Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Focusing On Things You Can Control-Part 2: Estate Planning

February 2009

(In describing our investment philosophy to clients we often tell them to not worry about things they can’t control (e.g., stock market gyrations) and instead focus on things they can control: fees, taxes, etc. The same thing goes for other areas of managing wealth. Over the next few months I will explore some areas of wealth management that clients’ DO have control over.)

Obama Plans to Keep Estate Tax – Democrats Want to Freeze Levy at Current Levels Instead of Letting It Expire Next Year” reads the top headline in the January 12, 2009 edition of The Wall Street Journal. The article details recent history about the estate tax and various legislative initiatives to change it. The driving force behind the incoming administration’s desire to deal with this issue now is that current legislation calls for the estate tax to be repealed in 2010 only to see it sunset and return to Clinton-era legislation which taxed estates over $1 million ($2 million for couples) at 55%. Based on several conversations I’ve had with tax attorneys and confirmed by the Obama administration in the above-referenced article, the conventional wisdom is that the incoming administration will push to pass legislation that makes the estate tax permanent with a $3.5 million exemption - $7 million for couples –from any taxation. The values of estates above that would be taxed at 45%.

Many clients have pointed to the Bush administration’s efforts to “end the death tax” or the uncertainty of the exemption amounts to put off updating their estate plans. As a result, it is fairly common to learn from a client that they haven’t updated their plan in more than 5 years. Even more importantly, since their last update there has typically been a change in family circumstances (e.g., grandchildren) and/or a change in their financial circumstances. We know the law surrounding estate tax has changed over this time. Here are some additional reasons to update your estate plan in 2009:

  1. Review Titling of Assets: Estate Planning 101 calls for each spouse to own assets equal to the exemption amount in their respective names. Effective January 1, 2009 the exemption amount has increased to $3.5 million and the odds appear high that this amount will be made permanent. This is a great time to review your net worth statement from an ownership perspective to make sure you’ve taken full advantage of the exemption amounts.
  2. Review the Use of Exemption Amount in Your Will: Some married clients have adopted estate plans that leave an amount equal to their estate tax exemption to their children and the balance of their estate to their spouse. This is very common in second marriages. Because of the increase in the estate tax exemption, such a plan may have the effect of leaving more to children and less to a surviving spouse than was intended. With the increase in the exemption amount coupled with the downturn in the real estate and stock markets it is conceivable that such a plan could disinherit the surviving spouse entirely. A similar problem exists with plans that provide bequest to the grandchildren measured by the grandparent’s generation-skipping exemption; this year’s increase may leave more to the grandchildren than was intended.
  3. Opportunity to Transfer Wealth: One silver lining to the current economic environment is that, if so inclined, it presents a rare opportunity to make gifts or sales of assets to children or grandchildren at significant discounts from their market highs. There are a variety of estate planning techniques that will transfer wealth from a senior generation to younger family members with little, if any, transfer tax consequences. Some of these techniques include outright gifts, sales to defective grantor trusts to GRATS and charitable lead trusts.

At the very least a conversation about your wealth transfer goals and a quick review of your current plan is a must in 2009 and is something that we DO have control over.

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