Do You Have An Estate Plan?

As copywriters well know, when you reference learning in a headline, readers’ interest tends to perk up. Add a mention to the “rich and famous,” and you really generate interest. So, “Lessons of the Rich and Famous . . . in Death” about estate planning caught my attention.

Given so many stories of family feuds and financial disasters, it’s surprising that most Americans don’t have an estate plan. In fact, the article notes that many of our past Presidents died without estate plans, including Presidents Lincoln, Johnson, Grant and Garfield.  Notably, President Lincoln, although he was a practicing attorney, left such a financial mess that it took two years to settle his estate.

The article also addresses perhaps the most famous case of a celebrity dying intestate.  When the handwritten will of Howard Hughes was determined to be forged, it took 34 years to divide Hughes’ $2.5 billion estate among 22 cousins. And then there was James Brown, who tried to leave his $100 million fortune to a special trust set up to benefit needy children. However, because he never addressed the plan with his family or updated his will after his fourth marriage, much of his wealth was lost in legal battles.

The article closes by praising Elvis for leaving the building with a solid estate plan. Elvis Presley had not only a will, but testamentary trusts to provide for his family long after his passing. You can improve on The King’s handling of his affairs by having the appropriate documents drafted – and discussing your wishes with your heirs.

As a side note to our peak into the lives of the rich and famous, I read recently where Mick Jagger’s former financial advisor, Prince Rupert Loewenstein, has written a book, A Prince Among Stones. Apparently,  Loewenstein, who is credited for having a hand at keeping the Rolling Stones together for 40 years, divulges more of Mick Jagger’s personal finances than the Stones’ front man likes. Commented Jagger to The Mail Online, “Call me old fashioned, but I don’t think your ex-bank manager should be discussing your financial dealings and personal information in public.” The book hits the shelves in a few weeks.

Tick, Tock on Estate Planning Opportunity

One of life’s certainties -- taxes -- is a little less certain in 2012. It’s increasingly unlikely Congress will address the expiring Bush tax cuts before the November elections. Instead, the debate will be left to a lame-duck Congress, or even pushed into 2013. That’s not great timing for tax planning.

As investors focus on whether to accelerate portfolio gains due to scheduled increases to income and capital taxes, they may be overlooking a small window of opportunity in the estate planning arena. If Congress fails to act before the end of the year, today’s high gift tax exemption levels and low estate tax rates will expire on January 1, 2013. And when the federal gift tax exemption and estate tax revert to 2001 levels, the change will be significant.

For 2012, both the estate tax and lifetime gift tax exemption are $5,120,000 per person and $10,240,000 per couple, with a 35% top tax rate. Beginning in 2013, however, unless new legislation is enacted, the exemptions will drop to $1 million per person ($2 million per couple) and the top tax rate will increase to 55%.

If you're single and have a taxable estate worth more than $1 million, or if you're married with a taxable estate worth more than $2 million, now’s the time to think about the implications of these new taxes on your estate. Making immediate outright gifts is probably the easiest way to get money out of your estate in advance of these changes, but you might also talk with your attorney about a grantor retained annuity trust (GRAT), a qualified personal residence trust (QPRT), or gifting into an irrevocable trust.

Remember, in order to use the higher exemption, your gifts must be completed by December 31, 2012. It is important to note, too, that as the market continues to recover, it may be that getting all future appreciation of the gifted assets out of your estate may be an additional benefit of this strategy. While it’s impossible to predict how a new Congress will deal with estate tax reform (Remember when they let the estate tax expire all together in 2010?), this is a valuable estate planning opportunity that is available today.

Is Now a Good Time for Wealth Transfers?

Our ever changing tax laws seem perpetually riddled with sunset clauses. And that makes estate planning opportunities fleeting. For instance, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), increased the federal gift tax exclusion to $5 million. Accordingly, you can make $5 million in gifts in your lifetime without paying a gift tax. However, the TRA is scheduled to sunset at the end of 2012. Post-sunset, the federal gift tax exclusion will revert to its previous lower level of just $1 million. Therefore, if you have been considering making large gifts to your children or grandchildren, it may be advantageous to move those assets before the end of next year.

