Insuring Your Estate Plan By Reviewing  

The Tax Relief Act of 2001 brought forth diverse and complex tax law changes that may impact a number of areas within a person’s financial plan. One such area is estate planning. Although estate planning is fundamentally about controlling personal assets while passing them to heirs in the most efficient manner possible, most individuals would associate this with not paying or minimizing the estate tax. For this very reason, it may be beneficial for an individual to review their estate plan currently in place to insure they are able to fully take advantage of the tax law changes.

One of the most significant changes within the tax law was the increase in the amount of assets each person can transfer free of estate and gift tax and the ultimate repeal of the estate tax for one year in 2010. This exemption is currently $1,000,000 and will gradually increase to $3.5 million in 2009. The exemption equivalent will increase in the following manner: $1,500,000 in 2004 and 2005, $2,000,000 in 2006 through 2008, and $3,500,000 in 2009. This will effectively increase the amount of assets an individual can pass on to his/her family or others without exposing assets to an estate or gift tax.

Given these changes, there are several areas within your current estate plan that may be reviewed in order to take full advantage. One such area involves the area of gifting. By utilizing both the gift and estate tax lifetime “applicable exclusion amount” and the $11,000 per recipient annual gift tax exclusion, an individual may sharply reduce any potential estate tax liability. Also, for those individuals that have authorized a trusted individual to carry out their gifting program, the documents in place should be reviewed in light of the new law. An example would be a power of attorney. If you have a power of attorney in place that authorizes a trusted agent to continue your gifting program, make sure it allows the agent to take full advantage of the changes within the new tax law.

Gifting allows an individual to transfer assets from their estate to their heirs while they are still alive. For most individuals, however, the transfer of assets to their heirs will take place at their death. The document that facilitates this transfer is a will and, thus, another area that should be reviewed. Wills are commonly used to direct an estate plan. The will is the document that determines what amount of assets are exposed to an estate tax to fully take advantage of the applicable exclusion amount.

For example, Mr. Jones’ will may read that, upon his death sufficient assets will be exposed to estate taxes covered by the exclusion without incurring an estate tax due while the extra assets will be left to his wife. This is possible by exposing $1,500,000 worth of assets to the estate tax and, therefore, fully utilizing the exemption afforded each individual upon their death. A problem may arise if the will specifically quantifies the amount of assets as $1,500,000. This amount may be wrong in future years because the exemption is going to increase from $1.5 to $2 million in 2006. If this individual dies next year, his estate may miss out on up to $500,000 of tax protection. Instead of quantifying a specific dollar amount in your will, it could be changed to incorporate formula language. Formula language will allow an individual, upon their death, to fully take advantage of the applicable exclusion amount no matter when they die.

A common substitute for a will that many people opt for is the living trust. The living trust not only serves the same function as the will but may provide additional benefits such as professional management of assets along with circumvention of the probate process upon death. But keep in mind that assets held in a revocable living trust remain subject to estate tax just like assets that pass by will. Therefore, a living trust should be reviewed in the same manner as a will.

Of course, this brief article is no substitute for a careful examination of all of the advantages and disadvantages of this matter in light of your unique personal financial circumstances. Before implementing any estate planning strategy, contact and consult with your Financial Advisor, estate planning attorney or tax professional.