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Schedule Your 2011 Estate Plan Review

Estate Planning

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When you are in the business of estate planning you have an uphill battle when it comes to the matter of procrastination. People have a tendency to postpone the things that don’t seem to be immediately relevant to them, and nothing could fit this description more aptly than preparing for death.

Though it is easy to relate to this line of thinking it can be quite problematic, because however we may think about it, we all do pass away. And in a significant percentage of cases the ideal amount of forewarning is not forthcoming. Death is often preceded by a period of decreased mental and physical capabilities, so if you put off planning your estate too long it may not be possible for you to do it properly.

This having been said, sooner or later most people do finally get around to planning their estates, but this is just the first step. When you put an initial estate plan in place you will be working with personal and societal realities as they exist at that particular point in time. Things are constantly in flux, and on the one hand you go through changes that are specific to your own life. Your marital status may change, you might buy or sell a business, and the value of your investments may fluctuate significantly. All of these things could warrant adjustments in your estate plan.

There are also things that take place that impact the society as a whole that are relevant to your estate plan. A prime example is the new tax legislation that was passed in the middle of December. The Federal estate tax exclusion was scheduled to be just $1 million in 2011, but it has been raised all the way up to $5 million. In addition, the top rate has been reduced to 35%. These alterations are limited in time, and are due to expire at the end of 2012, when the estate tax exemption will be reduced back to $1 million with the top rate of 55%. Also, New York State’s estate tax exemption remains at $1 million. These changes are very relevant to many taxpayers, making a 2011 estate plan review a must. Do the right thing and make an appointment with your estate planning attorney sooner rather than later to discuss how these changes affect your present plan and what adjustments might be necessary going forward.

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We have highlighted the inheritance planning strategy of gift giving previously, but there is an exemption that is often overlooked that we would like to look at today. To provide some context the purpose of giving gifts from an estate planning perspective is to reduce the value of your estate in an effort to limit or eliminate your heirs’ estate tax exposure. On a personal level, when you give those who would be receiving inheritances from the estate gifts while you are still alive you get to enjoy the exchange and it is a totally positive experience for all concerned.

Of course there is a gift tax that comes in at a rate that mirrors the estate tax, but there are exemptions that you can utilize. The one we want to take a look at here is the tax-free medical gift. Each individual can pay the medical expenses of an unlimited number of people without incurring any gift tax responsibility. This includes necessary health care treatments and not elective measures like cosmetic surgery. It should be noted that the high cost of nursing homes and assisted living facilities are a cause for concern in elder laws circles, and these can be mitigated through tax-free medical gift giving depending on the circumstances.

Paying the bills when someone that you care about becomes ill is one way to take advantage of this gift tax exemption, but you can also pay for the health insurance of as many people as you want to regardless of the total cost. This includes some forms of long-term care insurance as well, so you can really provide your loved ones with quite a safety net if you choose to give them medical gifts. Aside from the insurance and perhaps paying for the long-term care of a loved one it is hard to have a hard and fast health care gift plan in place, but it is something to keep in mind should you find that a family member is in need of medical assistance.

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When the value of your estate exceeds the estate tax exclusion amount your estate planning objective is to rearrange your assets to create space and bring the value of your estate under that exclusion. Giving gifts is one way of doing this, but of course the IRS is well aware of this so there is the gift tax to contend with. However, there are financial instruments that can be used to facilitate tax-free gift giving when they are successfully implemented, and one of these is the grantor retained annuity trust or GRAT.

The objective of the grantor retained annuity trust is to pass along the appreciation of volatile assets, so when you create the trust you fund it with things like stocks and other securities, business interests, and real property. You name a beneficiary and set a term during which you as the grantor or donor will receive annuity payments from the trust. This term can be as long as you want it to be but the assets in the trust will go back into your estate if you die before the term expires so you have to keep this in mind.

The strategy we are presenting here is the “zeroed out” GRAT. The funding of the trust constitutes a taxable gift, but the IRS sets the value of this gift using the Federal Midterm Rate that is in effect during the month that the trust was created. This taxable value will be reduced by your retained interest in the trust, so if you “zero it out,” i.e. take payments out of it throughout the term that, when combined, are equal to the original taxable value, you owe no gift tax. At the end of the term, if the assets appreciated beyond that original taxable value your beneficiary assumes ownership of this remainder tax-free.