The state of estate tax planning

June 1, 2011
Tax planning these days is somewhat like buying a carton of milk - one must check the do-not-sell-after date.

Brian Hufford, CPA, CFP®

For more on this topic, go to and search using the following key words: estate tax planning, retirement, exemption, portability, expiration date, Brian Hufford.

Tax planning these days is somewhat like buying a carton of milk — one must check the do-not-sell-after date. With income and estate tax laws expiring every couple of years, how does one plan? Still, recent estate tax law changes are worthy of your notice, and may require a plan of action. The federal estate tax is levied on the value of your assets at death: savings, retirement accounts, real estate, life insurance proceeds, etc. With life insurance proceeds and retirement accounts included as federal estate assets, it is not difficult to see how a dentist’s estate could easily have a need for estate tax planning.

I am continuously alarmed by the number of dentists who have substantial estates or dependent children yet no will or trusts in place. Frequently, the reason for estate planning has nothing to do with taxes at all. The planning necessity is more about not having the courts decide who cares for your dependent children, or having probate delays that make it impossible for a spouse to sell your dental practice. I once read an article titled “Consumer Resistance” about funeral directors who complained that people were not dying according to expected mortality statistics. Perhaps our own mortality is too hard to contend with.

Estate tax laws have been extremely volatile lately. There was no federal estate tax in 2010, while estate taxes were scheduled to be reinstated in 2011 with an exemption drop to $1 million and a maximum tax bracket of 55%. This was changed at the last minute by Congress to a $5 million exemption with a 35% maximum estate tax bracket.

Unfortunately, this recent law change has an expiration date: Dec. 31, 2012. At this time, the law states that the estate exemption is scheduled once again to drop to $1 million in 2013 without affirmative action from Congress. Recently, I interviewed Charles (Chuck) Cohen, JD, who practices in estate planning, to determine what dentists should consider with recent law changes.

Hufford: What should dentists do now to plan for recent federal estate tax law changes?

Cohen: Since the recent estate exemption increase to $5 million has not been made permanent as of this date, the key word for dentists’ estate planning is “flexibility.” When the exemption was much lower, for example at $1 million, it was important for dentists to conduct estate tax planning to fully use both spouses’ exemptions. This typically involved setting up bypass trusts in either a will, or more commonly, a trust agreement. A bypass trust would enable the first spouse to die to use that spouse’s federal estate tax exemption.

One of the new provisions in the recent legislation allows “portability” of the unused portion of the $5 million exemption of the first spouse to die. In effect, this law could remove the necessity of separate titling of assets and the need for bypass trusts since the estate of the second spouse would retain the unused portion of the estate exemption. But since the new law provisions will expire after Dec. 31, 2012, it may be necessary to retain bypass trusts since the exemption could drop to $1 million after that date.

Hufford: With the change in the exemption and the portability provision, what changes should be implemented?

Cohen: The most important planning currently needed is assuring that each spouse has flexibility in how the estate exemption is used. It may be necessary to have a “disclaimer provision” associated with bypass trusts so that an appropriate amount of assets are subject to trust provisions currently in place. Otherwise, unintended consequences could happen with the new large exemption amount.

If Congress makes the current estate tax provisions permanent, dentists will want to reexamine the use of bypass trusts, irrevocable life insurance trusts, family limited partnerships, and other estate planning strategies. These old strategies may no longer be needed, or may need to be amended by many dentists if the current exemption amounts and portability provisions are made permanent.

In summary, if you have current estate planning documents in place, it will be important to assure that there are no unintended outcomes with changes brought about by the new law. It is likely too early to eliminate estate planning strategies, such as irrevocable life insurance trusts and family limited partnerships, until Congress passes a more permanent revision to existing laws.

Remember that the $5 million exemption amount is set to expire Dec. 31, 2012, with the estate tax exemption once again dropping to $1 million. Unlike the carton of milk, here’s hoping that your personal expiration date is long after this legislative wrangling is certain.

Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or [email protected].

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