InstantNewsWestU.com

Estate Planning in Uncertain Times

Russell Hall

The estate tax is repealed (or not), the Bush tax cuts are expiring (or not), and the Dow can lose (or recover) a year’s gains in a matter of minutes.

Estate planning in this environment has become exponentially more difficult, at least for those relying on the most sophisticated wealth transfer techniques.

However, for most of us, the basics remain unchanged, and estate planning is no more or less difficult than it ever was.

Most people need a will and powers of attorney, which should be coordinated with nonprobate assets. IRAs, life insurance, brokerage accounts, and other assets with a designated beneficiary or a joint owner with right of survivorship do not go through probate. They are nonprobate assets. They must be coordinated with the will and powers of attorney in planning for both death and disability, because beneficiary designations and account agreements can trump wills and powers of attorney, leading to unfortunate surprises if the wrong beneficiary receives the life insurance or the bank refuses to honor a power of attorney.

If you die next year and leave as much as $1 million, and that includes life insurance death benefits and other nonprobate assets, your estate is taxable. An unlimited marital deduction is available if you leave everything to your U.S. citizen spouse, meaning Bill Gates could leave Melinda everything, estate tax free. However, there is no deduction for children, and the estate tax bill comes due when the surviving spouse dies.

If all you do is leave everything to your spouse, and he or she is a U.S. citizen, the estate taxes are the kids’ problem, not yours.

So who worries about estate taxes? Parents worry, especially if young children might be taxed on the life insurance. Savers worry, because even those that hate their children hate taxes more.

The most basic tax planning for spouses involves a testamentary trust. It is written in the will and is not funded unless the will is admitted to probate and the executor distributes assets to the trustee. The so-called bypass trust shields both husband and wife’s estate tax exemption amounts, and can double the assets that pass tax-free to the children. This technique is very passive, and is largely unaffected by changes in estate tax laws, except as the exemption amount rises and falls so the amount protected changes.

More sophisticated tax planning techniques are available, such as insurance trusts, grantor trusts, and family limited partnerships, but their reliance on lifetime gifts across multiple generations makes them very sensitive to changing laws and market conditions. Most people can simply disregard them, if only because they neither need them nor can afford them. These high end techniques are not indicated unless the taxpayer has “excess capital,” meaning they have or will save more than they conceivably might need.

Mere mortals tend to stop working once they have enough, and their estate plans remain straightforward, even in these uncertain times. A will and powers of attorney, coordinated with nonprobate assets, is enough.

This article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

Russell Hall is a local lawyer. He is board certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. He is an alum of Bellaire High School, Rice University, and the UH Law Center.