John P. Dedon
March Madness: brackets, teams on the bubble, last-second shots. Right? Yes, but how about the madness facing those who are currently planning their estates while Congress fails to act on the estate tax law. Those who have followed this debacle know there currently is no federal estate tax; that Congress could reintroduce the estate tax this year, perhaps retroactively; and if Congress fails to act in 2010, in 2011 the amount individuals can protect from a maximum 55 percent death tax rate will be only $1 million.
This is also “March Madness,” or “March sadness.” Tax attorneys and financial planners are struggling to advise clients how to plan with this uncertainty. However, the impossibility of predicting the death tax future should not obscure the need to address fundamental planning needs. The Alley Oop Dunk will make Sports Center, but the team making its free throws and the extra pass will win. Here are some fundamental objectives individuals need to address, whether or not there will be estate tax to pay.
- Guardians for minor children: if you have children under 18, who will care for them if neither parent is living? Absent you naming a guardian, family members may be in front of a judge arguing over who has custody of the children.
- Spouses from second (or third) marriages: Individuals in second marriages and who also have biological children often want to take care of the surviving spouse but want any remaining assets at the second death to revert to the biological children. If appropriate trusts and trustees are not utilized, the assets could end up with the second spouse’s new husband or wife or the second spouse’s children.
- Assets passing to children: Parents often express a concern that their children’s inheritance could end up with a former son-in-law or daughter-in-law in the event of a child’s divorce. Another common concern is that the inheritance could be frivolously wasted or that the inheritance could sap the child’s motivation to lead a productive life.
- Probate avoidance: Whether the estate is $100,000 or $100 million, we all can avoid probate, i.e., the process whereby the local jurisdiction will supervise the collection and ultimate distribution of the estate assets. Weaving through probate will take months (and sometimes years) and can be expensive, among other disadvantages. By utilizing trusts and properly titling the assets and coordinating the beneficiary designations, probate is avoided.
- Asset titling and beneficiary designations: Individuals often prepare thorough planning documents but do not coordinate the documents with the titling of their assets and beneficiary designations. Typically, the titling and beneficiary designations will supersede the dispositive provisions in the documents. An estate plan can fail if assets are not tied to documents.
Congress’ inaction on the estate tax issue has been far from a legislative “One Shining Moment.” Hopefully Congress will focus on estate tax issues this year and provide some permanence prior to 2011 and a $1 million exemption amount. But with or without Congress, individuals should ensure their fundamental estate planning objectives are met.
John P. Dedon is a principal in the firm with the Trust, Estate & Tax Planning practice group of Odin, Feldman & Pittleman. Dedon blogs about estate planning issues for Virginians and U.S. citizens at dedononestateplanning.typepad.com.