Estate planning remains important despite benefits of estate-tax law

The estate-tax law that Congress passed at the end of 2010 has many benefits for taxpayers, not the least of which is an exemption of $5 million per person. It also contains a “portability” provision that lets a surviving spouse claim the unused portion of the deceased spouse’s exemption, which creates a potential exemption of as much as $10 million for a couple.

However, despite the law’s benefits, people still need to consider creating a strategy for preserving and passing along wealth, says William H.T. Frey, a Grand Junction estate attorney and partner in the firm Dufford, Waldeck, Milburn & Krohn. Even if assets total less than $5 million, people need to think about setting up trusts and not relying on the portability provision.

Frey says portability can be a “trap” for tax purposes, and he suggests using a family trust rather than relying solely on estate-tax laws that can change at the whim of lawmakers.

A trust is preferable to the exclusion amount for several reasons. The first, Frey says, is that if the combined estates of the husband and wife exceed $10 million, use of the portable exclusion instead of a family trust exposes asset growth to estate taxes. The second reason is that the estate-tax law after 2012 (when the current law is set to expire) might not contain a portability provision, and consequently, the surviving spouse may not be able to utilize it. Third, if the surviving spouse remarries, and the new spouse dies, the exclusion that passed to the surviving spouse from the first spouse could be reduced.

The new law holds some benefit for business owners who want to pass their businesses to their children, Frey says.

“For business owners, I think it’s a golden opportunity to shift that business into the next generation with minimal transfer tax,” he says. Several types of trusts and other arrangements, such as gifting, can help minimize estate and transfer taxes, and Frey says this year is a good time for people with questions to confer with financial advisers about such arrangements, especially since the exclusion amount might be reduced in future versions of the estate-tax law.

“It’s probably worth spending the money to do estate planning now, even though the law might change in two years,” Frey says.

Frey also pointed out in a recent Estate Planning Council meeting that anyone wanting to use the portability of the exclusion on the death of the first spouse must file a 706 (estate return tax form) even though the new law does not require a filing if the deceased spouse's estate is under $5 million. If the laws do go back to the old levels, it may be important that the exclusion of the first spouse has been transferred to the surviving spouse to cover any assets allowed to roll over to the surviving spouse that become of their estate. Filing a 706 may be an expensive hassle, but for many affluent folks it will remain a necessary evil. So while the new law seems like reason for celebration, it is more important than ever to be certain your estate plan is up to date, now that we have a new set of temporary rules.
 
The discussion of tax issues and strategies in this article is not intended to be legal advice and is not intended by the presenter to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. A taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser. 

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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