Keep Your Eye on the Ball - Estate Tax Repeal and You

By

Joe B. Womack, J.D., C.F.P.

Senior Vice President

Now that Congress and the President have given us a sweeping tax law change, we are in the process of digesting the details. I think it is safe to note that the devil is certainly in the details.

While the public announcements have touted the victory of eliminating the federal estate tax, the most important point to understand is that the estate tax is reborn as of January 1, 2011, unless some future Congress and President pass another law to extend the elimination of the tax before December 31, 2010. In other words, the death of the death tax could be an illusion! Between now and December 31, 2010, we will enjoy the public service of five Congresses and as many as three presidents. Only a truly dedicated optimist could believe that the new law will continue in its present form!

Estate Tax Repeal at a Glance

Beginning in 2002, the highest estate tax rates will be:
2002 50%
2003 49%
2004 48%
2005 47%
2006 46%
2007 45%
2008 45%
2009 45%
2010 Repeal of tax
2011 Rebirth of 2001 tax rates because of Sunset Provision

The unified credit effective exemption amount increases over the same time period, as shown below. Put simply, estates that fall below the amounts listed are not subject to the federal estate tax in the years indicated. The present exemption is $675,000.
2002 $1 million
2003 $1 million
2004 $1.5 million
2005 $1.5 million
2006 $2 million
2007 $2 million
2008 $2 million
2009 $3.5 million
2010 Repeal of tax
2011 Rebirth of tax because of Sunset Provision

Present Estate Plans

Clearly the perfect estate tax planning would suggest that we should plan to die in 2010 leaving an estate in excess of $3.5 million or die anytime between now and December 31, 2010, and leave an estate under the exemptions listed above. I don't know about you, but I think tax planning is out of hand! Taxes are a part of life, but they should not dictate every detail of how we live and plan our futures.

For most people, the phase-out and repeal of the federal estate tax will not require any change in existing estate plans. However, if you have not reviewed your plan for a few years, have highly appreciated assets, are involved in a major gifting plan, or are using bypass trusts to avoid estate tax, it would be a very good idea to contact your estate planning attorney or accountant to be sure that your plans are up-to-date in view of the new federal legislation. There are many other details in the new law that may affect your plans.

Do you still need a trust?

Some well-intentioned but ill-informed consultants and even a few legal professionals have suggested that trusts will no longer be required in the future because of the federal estate tax phase-out and repeal. WRONG! WRONG! WRONG!

Trusts have served many purposes other than tax planning since they came into wide use during the Crusades. Trusts remain a cornerstone for ensuring privacy, avoiding probate, avoiding guardianships, and for remarkable flexibility in distributing assets to the beneficiaries of your choice.

Protect your value system

With increased individual wealth and the predicted trillions of dollars that will pass to the next generation in the coming years, there is a growing awareness among families with wealth that passing large estates to children may create more harm than good. Simply dumping money upon heirs without strings attached can lead to a lack of an heir's motivation to become productive. The often hard-earned money accumulated over a lifetime may reinforce exactly the opposite value system that they would want to encourage. We are seeing that people want to pass on their value system along with their wealth.

Various trust provisions are becoming popular with some of our clients. Paying out the trust assets over an extended period of time has long been used as a way to avoid large distributions that could be squandered or attached by creditors. The unitrust payout is one tool that is gaining supporters. The unitrust payout commands that the trustee pay a fixed percentage of the trust assets each year to named beneficiaries. Usually the payout will be from one to five percent. The annuity payout is another device. The trustee is commanded to pay a fixed sum of money each year to named beneficiaries.

Incentive trust provisions are also popular. Matching a beneficiaries' W-2 income each year encourages the beneficiary to continue working. Bonus provisions for finishing college, getting married, having children or getting advanced degrees can provide incentives for doing things that the creator of the trust valued during his/her life. Educational trust provisions can also prevent the lifetime student life style while still encouraging education. The trust can be crafted so that tuition and student expenses will be paid only for a specified number of years per degree.

Safety nets for major illnesses or accidents or the birth of a disabled child can also be built into trusts. These provisions ensure that major life disruptions can be eased while preserving the strings attached to most other distributions of trust funds. Generations of family members may benefit from such trust provisions.

There are times when our children or grandchildren lead lives that we do not want to support. Trust provisions can ensure that you do not fund a lifestyle that you would find untenable in your lifetime. I have even seen a provision that requires annual drug testing prior to trust distributions.

With a constantly high divorce rate, many people do not want to risk their wealth on the multiple spouse possibility. Trust provisions can ensure that your wealth does not get caught up in a divorce trial of your children or grandchildren.

Your action plan

Whether you want to verify that your estate plan is on track in view of the new federal estate tax law or whether you want to take advantage of some of the changes mentioned above, now is a good time to make an appointment with a qualified estate planning attorney. The wait-and-see-what-Congress-does excuse is no longer a valid reason to put off reviewing or beginning your estate planning. You can ensure that you pass your assets and your values to your family the way you wish. Of course, The Trust Company of Oklahoma stands ready to serve as your trustee and to carry out your wishes for future generations.