Talking to Your Family About Your Estate Plan

You have gone through the pain, hassle, and expense of getting your estate planning done. Now what? For most people, the answer is to put the plan in a safe deposit box or on a shelf, and forget about it. That may not be the best answer.

Who should I tell? A common concern is whether a person should disclose the particulars of their estate plan to family members. While this is a very personal decision, the following factors should be considered:

- An estate plan is not worth the paper it is written on if no one can locate it when it is needed. You should at least let people know where they can find a copy of your plan, or the phone number for your attorney who can provide them with that information.

- Powers of attorney only work if the agents are aware of their duties. If you name a family member as an agent under a power of attorney, it is probably best to give them a copy of that power of attorney, in case it is needed. This applies equally for medical and general durable powers of attorney.

- A living will can only be enforced if it is provided to your doctor. Consider giving your primary care physician a copy of your healthcare power of attorney, HIPAA release, and living will. Additionally, if you are scheduled to undergo a medical procedure, make sure to take a copy of these documents with you.

- Family disputes may arise after your death if your heirs are surprised by the contents of your estate planning documents. Consider having a general conversation with your heirs about the contents of your estate plan as a way to ensure peace after your passing. A good rule of thumb is to make sure that no one will be surprised - at least in a bad way - when you pass.

- If you provide a copy of any estate planning documents to your loved ones, and then subsequently change those estate planning documents, make sure that your loved ones get copies of the updated documents. Otherwise an outdated document could be relied upon - simply because there was no knowledge of any changes.

- Your primary estate planning document, whether it be a will or trust, can be kept confidential if you choose - no one can force you to turn over a copy of your plan.

- Life insurance policies may not be redeemed unless your loved ones know of their existence, and where to find the necessary paperwork to collect the death benefit.

For more information, consider the following article from the New York Times - (click here).

Will You Be Affected by Changes in Estate Tax Laws?

A recent article by the Wall Street Journal (click here) contains some interesting statistics regarding wealth in America. The article reports that the number of millionaires in the United States has risen by more than 16% in the past year. There are currently 7.8 million millionaires in the United States, compared with only 6.7 million millionaires in 2008. A millionaire is someone with a net worth of at least $1,000,000. The number of people who have a net worth in excess of $500,000 has reached 12.7 million – which is significant because this represents the group who are most likely to become millionaires. Finally, the number of people with a net worth in excess of $5,000,000 has also grown by as much as 17% in the past year, to 980,000 people. Significantly, the number of people who qualify as a millionaire at their death (from the IRS’s point of view) will far exceed these numbers, because the IRS will also include the value of any life insurance payments on policies owned by the decedent.

Why are these statistics important? With the scheduled changes in the estate tax (which will take place on January 1, 2011), 7.8 million Americans can expect some type of estate tax liability, unless they engage in proper estate planning. Several techniques can be used to reduce (or in some cases eliminate) a person’s estate tax liability. These techniques include the effective use of exemption amounts, use of the unlimited marital deduction, charitable giving, lifetime giving, life insurance planning, and the use of trusts.

Will you be affected? If your total net worth, including the death benefit of any life insurance policies owned by you or payable to your estate, is greater than or equal to $1M at the time of your death, then you will be affected. The sad truth is that many people who do not consider themselves wealthy will be hit with an estate tax liability (e.g. a property owner who has lived in the same home for several decades, only to find that the appreciated value of their home, in conjunction with their modest retirement savings and life insurance policies has a value in excess of $1M).

Estate Tax Repeal - What Now?

The biggest topic in estate planning this year has been the repeal of the federal estate tax. While this repeal has been scheduled since 2001, very few saw any realistic chance that it would ever happen. The "experts" were confident that legislation would be enacted, even as recently as mid-December of 2009. Unfortunately, Congress failed to act, and the results could not be more confusing.

Where We Stand Now: As the law currently reads, anyone passing away during 2010 can pass an unlimited amount of property to their loved ones at their death without paying any estate or generation-skipping transfer taxes. If that same person were to die on January 1, 2011, they would only be able to pass $1M at their death, with the rest subject to estate taxes at a rate of 55%.

What Will Happen From Here: There are three realistic possibilities - (1) Congress enacts comprehensive estate tax legislation; (2) Congress enacts a temporary estate tax patch, or (3) Congress does nothing. Even the most optimistic experts do not foresee comprehensive estate tax reform during 2010. Much more likely is a temporary patch, designed to get us through the end of this election year. It is likely that such a temporary patch would freeze the estate tax at its 2009 levels, or somewhere close.

Perhaps the most likely scenario is that Congress will do nothing. The recent election of Senator Brown, in Massachusetts, deprives Democrats of the votes necessary to push through corrective legislation. That means that whatever happens will require some minimal degree of compromise, which seems to be in short supply in Washington. Furthermore, many Republicans have already gone on record opposing any action that would impose an estate tax for 2010.

