investing

Estate planning, no taxes

Wednesday, Feb. 3
Posted 4 p.m. EDT

It's pretty hard to do estate planning that accounts for when you think you'll die -- never mind the vagaries of congressional legislation.

As a result of President George W. Bush's tax cuts passed in 2001, the estate tax for just one year -- this year -- is nada, as is the tax on generation-skipping transfer trusts, or GST, a popular method for the wealthy to bequeath assets to grandchildren.

Estate planning

If Congress doesn't enact new tax laws this year -- and there is no consensus on whether they will or not -- next year the taxes will wind back to 2001 levels, with the GST and estate tax rate reaching up to 55 percent. Estates worth less than $1 million will be exempt from tax.

So what's a wealthy family to do?

"I just met with a client and this came up," says Leslie Corcoran, Certified Financial Planner and founder of Family First in Stuart, Fla.

The client has a generation-skipping trust, but it specifies that the trust be the lesser of the unfunded GST exemption or $2 million, whichever is less. The reasoning is that, for a married couple, the trust would either include $2 million (the 2001 exclusion of $1 million each person) or less than that if the exemption fell below that amount, ensuring it would remain free of the GST tax. But due to the situation this year, if they should die, the GST would be funded with zero since there is no exemption amount, and it would be the lesser of the two numbers.

"This of course was not their intention," Corcoran says. Her advice to all clients is to re-examine their documents to be sure their intentions will still be carried out. Perhaps they could insert alternate language that would allow flexibility for whatever action Congress eventually takes.

"It is hard and frustrating to plan, but I recommend planning as if the estate tax exemption will be $3.5 million (the 2009 rate) and making sure there is some flexibility in the language in the document or the ability to disclaim if needed, she says. Inheritors can disclaim within nine months of the time of a gift, and depending on what Congress does, a spouse, for example, could disclaim a trust that is meant to go to the kids if there is no GST tax and only a 35-percent gift tax.

Deborah Jacobs, attorney and author of "Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide," agrees that clients need to be flexible, especially with the language in their documents.

"There are two broad concerns here: one is to avoid unintended consequences if someone happens to die when there is no estate tax. The other is whether wealthy people want to take advantage of potentially more attractive opportunities to make lifetime gifts," she says. The gift tax this year fell from 45 percent to 35 percent, but it will rise to up to 55 percent in 2011 unless Congress takes action.

To avoid unintended consequences, Jacob advises people to skim their wills and living trusts to see if they include phrases such as "that portion," "that fraction" or "that amount" (without saying what it is). These were the tactics of lawyers who were trying to take maximum advantage of the estate tax exemption, which kept increasing over the past decade, from $1 million in 2001 to $3.5 million in 2009.

If your plan includes those phrases, it's possible that under your current arrangement, less money would go to your spouse than you would like or that too much would go to your grandchildren, according to Jacobs, who says to consult a lawyer about whether amendments may be necessary in case you die at a time when there is no estate tax.

If you're not worried about dying in 2010, she adds, or think the tax will soon be restored (no one really knows what will happen) you might prefer to do nothing for now, rather than incur legal bills.

Watch a video on the basics of estate planning.

Calculate your estate tax liability.

Bankrate's guide: Estate planning for everyone.

Questions? Comments? E-mail jmartel@bankrate.com

Read more Your Wealth blogs.

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