assets at later stage outside your estate even if disabled. A gift power should address a number of key issues *Who can receive gifts? Children only? Grandchildren? Spouses? Partners of children? * Should gifts be distributed equally by child family line? * Can gifts be made to 529 college savings plans? Can those gifts be front-loaded (the law lets you give 5 years worth at one time, but should your agent be permitted to do this?). * How much can be given? Should it be limited to the annual gift exclusion (currently $12,000/year/donee)? Consider including broad rights to change beneficiary designations of retirement plans and insurance. These mechanisms may provide flexibility to change planning in the event of changes in the estate tax occur, but at that time you do not have the competency to modify your plan yourself.
If you need to set up an irrevocable trust (cannot be changed), build in flexibility to deal with future uncertainty. Name a person (trust protector) that can change trustees, the location of the trust, and other factors to add more flexibility. Give more discretionary authority to make distributions, since the future is unknown. Example: In a bypass trust under your will (the trust used to protect the estate tax exclusion amount, currently $2 million) consider naming your surviving spouse and all heirs, and giving the trustee the right to "sprinkle" funds to whoever they determine.
Instead of bequeathing assets outright to your surviving spouse, use a marital trust that provides more flexibility to determine how the assets should be characterized for tax purposes after death.
You can purchase life insurance (or better have a trust do it, so that the insurance is protected and outside your estate) and then take a wait and see what approach to take with the estate tax developments. Caution: If you do this consider purchasing a permanent policy that is structured to minimize premiums in the first years or a term policy with conversion features. Many people do this with term coverage but if you develop a health problem and the tax laws become more unfavorable the term insurance may not be renewable when you need it.
Front loan five years of gifts to a college savings plan and remain the account owner. This permits you to gift away $60,000 now, but since you are the account owner you can take the money back (yes, with taxes and a penalty) in the future. Caution: If you die within five years part of the gift may be pulled back into your estate. Using 529 plans and annual gifts is a simple and inexpensive way to move assets out of your estate that you can reclaim if future changes require it.
Grantor retained annuity trusts, a complex trust planning technique known as a GRAT, lets you shift the growth in a portion of your stock portfolio or other assets out of your estate (i.e. growth over a federally mandated rate of return you must keep, currently about 3.84%). This can move some growth out of your estate but keep your principal, so that you can evaluate re-using the technique each year as circumstances change. This is a great way to get some planning into play that can be monitored and tweaked as circumstances warrant. Caution: If Congress repeals the technique, re using (rolling) the GRATs in future years may not be possible.
You can set up a trust in anyone of more than a dozen states, the most popular being Delaware or Alaska, and gift large assets to the trust (or use more esoteric techniques to transfer even greater amounts of value). Since these states let you remain a discretionary beneficiary of the trust, you can still benefit from trust assets should you need them in the future. If successful, you can remove substantial assets from your estate yet still benefit from them if you need.
Set up a revocable trust and transfer substantial assets to it (known as a funded trust). You can be your own current trustee (or co-trustee) and designate trusted persons to succeed if you become disabled. Give the successor trustees broad power to change your estate plan in the event circumstances change. This can provide flexibility to deal with the uncertainty, even if you are disabled and cannot change your plan yourself.
Do not forget that estate planning is never just about taxes. Taxes should never be the only or even the primary focus. Tax savings should only be pursued if consistent with other important personal goals. Asset protection, business succession planning, the addressing of disability concerns, income tax planning, protection of loved ones and a myriad of other issues are vital to address. Do not let the tax tail wag your estate planning dog! Repeal, no repeal, you need comprehensive planning.
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