Estate Planning as a Career

Myths and Realities of Estate Planning – 2008 Unified Credit and Gift Shielding

March 24th, 2009 Filed under: ab trust,Executor Fees,sample wills,Trusts attorney — Estate Planning Author

The objective of this discussion is to review some of the myths and realities of estate planning.A number of articles have been written on the subject but let’s see if we can’t put a different spin on it by keeping it simple.By dispelling some of the common misconceptions, we will have a better understanding of how important it is to take positive action to keep our estate plans in order.

The Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) threw many individuals for a loop when it came to estate planning.Tax laws are never simple but EGTRRA added a level of confusion rarely seen in advanced planning.For instance, between now and 2011 the federal estate tax is scheduled to decrease, disappear and then spring back to life. According to a Wall Street Journal article dated May 11, 2005, the “…current estate tax law puts estate-tax planners in an impossible situation…”.With such uncertainty, some potentially damaging estate planning myths have surfaced.These financial “urban legends” stand in the way of prudent estate planning.

Myth. In 2008 the Unified Credit shields lifetime gifts of up to $2 million.

For many years, the estate and gift tax systems shared a “unified” credit.The credit was unified in that it shielded lifetime gifts and post death transfers up to a certain dollar amount.Many people still mistakenly believe that the federal estate tax exemption amount ($2 million in 2008) also applies to lifetime gifts.

The reality is that the lifetime gift tax exemption amount (the amount of a taxable gift each person can make without paying gift taxes) is set at $1 million and is not scheduled to increase under current laws.The federal estate tax exclusion amount is $2 million and it will change, however, the gift-tax exclusion amount is $1 million and will remain at $1 million.Therefore, the unified credit is no longer unified above $1 million.What does this mean?It might be best from a tax planning perspective to hold off on making lifetime gifts and receive a stepped-up basis at death, avoiding transfer taxes altogether (depending on the size of the estate and the year of death). Admittedly, not everyone is contemplating making large gifts, but the annual gift tax exclusion is something most people can use.Annual gifts could be made to fund a life insurance policy to create a legacy for future generations, to cover estate liquidity needs or simply to leverage the gift.

Myth. You should review your wills and trusts every 3 to 5 years.

Not so long ago, we were instructed to review our wills and trusts every three to five years or whenever we experienced a major life event (birth of a child, move to a new state, getting married, etc.).

With the estate tax laws in a state of flux, annual reviews may be necessary to avoid unintended results.For example, a married couple may use a family (bypass) trust to minimize estate taxes and provide for family members.Many wills use generic language that sets the bypass amount at the maximum amount that will not create an estate tax at the first death.By using this generic language, a surviving spouse might receive too much or too little depending on the year of death.For instance, in 2009, an estate of $3.5 million would entirely bypass the surviving spouse.The spouse then would be forced to elect against the will, causing additional delays and expenses.

Today, it is generally recommended that wills and trusts drafted prior to 2001 (the year in which many tax law changes were enacted) be reviewed.Instead of using generic bypass language, a specific bypass dollar amount may be listed in the will.Alternatively, a will may leave a surviving spouse a specific floor amount to prevent disinheritance.The impact of state estate taxes should also be reviewed.As previously discussed, state estate tax laws have changed significantly since 2005.Wills and trusts should be updated to coordinate the change in state estate taxes to ensure the most efficient apportionment and payment of state estate taxes.Additional life insurance may be necessary to provide liquidity.A regular review of asset ownership is also recommended to help maintain a balanced estate.In some cases, repositioning asset ownership could reduce or eliminate estate taxes altogether.

Anthony J. (Tony) Damoulis
Principal
Family Benefits Planning Group, Inc. http://www.FBPGInc.com
An independent insurance organization serving the financial security, benefit risk management and retirement needs of families, the self-employed and small businesses

Tony may be reached via email at AJDamoulis@FBPGInc.com

Tony has over 38 years experience in the personal, self-employed and small business financial risk and business management and benefits arena. He consults, educates and recommends available and affordable benefits and opportunities in these areas and assists clients with their financial and retirement planning. Over his lengthy and successful career in this profession, Tony has served as an adjunct instructor at the New York College of Podiatric Medicine instructing the new podiatric doctors in practical risk management, he has lectured and consulted in the practical aspects of financial planning and personal risk management, he was the keynote speaker of the 1989 International Insurance Conference and has been published in the 1990 Who’s Who & Business Guide in the Caribbean