By: Arthur Cooper
Submitted: 2011-04-07 08:52:14 | Word Count: 664
Many bloggers, pundits and writers have opined about the potential transfer tax opportunities created by last year’s temporary repeal of the federal estate tax. While such opportunities may have existed, it is likely that those planning strategies will generally be suitable only for aggressive, sophisticated people who are fully advised by their estate attorney on the risks and uncertainties that exist.
More broadly, those in Cleveland facing estate taxes or those living elsewhere, should simply review their wills and/or trusts and address major gaps with their estate attorney. For example, marital and family shares defined with respect to a federal estate tax that does not exist, may allocate assets in unexpected ways and leave a surviving spouse with less money than intended, or may establish conflicts with co-beneficiaries of the family trust. Likewise, similarly defined charitable bequests may go unfunded.
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An executor for a decedent whose estate is subject to the modified carry-over basis rules will be forced to make complicated and likely contentious decisions based on complex and ambiguous tax laws. Consideration should be given to granting executors extremely broad authority and protection in such circumstances. Your estate attorney will also tell you whether a temporary change in the estate tax rules merits revising estate planning documents entirely. The key factors are mortality risk and estate size. Clients with high mortality risk and/or large estates have the highest tax exposure although mistakes in smaller estates could devastate the standard of living of the surviving spouse or children. Like investment risk tolerance, it is a question of client temperament and ultimately, the individual’s decision.
Despite unprecedented uncertainty, basic planning needs remain for most. Spouses still want to care for partners. Parents still want to provide for children. Owners still want to protect businesses. An estate attorney that concentrates on the basics and helps clients make educated decisions provides the greatest planning foundation in this environment.
The bottom line is there remains a lot of uncertainty out there about estate planning. Obviously a lot more familiesâ€"who aren’t necessarily wealthy by the wayâ€"are going to be subject to estate taxes if the exemption remains at $1 million. When you take into account a house, IRAs and a 401(k), it’s relatively easy for middle class families to build a million dollar estateâ€"especially if they live in areas with high property values.
This means a lot more opportunities for agents and advisors who deal with estate planning to help their clients maximize what they can pass tax-free to their loved ones.
The 2010 Tax Relief Act reinstated the federal estate tax, imposing a 35% tax rate on estates that exceed the $5 million exemption through 2012. By taking specific steps, married couples may be able to pool their exemptions to shield up to $10 million. But these parameters â€" the most generous in decades â€" are temporary. After 2012, the federal estate tax is scheduled to revert to pre-2001 tax law levels, with a 55 percent top tax rate on estates valued at more than $1 million, unless lawmakers extend or modify the current law.
If you are concerned that your estate may be subject to estate taxes, you might consider setting up a trust. When properly structured, an irrevocable trust may help you reduce or avoid the fees and estate taxes that may be imposed upon your death, control the distribution of your assets, and avoid probate. Trust assets are also protected from creditors.
A properly structured trust may help shield your assets from estate taxes, but you must relinquish ownership of them to the trust. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate attorney and your legal and tax advisors before implementing such strategies.
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