Estate planning: Now what?

June 1, 2010
Congress has yet to agree on new estate tax legislation, leaving in place a one-year elimination of the federal estate tax in 2010.

By Jim Biesterfelt

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Congress has yet to agree on new estate tax legislation, leaving in place a one-year elimination of the federal estate tax in 2010. Unless Congress acts, the estate tax will return in 2011, the amount exempt from the tax will revert to $1 million (compared with $3.5 million in 2009), and the highest tax rate will jump from 45 to 55%. The result: more estates could be subject to estate tax than in recent years.

“We hope Congress will do something before the end of the year, but we can’t take it for granted, nor do we know what any legislation will provide or even if it will be retroactive,” explains Stephen P. Rickles, JD, an estate planning attorney based in Denver. Rickles will conduct a free estate planning seminar this October at the American Dental Association’s Annual Session in Orlando. “All of this has created a great deal of uncertainty,” he says.

Planning for 2010

No estate tax in 2010 might seem like a windfall for heirs of well-off individuals who die this year, but Rickles cautions that there are still state estate and inheritance taxes to consider. In addition, other federal tax rules have kicked in, which could increase heirs’ income taxes.

This year, heirs must generally use the original price paid for certain inherited assets, such as stock and real estate, to compute their income tax liability when the asset is sold (referred to as a “cost” or “carry over” basis). This differs from past years when the value at the owner’s death (a “stepped-up basis”) was used. Although a limited step-up in basis will still be permitted (i.e., a $1.3 million step-up, plus another $3 million when inherited from a spouse), this change in the asset’s cost basis could nevertheless result in a larger capital gains tax when the property is sold.

The taxpayer must establish an asset’s cost basis or the cost basis will be deemed to be zero. For that reason, Rickles is urging clients to locate and maintain accurate records of their real estate and other investments, including the original cost, expenses, and improvements. “Locating detailed records becomes particularly crucial for an individual who is likely to die in 2010,” he says.

Life insurance is not affected by these rules, because current law allows beneficiaries to receive life insurance proceeds free of federal and state income taxes. Therefore, in most cases, it’s not necessary to track premium costs for income tax purposes.

Rickles also advises reviewing estate planning documents to see how they would be interpreted in light of the current situation. “It could be problematic if the documents refer to estate tax rules that are not in effect this year,” he explains.

When reviewing your estate planning documents, also check the beneficiary designations for your life insurance and retirement accounts. Proceeds directed by beneficiary designations typically pass independently of a will, so make sure they reflect your wishes.

2011 and beyond

While waiting for Congress to act, Rickles recommends building flexibility into an estate plan, so it can adapt to future changes in the tax law. One way to do this is with a “disclaimer will.” With this type of will, for example, a dentist could leave all of his or her property to the spouse, anticipating that estate taxes will not be a concern. However, wording in the will could allow the spouse to disclaim a portion of the assets into a trust that would be exempt from estate taxes and not included in the estate of the surviving spouse at his or her death. A family/marital trust arrangement is another strategy that has tax advantages for larger estates, according to Rickles.

If you think your estate might be subject to estate tax after 2010’s one-year sunset, keep in mind that life insurance can provide immediate funds to pay the tax and other settlement expenses. Adequate amounts of life insurance also can finance a child’s education, pay off a mortgage, carry out a buy-sell agreement, and more. And, your heirs can use life insurance for these needs with no income-tax consequences, rather than having to cash in your IRAs or other retirement plans, which are often subject to income taxes when withdrawn.

“For all these reasons, life insurance planning is an integral part of estate planning, no matter what Congress decides to do,” Rickles concludes.

Editor’s Note: This article does not constitute legal, tax, or financial advice. Please seek professional input as appropriate to your situation.

Jim Biesterfelt is vice president of Group Special Accounts at Great-West Life & Annuity Insurance Company, which underwrites and administers the ADA Insurance Plans, and is sole provider of ADA-sponsored life and disability insurance. For more information about the ADA Insurance Plans or to request a free Personal Estate Planner, call (866) 607-5330, e-mail [email protected], or visit

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