With the basic exclusion amount at $11.4 million and growing, along with the portability of a decedent’s unused exclusion, most individuals will not have a federal estate tax liability. In addition, many states, such as Delaware, piggyback the federal rules, thereby eliminating all federal and state estate taxes.
In the past, a married couple with a combined $7 million estate would certainly feel the need to meet with an estate planner to save taxes, but not necessarily today, and that is a big mistake. Among other considerations, these same people forget that (1) estate values grow, either naturally or by inheritance and (2) laws change. They also don’t think they need to plan because:
- They think they are too young to plan their estate
- All of their property is jointly held with their spouse
- They think estate planning is only for the super-rich
- They think it’s too expensive
- They had wills drawn up when they were married (probably 15-20 years ago)
- They don’t want to think about it
Below are some of the reasons that estate planning is critical for everyone.
Outdated documents: Older estate planning documents may have required funding of the credit shelter trust in such amounts as to bring the taxable estate to zero. But with the exclusion now over $11 million, this may leave little or no funds for a marital trust or to be left outright to the surviving spouse, which many not have been the decedent’s original intention.
“Basis” planning: Income tax and basis planning is now the new norm for smaller estates. Making lifetime gifts results in carryover basis and if the assets have a low basis, the beneficiary could incur a substantial federal and state tax burden when they are sold. Passing the assets at death and obtaining a basis step-up for low basis or hard-to-value assets might be a better alternative, resulting in little or no tax when the asset is sold. “Basis” planning needs to be done on an asset-by-asset basis. It is important to look at which assets are best to be left in an individual’s estate.
State inheritance tax considerations: Several states have estate tax exclusions well below the federal level. Therefore, those planning to retire to another state need to consider the impact, if any, of that state’s inheritance/estate tax laws.
Need to provide for a surviving spouse and children: Does the client want assets left outright or in trust? At what age should heirs inherit? These are questions that need to be answered even for nontaxable estates that still could be worth several million dollars.
Second (or third, or fourth) marriage: Blended families can create their own challenges where, e.g., a husband wants to provide security for his second wife, but wants the remainder of his estate to pass to the children of his first marriage at her death. In such cases, a Qualified Terminable Interest Property (QTIP) trust would be advisable.
Family dynamics: Every family has them. Consideration and proper planning needs to be done to address heirs with drug or alcohol addictions, unstable relationships, spendthrifts, and those that may otherwise be vulnerable to predatory practices.
Caring for a special needs person: This can generally be accomplished by creating a special need trust or funding a state program such as the Delaware Care Plan to provide funds to maintain the beneficiary’s quality of life without jeopardizing federal or state aid.
Beneficiary designations: Individuals need to make sure that the beneficiary designations, including contingent beneficiaries, are up to date for IRAs, employer retirement plans, insurance policies, and annuities. This is especially important after a divorce, death of a spouse, or any inheritance of IRA/retirement plan assets.
Asset protection: Creating a trust to protect the beneficiary from predators or even from themselves, if they aren’t good at handling money, is critical.
Closely held business or farm operations: In many cases, some but not all children of the business owner will continue in the family-owned business. The challenge here may be creating equal inheritances for all heirs if the value of the business comprises the bulk of the taxpayer’s estate (think life insurance).
Guardianship for minors and incapacitated persons: The individual’s will can express who the decedent wishes to care for their minor children, rather than leaving it up to state law.
Charitable intent: Even without consideration of the charitable deduction to reduce a taxable estate, most charitable planning techniques can be created either during the individual’s lifetime or upon their death by including a charitable clause in the will or trust. This would include outright gifts of cash, securities, or real estate, creating a charitable remainder trust or an endowment.
Other Considerations: Other issues to consider include providing for the future education of heirs, issues surrounding hard-to value assets such as antiques and collectables and special tax considerations for leaving assets to a non-U.S. citizen spouse or other beneficiary.