It is time again to face year-end chores, including gathering income tax information and estate and gift tax plans. In previous years, a good start would be to first review assets: what is owned, how much is it worth, how is it owned and who gets it when you die? This year, the most important start is to review the actual wording of existing wills and trusts.
The federal estate tax expired at midnight Dec. 31, but is due to reappear next year with an exemption of one million dollars, not $3.5 million that has been current.
Most estate planning professionals do not believe that this scenario will remain, but no one can predict what changes, including potential retroactive taxes to be enacted by Congress. The current situation poses intriguing and difficult problems for individuals.
If there is no estate tax, do we still need trusts to avoid or minimize estate taxes? Or will we need them again in 2011? What will happen if a person dies in this year with a trust that leaves the “exempt amount” — which last year was $3.5 million, and so far, this year is zero — to his children and the balance to his wife?
Depending upon how the trust is worded, it is possible to interpret it to say that the wife gets everything or nothing. In estate plans where there are distributions to be made on the death of the first spouse to both the children and the surviving spouse, as is often the case in second marriages, these questions are the most troublesome.
Similar problems can arise next year, when, if no changes are made, there will be an exemption of $1 million. If a formula in a trust describes distributions as being equal to the “exempt amount,” then again there can be questions as to what that amount will be, and to whom it will go.
These questions highlight the fact that a key element in estate tax planning is to determine what amounts and benefits are intended to be transferred to others due to the death of the owner.
To make these determinations, more than wills and trusts need to be considered. Estate taxes are not just based upon real estate and stock accounts. The federal estate tax return requires information about, and possibly the taxation of, life insurance, retirement and annuity programs, deferred compensation plans with death benefits or death payouts, business buyout plans, joint and survivorship ownership and distributions from some existing trusts that were established by others.
A list should be made of each and every kind of possible benefit that flows to another person on account of the owner’s death. Beneficiary designations on life insurance policies, pension plans, IRAs and the like should be reviewed, both as to the naming of beneficiaries as well as the possible estate taxes which may be imposed.
Whether or not we will have some estate taxes in the future, it is important to know if assets are owned by the husband, the wife, or in joint ownership with rights of survivorship.
All too often a well written trust is completely useless because a husband and wife own all of their stocks, real estate and securities in joint accounts with right of survivorship. In this scenario, when one dies, the accounts go directly to the surviving spouse and nothing goes into the trust which has been set up to eliminate or reduce estate taxes, or simply to avoid probate, and provide for management of assets for the surviving spouse, and possibly to extend management and control for the benefit of children and grandchildren.
Once the list of assets and family are complete, it is prudent to review the tax impact of the disposition of the assets involved in the estate plan.
Finally, and without regard for the federal estate tax or lack thereof, everyone should check on whether there has been any change in their state’s death taxes.
Florida remains an estate and income tax haven. Florida residents pay no Florida income tax or death tax. Massachusetts came on line with Florida and other “sponge tax” states on Jan. 1, 1997, but now has reverted to allowing only a small exemption, so there is a state estate tax in Massachusetts.
Many other states are breaking away from the federal increased exemptions and imposing death taxes at a lower threshold. Regardless of federal law, many states impose there own estate tax on their residents, and even Florida residents may have to pay an estate tax on real estate or personal property when it is located in a state like Massachusetts that has its own estate tax.
Enjoy the good times and save some time and money for tax planning, rather than tax payments.
Attorney Alan S. Novick of Naples and New Bedford, Mass., is certified as a wills, trusts and estates lawyer. Novick is a member of the Massachusetts Bar and the Florida Bar. Contact him at firstname.lastname@example.org. The information provided in these columns is for general information and cannot be relied upon as legal advice. Readers must consult your own attorney for specific legal advice.