Also on the estate planning radar screen is the fact that Standard & Poor’s recent downgrade of long-term credit rating for U.S. Treasury debt from AAA to AA+ may cause an increase in the safe harbor interest rates for intra-family debt transactions. These so-called Applicable Federal Rates (AFRs) are currently near historic lows -- and that obviously works to your advantage when making lifetime transfers of business interests or property to your children or grandchildren. We’ll keep a watchful eye on interest rates so we can effectively guide your estate planning decisions.

If you want to discuss how to take advantage of the increased gift tax exclusion under the TRA or how a potential increase in AFRs might impact your estate planning, you should consult your attorney, accountant, or wealth manager.

Now Law: Estate Tax Rate and Exclusion

I have previously written on my amazement that Congress allowed the estate tax to lapse last year and of the many plans put forth to reinstate the death tax. With the signing of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the estate tax has been reinstated for 2011 and 2012 at a maximum rate of 35% with a $5 million per person exemption. In 2009, a 45% maximum tax rate was accompanied by a $3.5 million exclusion. Beginning in 2013, however, the exclusion drops to $1 million per person and the estate and gift tax rate increase to 55% – that is, of course, unless further legislation is enacted.

Interestingly, the new law retroactively reinstates estate taxes for 2010 at the rate of 35%. However, executors of estates of decedents who died in 2010 are permitted a taxation choice. They can distribute assets to heirs estate-tax-free but with a carryover basis (generally the original purchase price), or step up the basis to the market value (generally at time of death) and pay the current 35% rate on anything above the $5 million exemption. A step-up in basis means the value of an appreciated asset is readjusted at a higher market value for tax purposes upon inheritance versus what the value of the asset was when it was originally purchased.

Because this is a complex decision for estates over $5 million with highly appreciated assets, be sure to contact your financial advisor, attorney, or tax advisor for advice.

Other notable estate tax changes for 2011 include:

• New portability rules that allow any unused exemption to be passed to a surviving spouse. Therefore, a married couple can exempt up to $10 million.
• A new lifetime gift tax exemption of $5 million per person ($10 million per couple.) Taxable gifts made in 2011 and 2012 will be taxed at the rate of 35%.
• A generation skipping transfer tax (GSTT) exemption of $5 million per person ($10 million per couple) with a 35% tax rate. Note: The GSTT is not portable.

If you are unsure if the new law impacts your estate plan, you should consult your attorney to determine whether your estate plan needs to be updated or modified.

Where There's a Will, There's a Way

When the actor Gary Coleman died on May 28th at the age of 42 after suffering a brain hemorrhage, he left three different wills--including one that was handwritten. Legally, the last will written is the binding document. However, battle lines have been drawn, and it is likely his family and friends are in for a long court fight.

Coleman’s situation underscores the fact that without a well-executed and clearly written will, everything you worked for can go up in smoke. I would add that often overlooked in the estate planning process is the fact that proceeds from life insurance, investments in Individual Retirement Accounts (IRAs), annuities, and qualified retirement plans (such as 401(k)s, 403(b)s, and SEPs), as well as trust property pass outside your will directly to your named beneficiaries.

In fact, the beneficiaries you name for your IRAs and 401(k)s take priority over instructions in your will. That is, a beneficiary you forget naming for your retirement account twenty years ago will inherit those assets even if you later specify in your will that someone else will inherit everything you own. Accordingly, it’s crucial that you review your beneficiary forms on a regular basis.

Other documents that help ensure your wishes are carried out include a Durable Power of Attorney, a document that designates a person to act on your behalf during times of incapacitation, and an Advance Medical Directive, a document that lists your health care treatment preferences and designates a person or persons to make those decisions on your behalf.

Once you have developed and signed these documents, instruct your executor and family members where to find them.  And if you are uncertain about your documents, consult your attorney to discuss your need for a will, living trust, durable power of attorney and/or advance medical directive.