Estate Tax Mess

 

As you may know Congress has created an estate tax mess.  The mess exists because the 2010 law is very different from the old law and most attorneys believed that Congress would go back and reinstate the old law.  Most estate planning documents are now drafted using the old law.  The important Internal Revenue Code sections in the documents that are critical to the operation of the will and the flow of assets may be non-existent.

 

This is like playing football on a football field using basketball rules.

 

Congress has failed to take action in the last 10 years to correct the Estate Tax Mess, and with the health care debate, we are not counting on any new tax breaks from Congress and President Obama. 

 

So here is what you need to do. 

 

Powers of Appointment.  Make sure your estate planning documents have powers of appointment allowing the redirection of assets after death.  A common power of appointment is to allow the beneficiary of a trust to redirect the assets in that trust.  For example if a husband leaves assets in trust for his wife, she would be able to direct the assets during her life and at death using the power of appointment.

 

Life Insurance.  Review and keep your life insurance up to date.  Life insurance works well under the old and new law.  Life insurance is subject to estate tax so have it owned so it passes estate tax free.

 

Disclaimers.  A disclaimer is a refusal to receive property.  Make sure a person has the right to disclaim assets and the assets so disclaimed would go to the correct person.  Disclaimers can help to correct out of date tax clauses by redirecting assets.  However, the disclaiming person can’t control the flow of the asset after the disclaimer. 

 

The disclaimed property passes as if the person disclaiming predeceased the departed person.  For example if too much in value is passing to the children, the children may disclaim and the disclaimed asset may pass as if children were not living.  Usually, a disclaimed asset passes to the descendants of the children making it difficult to get the asset to the surviving spouse.  So the document needs to anticipate the flow of assets in the event of a disclaimer.

 

Trustees need to be able to disclaim.  A Trustee holds assets for the benefit of another, so it may be a breach of fiduciary to disclaim asset away from a beneficiary without protective provisions.  The direction of the disclaimed assets needs to be considered also.

 

Shifting of title for step up in basis.  Past law allowed a full step up in the income tax basis of an asset at death.  This allows the recipient to sell the asset tax free.  Under 2010 law, the basis step in will not exist except on a limited basis.  Action should be taken to use the limited exemptions.

 

Preparation for a 1MM exemption in 2011.  If Congress does not reach agreement to grant this tax cut, we are looking at a 1MM exemption next year.  So a plan should be crafted to eliminate estate tax even with a $1MM exemption.

 

Omission of Assets to Spouse.  Many estate plans, especially for larger estates, have assets passing to a trust for the children to the extent there is no estate tax and the rest to the spouse.  In this case the surviving spouse may be cut out completely!!!

 

Second marriage situations.  Second marriage situations should be reviewed as this has an enormous potential for conflict.   An unanticipated flow of assets may be uncorrectable using powers of appointment and disclaimers.  For example, will the children from the first marriage disclaim assets which will flow to the second wife never to be seen again?

 

Proactive.  We are recommending a proactive approach with this Estate Tax Mess as it affects many other parts of the estate plan (and real people).  We believe that an estate plan should be able to work in 2010 and then work under the new law next year.  So have your estate plan reviewed and updated in 2010.

Effective July 1, 2009, Mississippi has a new organ donation law.  It allows the easier donation of organs.  However, if you wish not do donate organs, you may need to express that in your health care directve.

A study group of the Secretary of State's office is looking at changes to the Mississippi trust law, to make its laws closer to other states.  For example, changes considered are to allow trusts to longer life and provide asset protection benefits.  This could be a great economic benefit to Mississippi.