by Jim Biesterfelt
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Estate tax laws changed once again this year, proving the old adage that the only certainty in life is change itself. In an environment of uncertainty, how should you approach estate planning and what does it mean for insurance in your plan?
Stephen P. Rickles, JD, an estate planning attorney based in Denver, Colo., recently shed light on these questions. (Rickles conducts free estate planning seminars sponsored by the American Dental Association’s Council on Members Insurance and Retirement Program and Great-West Life & Annuity, insurer of the ADA Insurance Plans. His next seminar is at the ADA’s annual session in Las Vegas in October.)
What to know
The latest federal estate tax law was passed as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under the act, the “tax-free” or exempt amount for purposes of the federal estate tax was increased to $5 million, compared with $3.5 million in 2009. (In 2010, there was a one-year sunset of the federal estate tax.)
The tax-free amount for the gift tax also increased from $1 million to $5 million. For estates larger than $5 million, the estate and gift tax rate was reduced from 45% to 35%.
In addition, the exemption is now “portable” for married couples. This means that any unused portion of the estate tax exemption of the first spouse to die can be added to the surviving spouse’s exemption. A married couple could potentially pass a total of $10 million to their heirs free of estate taxes without having to be concerned with equalizing the two estates during their lifetimes or having a portion of the first decedent’s estate held in trust as estate planners often recommended in the past.
The act also reinstates prior law that increases (steps up) a decedent’s cost basis in his or her assets to the value at the date of death for purposes of the capital gains tax.
The new law seems to suggest that all but the very wealthy can abandon complex estate plans that focus on minimizing taxes. Rickles advises caution, however.
“The law only applies to a two-year period — 2011 and 2012,” he explains. “Then, unless Congress acts, the estate and gift tax exemptions will revert back to $1 million in 2013, casting a tax net over many more estates.”
In addition, subtleties in the law could have unexpected consequences.
“For example, the portability of the estate tax exemption only applies to the most recent spouse,” Rickles says. “If a widow or widower remarries, the deceased spouse’s unused estate tax exemption is no longer available.”
He also cautions that even if no federal estate taxes are due, 17 states and the District of Columbia assess a separate estate tax.
What to do
In light of the new federal law — and uncertainties about its permanence — Rickles recommends discussing the following three questions with your estate planner:
• How will my current estate plan work in light of the new rules?
• Is that what I want?
• If a change is warranted, should it be made now or after 2012?
Rickles also suggests building flexibility into an estate plan so it can adapt to future changes.
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 no estate taxes will be due.
However, if the exemption drops to less than $5 million in the future and estate taxes become a concern, wording in the will could allow the spouse to disclaim a portion of the assets into a family trust that would be exempt from estate taxes and not included in the estate of the surviving spouse at his or her death.
Addressing non-tax goals is another important aspect of good estate planning.
According to Rickles, trusts remain useful estate planning tools to manage assets, provide for the care of young children, and reach other goals. In addition, he suggests updating advance directives such as powers of attorney and living wills as part of periodic estate plan reviews.
During your review, 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.
Where life insurance fits
Asked about life insurance in a 2011 estate plan, Rickles observes, “If you own life insurance to protect your family against a premature death, to educate the kids, or to leave a larger estate to loved ones, then the desirability of life insurance remains unchanged.”
On the other hand, if you own life insurance primarily to provide liquidity to pay estate taxes, there may be a reduced need for the insurance if your estate is less than $5 million. Rickles is quick to add a caveat, however.
“Remember, the current rules are only in effect for two years,” he says. “Therefore, I would be reluctant to reduce life insurance based on the new law. If it changes and you need life insurance to pay estate taxes in the future, you don’t want to take the risk that you might be uninsurable at that point.
“You can always change your estate plan,” Rickles concludes, “but you can’t always obtain life insurance.”
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 insures the ADA Insurance Plans and is the sole provider of ADA-sponsored life and disability insurance to ADA members. For more information or a complimentary insurance review, call (866) 607-5330, send an email to [email protected], or go to www.insurance.ada.org.