September 2008

ESTATE AND TAX PLANNING

To many of us, estate and tax planning seems both complicated and annoying. And few of us want to contemplate our own mortality. As a result, far too many procrastinate or just never get around to it. The stark truth is that, while heaven can wait, we can't plan from heaven.

There are three major reasons to engage in estate planning:

1. planning for the future of your family and loved ones;
2. minimizing taxes; and
3. supporting charitable causes while still providing for your family and loved ones.

If you fail to have a will or a trust setting forth your wishes, the law directs where your assets will go - and they may not go to those you prefer. Even if the law matches your wishes, your assets may go directly to beneficiaries (such as your spouse, children, grandchildren, or mentally incompetent relatives) for whom it might be wiser to have assets pass in trust or through a special needs trust. For example, without a trust, a situation could arise where a 20-year-old directly inherits $1,000,000 but he or she is not ready to handle the money.

And, without an estate plan, who will take charge of and distribute your assets? Do you want a judge selecting someone who you would not have chosen and would not trust? Or, would you prefer to have someone you know and trust - and who is familiar with your goals and values?

Estate planning is actually easier than you might think, and it can give you great peace of mind. The rub, however, is that we have some fairly significant federal and state estate and gift taxes. Estate taxes have been around for about a century, and in these challenging economic times it is unlikely they will be repealed. Our only weapon is planning.

As the chart below illustrates, the federal estate tax kicks in once an individual gives away more than the federal exemption amount. Absent an amendment to the law, there will be no federal estate tax in 2010, but in 2011 the tax - at rates of up to 55% - will return but the exemption amount will be only a meager $1,000,000. What's more, without careful planning, your assets include everything you own - your home, stocks, bonds, retirement account, life insurance, intellectual property, and art, jewelry, cars, and other personal property. So it can be fairly easy to reach the exemption amount.

While it is unclear whether a new Congress will act in time to eliminate the absurd situation - no federal estate tax in 2010 and high taxes returning in 2011 - one thing is for certain: people should not wait to adopt a plan, and they need a plan with flexibility.

Whatever Congress may do, we have several estate planning techniques that can help avoid or minimize estate taxes. For married couples, it is important to take advantage of the marital deduction, which is unlimited and defers the estate tax until the second spouse dies. It is also important for married couples to "balance" the sizes of their estates to ensure that bequests up to the exemption amount can be passed to the next generation tax-free. Without proper planning, insurance on your life will also be taxable in your estate. We can also employ several techniques to provide for families and charity using the tax savings available for charitable giving, to increase the total amount available for distribution. There are other, more sophisticated ways to plan for your family and save taxes, such as family limited partnerships.

In addition to the lifetime federal exemption amount, there is an "annual gift exclusion." The "annual exclusion" is the maximum amount that an individual may give to another person without incurring federal tax. And there are certain other permissible payments that do not count against the annual gift exclusion or the lifetime federal exemption.

When you are planning your estate, it is a good time to make sure that other documents are put in place - especially powers of attorney for property and health. For example, everyone needs a health care power of attorney, under which an individual (a principal) delegates legal authority to someone else (an agent) to make decisions concerning his or her health should the principal be incapacitated. As the Terri Schiavo case sadly illustrated, not having a health care power of attorney in place can leave relatives unsure of a principal's wishes and lead to expensive and difficult court battles.

There are many strategies that can be employed to provide for one's family and defer or avoid costly taxes. Estate and tax planning is best achieved with the advice and counsel of professional advisors - one's attorney, accountant, and trusted financial advisors. While it may be tempting to put off estate and tax planning, it behooves all of us to have our plans in order. After all, if we don't make our estate plans a priority, who will?