The Continuing Case for Estate Planning
President Bush’s signature on The Economic Growth and Tax Relief Reconciliation Act of 2001 did not — and, of course, could not — change the fundamentals of human nature. Before he signed the Act, it was possible to leave your children too much money. It still is. Before he signed, there was an amount — no matter how small — that carried with it the potential for discord among your heirs. That amount is probably no different today from what it was on June 6, 2001, the day before the signing ceremony. One of the cornerstones of the new law is the supposed gradual repeal of the estate tax. Many people are starting to ask themselves whether estate planning is needed any more. “After all,” they say, “if the estate tax has been repealed, why bother?” The core reasons for estate planning — many of which have to do with human nature — still apply. · Family wealth creates both possibilities and problems. o Family succession planning – The challenge of leaving behind harmony rather than discord often involves planning for “fairly equal” treatment of surviving family members, which may not be easy where a family business is involved. o Before you think your estate is “too small,” ask yourself: “How much money would it take for my heirs to start fighting over it?” o Protecting wealth from family members – What if son George is a spendthrift? What if his wife divorces him? What if daughter Ellen is sued? Can the money be protected in advance? o Protecting family members from too much wealth. How much is too much? Will the next generation have the incentive to be independently productive? How young is too young? Are you comfortable leaving $500,000 outright to a 19-year old child or grandchild? o Do you want some of your wealth dedicated to charity? If so, do you want to encourage your surviving family members to be involved in the charitable uses? · Who will care for “your” people when you’re gone? o The #1 reason people prepare their first wills is to appoint a legal guardian for their minor children. Money matters, but people matter more. Without a will, a guardian is appointed by a court, which might or might not choose someone you would want. o If you want to leave some money in trust for your children, grandchildren or others, someone must serve as trustee to ensure its proper investment and administration. Who should have “checkbook discretion” over when the beneficiaries should get the money? A new reason for planning: You — or your surviving spouse — may be surprised by what the new law does to existing documents. · For example, many existing wills and trusts use so-called “bypass” planning to maximize the use of both spouses’ unified transfer tax credit. A formula in the will or the trust determines how much passes to the surviving spouse and how much passes to the children (or grandchildren, or “family trust”). · Under most existing “bypass” estate plans, the increase of the unified credit will decrease the surviving spouse’s inheritance. This effect will be particularly pronounced in mid-sized estates (say, between $600,000 and $2.5 million). · A review and update of your existing estate plan should include a projection of how much will pass to the surviving spouse, and how much to the children or other beneficiaries, based on your current financial information. Income tax planning will become more important. · IRA’s, 401(k)’s, and other retirement accounts will continue to be heavily taxed on distribution. A review and updating of your beneficiary designations is advisable to avoid expensive surprises. If you have charitable inclinations, always consider using these accounts to fund your charitable gifts, either directly or through a planned giving vehicle. · If repeal becomes effective, the new law provides for a repeal of “stepped-up basis” on death. Also, the gift tax is not repealed. These points may factor into decisions on the timing and size of lifetime gifts. Finally, repeal is a nine-year process, and even then is still far from certain. · Amazingly, the new bill “sunsets” after the year 2010, bringing back in the year 2011 the estate tax as we now know it. Observers agree that it will be no simple matter for Congress to “keep the estate tax repealed.” · Even if repeal really happens, it’s not until the year 2010. Prudence dictates planning for the interim. · The short-term outlook is for fewer estates to be subject to federal estate taxes, and for lower overall taxes on taxable estates. · However, tax planning will still be required — especially on the state level. For revenue reasons, states are unlikely to repeal their death taxes. About the author . . .
Matt Kadish is an attorney with the Cleveland, Ohio, firm of Kadish, Hinkel & Weibel. His academic credentials include a Masters in Taxation from New York University, and a clerkship with the U.S. Tax Court, and he is a frequent speaker on tax-related subjects. The contents of this publication are intended for general informational purposes only and should not be construed as legal advice or legal opinion with respect to any specific facts or circumstances. Readers with specific legal questions should consult a lawyer concerning their own particular situation. © 2001 Matthew F. Kadish