Modern Estate Plans Should be Flexible

Modern estate plans should be flexible.  We want them to be flexible so they can withstand a variety of situations and tax law changes.  Currently, there is uncertainty in the federal estate tax.  Current federal estate tax law provides each U.S. citizen with a 2 million credit.  However, current federal law states that in the year 2011, this credit will be only 1 million. 

CONSIDER FUTURE VALUE:  When planning one’s estate, one should also consider what the value of the estate might be in the future.  To do this, we often use the Rule of 72, which provides that with an annual return of 6% on assets, the assets will double in 12 years, and an annual return of 8%, the assets will double in 9 years.  You see, if you divide 72 by your annual rate of return, the result will be the number of years it takes to double your assets. 

COUNT ALL ASSETS:  When planning one’s estate, it is also necessary to count all assets that will be included in one’s estate such as life insurance and retirement plans.  The death benefit on life insurance is included in one’s estate for purposes of the federal estate tax and so is the value of a retirement account.  For instance, if one owns a life insurance policy with a death benefit of 1 million, that 1 million is in their estate and it is subject to the federal estate tax.  

USE DISCLAIMER PLANNING, IF ADVISABLE:  One principal technique that we often use to provide needed flexibility is to provide the survivor of a married couple with the ability to “disclaim” assets.  A disclaimer is a written refusal to accept inherited property.  If this is done properly then such a disclaimer can be considered a “qualified disclaimer” which means the survivor is treated as never having received the property and thus is not liable to pay federal gift tax. This would be done with the advice of counsel to improve the tax situation for the family. For instance, one might disclaim if their planning was structured in such a way so that what they disclaimed was given to them, as Trustee, of a Family Trust.  If planned for and done properly, the assets in the Family Trust can escape the federal estate tax in the survivor’s estate.

And so the moral of the story here is that advance planning is necessary to (1) ensure there is maximum flexibility in an estate plan to provide for unknown variables, (2) ensure all the assets are being considered, and (3) consider the future value of an estate.

Contributed by:

Mark F. Winn

Attorney at Law, PLLC