Why Estate Planning Now?

Why would somebody want to do estate planning under the American Tax Relief Act of 2012 (ATRA) if their estate was below $10,500,000? ATRA, in essence, alleviated any estate tax concerns for all estates under $10,500,000, indexed going forward. In 2014 the total per person is $5,340,000.

There are many non-tax reasons for succession/estate planning besides estate taxes. Most people do not want to leave their estate, no matter the size, up to the Laws of Intestacy which apply when somebody fails to provide for at-death property transfers. Clients today are more concerned with their family goals, dynamics within the family, business management, succession, and preservation of capital including extended care issues.

The non-tax issues in estate and succession planning are just as important, if not more so, under today’s new rules. Clients need to consider the following:

  1. Where the property will end up after the client’s death. Due to changes in family situations, asset values, and tax laws, many of the older document provisions are out of date. With the higher estate tax limits, much more of one’s property will end up in the hands of their heirs; thus, the goals and wishes of the client now become more paramount as to where the property lands.
  2. Protection against claims of third party creditors and divorce is something to be considered. The use of various entities such as family limited partnerships, family limited liability corporations, and S-corporations in addition to specific asset protection trusts are extremely important to the succession plan.
  3. If there is a family business or substantial investment in a portfolio, how does the client deal with the succession of the management and of the ownership? The key here is the use of trusts and business entities in an advance planning strategy.
  4. What happens in the event of disability, incompetency, substance abuse, long term care needs? Having a plan in place well before the event occurs will ease the emotional, physical, and financial consequences to the family.
  5. In today’s world with the divorce rate approaching sixty percent, the split-family issues must be dealt with properly and with care.
  6. One of the most important arenas in succession planning is management. Who will be the successor manager? Whether it be a CEO or trustee or, in some cases, even a trust protector, the trust provisions must be clear and give precise direction in order to minimize disputes and future litigation. At the same time, flexibility must be taken into account in order to allow for changes in circumstances.
  7. Retirement planning. The management and distribution of one’s qualified plans must be reviewed so future generations can benefit from the income tax deferral from the parents’ qualified retirement plan. This may be more important than ever with rising income taxes.
  8. In some states there is a state death tax which must be considered. One might even consider changing domicile in order to negate the state estate taxes.
  9. What do you do when a child or grandchild is unable to handle financial assets properly? The use of irrevocable or dynastic trusts must be considered. These types of trusts are very flexible and can be tailored to the family’s needs.
  10. Education, so often overlooked with regard to the heirs within the family, must now be addressed in order to deal with the succession plan. This is where the senior generation can assist the younger generation in becoming capable of managing and using the wealth that will pass down to them.

There are three sets of wealth circumstances:

  1. Young families who are still building their estates do not have to worry about Federal or State death tax risk, but here life insurance provides a way of eliminating debt, educating young children, and providing for the survivor.
  2. Where the estate is somewhere between $5,000,000 to $10,000,000, the use of Portability and structuring trusts to guarantee a step up in income tax basis at death may have more meaning than the Estate Death Taxes.
  3. Those estates that are greater than $10,000,000 will still suffer the Federal Estate Tax and thus the traditional valuation planning, entity structures, gifting, and shifting of wealth strategies are all still very important.

It’s time to review one’s estate to assure that it is structured properly, especially under our new estate tax rules.