Retroactive Taxes: If legislation is enacted during 2010, the big question is whether Congress will make such legislation retroactive to January 1, 2010. While many congressmen and lobbyist groups strongly oppose such an outcome on the grounds that it is unconstitutional, the most recent precedent from the U.S. Supreme Court seems to suggest that Congress can get away with retroactive tax legislation. Several taxpayer advocacy groups have already stated their intentions to challenge any retroactive tax legislation, however such challenges would take years to work their way through the court system. The likely result of retroactive estate tax legislation is continued uncertainty.

Effect on Estate Planning: Many estate planners contemplated the current situation, although they admittedly never thought we would get here. For most people changes to allocation formulas within estate planning documents, and changes to basis rules will require at least minimal adjustments in most estate plans. The disastrous results of failing to plan could result in inadvertent disinheritance of children, inadvertent disinheritance of a surviving spouse, or inadvertent disinheritance of charities.

Could Estate Tax Repeal Disinherit Your Spouse?

Many estate plans (both wills and trusts) were drafted to reduce or eliminate estate taxes. These plans use complicated formulas to ensure that a person fully utilizes their estate tax exemption amount, in order to shelter as much as possible from the estate tax. Often, an amount equal to the federal estate tax exemption passes to a family trust or to children, and everything else passes to the surviving spouse. The repeal of the estate tax creates a unique problem - which could inadvertently disinherit the surviving spouse.

Consider the following example: John and Jane have a net worth of $10 million. At John's death, his estate plan is designed to use his entire estate tax exemption by dividing his money into two trusts - a Family Trust for the benefit of his children, and then a Martial Trust, for the benefit of his surviving spouse. The Family Trust is designed to receive the maximum amount that is not subject to estate taxes, and everything else passes to the Marital Trust. In any year but 2010, this would work perfectly. Without an estate tax, however, everything passes to the Family Trust, and nothing is left for the Marital Trust. In short, the kids get everything, and the surviving spouse is inadvertently disinherited.

Most taxable estate plans use a formula similar to the one in this example. Often, the surviving spouse is also a beneficiary of the Family Trust, so there is no inadvertent disinheritance. If the surviving spouse is not a beneficiary of the Family Trust, or if the Family Trust is distributed outright to the children, there is reason for concern.

Now may be the right time to review your estate plan to ensure that you are protected.

A recent article from the Wall Styreet Journal offers more information on this topic: click here to view the article "Estate-Tax Repeal Means Some Spouses Are Left Out".

Is There Still an Estate Tax?

Are you confused about the current state of the estate tax? So is everyone else, including the federal government. Do we still have an estate tax? Has the estate tax gone away, and for how long? When will the uncertainty come to an end? The answer is simply - no one knows.

Recent Estate Tax History: Under the Economic Growth and Tax Relief Reconciliation Act of 2001 the estate tax was scheduled to disappear entirely for one year in 2010, and then reappear in 2011 with an exemption amount of $1M, and a top bracket of 55%. Most everyone expected some legislation last year to extend the estate tax through 2010 - but it never happened. On December 3, 2009, the House of Representatives passed the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009,” which would have permanently frozen the estate tax at its 2009 levels. The Senate did not act on the bill, however,and has recessed until January 19, 2010.

Current State of the Estate Tax: As of January 1, 2010, there is no estate tax (at least until next year or until congress changes the law). This means that for people dying during 2010, they will be able to transfer unlimited amounts of wealth to their friends and family without paying any estate or generation skipping transfer taxes. This seems too good to be true - and is probably just that.

On the Horizon: The federal estate tax accounts for between 2% - 3% of the total federal budget. The 2010 budget submitted by the White House, and the budget set forth by the Congressional Budget Office both anticipate that the estate tax will remain in effect in 2010. That means that the budget deficit would increase by another 3% if congress does not reinstate the estate tax for 2010. It is almost certain that Congress will act within the next few months to reinstate the estate tax for 2010, and will probably make the change retroactive to January 1, 2010.

Complications: First, estate tax returns are due 9 months after a person dies, so Congress will need to act before October 1, when the first estate tax returns will be due for people who die in 2010. Second, retroactive tax legislation raises constitutional concerns, and several groups have already expressed their willingness to fight any retroactive laws through the courts.

The Good News: Estimates suggest that in 2009 less than 1/2 of 1% of family-business owners were subject to the estate tax. Historically, only a small fraction of estates with small or family business interests have paid the estate tax—about 3.5% for businesses in general, and 5% for farmers, compared to 2% for all estates. Thus, relatively few people are affected by this uncertainty.