Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

PLAN YOUR ESTATE EARLY
(7/28/02)

Many of you probably read in the newspaper that the Senate failed in its attempt to permanently eliminate estate taxes from the American landscape. Because of this, you might be lulled into a sense of complacency, believing that your Will or estate plan is safe for the time being. This couldn't be further from the truth.

A Cloud of Uncertainty hangs in the Air

After the tax reform efforts of June 2001, estate planners and clients alike were left hanging. Because the estate tax rules change every year or two between now and 2011, estate planners are having to provide for all sorts of contingencies depending upon when you might die. If you die in 2010 when the estate tax is fully repealed, you can do almost anything you want in your estate plan. If you don't die until 2011, however, current estate tax rules revert to the pre-2001 law and much different planning is required. Your estate plan needs to be flexible enough to deal with all this uncertainty.

As noted in previous articles (available on our website), the June 2001 law shrinks the estate tax for the remainder of the decade and eliminates it altogether in 2010--but this disappearance is illusory. The estate tax springs back to life in 2011.

In mid-June, the Senate attempted to make estate tax repeal a permanent part of the law, but the votes weren't there. This means that for at least another year, you need to be sure your estate plan encompasses all of the various possibilities. If you haven't updated your estate plan since the law was revised last June, you may want to consider doing so.

Probable Action by Congress

The experts in the field tell us Congress will probably take some action to revise the current estate tax rules before 2011. The most likely scenario is one in which the amount exempt from tax is increased significantly, say to $8-$10 million for a married couple. If that happens, fewer than 1% of the American populace will face the specter of estate taxes. Until then, however, it is only prudent to plan the distribution and preservation of your estate under current law.

What Should I Do?

Here are some things you can do to make sure your family isn't left wanting should something unforseen happen to you.

First, make sure your current estate plan doesn't generate unnecessary estate taxes. This may mean limiting the amount to be distributed to your children so your spouse will receive sufficient funds to meet his or her needs. Many estate plans written prior to 2001 use tax-saving formulas to shift large amounts of the estate to children to take advantage of the IRS "exempt amount." Under current law, this formula could pass your entire estate to your children, leaving your spouse with minimal assets and income. Unless you take steps to correct this deficiency now, your spouse could find himself or herself in an untenable situation.

Another thing you want to be leery of is making unnecessary taxable gifts. For the time being, at least, you may want to avoid making gifts until you consult with your financial and estate planners. Your CPA and estate planning attorney are fully conversant with the current tax rules and can advise you on when such gifts might be appropriate.

Many of you are in the habit of making annual gifts of up to the exempt amount of $11,000 (formerly $10,000) per year per person. No one knows what the estate tax is going to look like in the near future, so it still makes sense to take advantage of these "annual exclusion" gifts. If you don't need the money for your living expenses and have children or other relatives who could use it right now, there is no reason to withhold the gifts.

If, however, you routinely make taxable gifts of more than $11,000 per year, you may want to rethink your strategy. Under current law, you can give as much as $1 million without triggering any gift tax. If you give more than this, you will have to pay a gift tax, starting at 41%. This gift tax exemption remains constant while the estate tax exemption will grow to as much as $3.5 million in 2009. Not many of us are in the enviable position of being able to make such significant gifts, but if you are, you may want to have the gift paid out of your estate or trust after your death, rather than as a present gift. This could avoid significant tax on the transfer. Unless there is some reason why the gift needs to be made now, it makes sense to delay it a few years so you can avoid paying such a confiscatory gift tax.

If your estate plan was drawn up in contemplation of the estate tax being repealed in its entirety, you should revisit it in the near future. You may well find that it creates more problems than it solves.

The key to effective estate planning is to know what your estate planning documents say and if this is what you want under the current tax regime. If you have a will or trust drafted some time ago, it may contain a "pecuniary" or "fractional" funding formula designed to take advantage of the so-called "bypass trust" by passing the maximum amount of your estate tax-free to your family. If the estate tax exemption is raised significantly or the estate tax is eliminated altogether, the effect of this language will deprive your spouse of control of your assets. Since we don't know what is going to happen in the future, language should be inserted to explain what is to happen depending upon the amount of exemption available between now and 2010. We tailor-make our clauses to fit our clients' needs. This way, regardless of what happens the estate will pass in the most beneficial way and in accordance with our clients' wishes.

Let me wrap up with a quick example provided by a friend at Kennedy & Coe, LLC, in Denver. Let's say you have a $3 million estate with a standard A-B Trust. You might be surprised at what happens depending on the year of your death. If you die today, $1 million will pass to your children and $2 million to your surviving spouse. If you die in 2009 when the exemption is $3.5 million, your spouse receives nothing. And if you live until 2010 when the tax disappears (at least for one year), your children receive nothing. Somehow, I don't think any of these scenarios are what you had in mind when you executed your estate plan.

If any of these issues apply to you, check with your attorney to make sure your estate plan is current and says what it needs to say.

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