What the tax deal means to your client’s estate plan

By Jesse Giuliani


BY: Nolan Baker & Mark Clair
The Retirement Guys
www.retirementguysnetwork.com

Recently, President Obama made a tax deal with the Republicans to extend the Bush income tax cuts for two years. Along with the extension, the federal estate tax issue was also addressed. As most people know, the federal estate tax in 2009 was 45 percent of anything exceeding $3.5 million.

In 2010, this tax was repealed and families, like the famous Steinbrenners, saved more than $500 million dollars in taxes, as their father, George, happened to die that year. The estate tax was supposed to come back to a tax rate of 55 percent on anything exceeding $1 million.

The deal Obama made with Republican lawmakers lowers the tax rate to 35 percent on anything exceeding $5 million for an individual and $10 million for a married couple. The law change also unifies the estate and gift tax exemptions, allowing generous people to give away a lot more money without paying tax. What this means is that less than 1 percent of the population will end up paying any federal estate tax.

As the robot on the old television show “Lost in Space” used to say, “Danger, Will Robinson!” What The Retirement Guys see as a danger here is being lulled into a false sense of security.

As an estate planning attorney, Mark first saw it back in the ’80s and ’90s when the federal estate tax exemption was first $600,000, then $750,000, then $1 million, then $2 million and finally $3.5 million. At these exemption levels, many folks out there thought they did not need to do any estate planning. If they were focusing only on estate taxes, perhaps they were correct. Now with the exemption amounts at $5 million to $10 million, many people may think the same thing.

Unfortunately, there are more issues to estate planning than just estate taxes. As financial professionals, it is good to stay up to date on these issues and talk with our clients about how these concerns may affect their individual situation. Here are a few of them:

1. Plan of distribution: Talk with clients and think through what they want to happen with their assets when they die. Who do they want to get their house, money and the grandfather clock? As a financial professional you need to make sure financial accounts correctly address those wishes. Have an attorney help with other assets.

2. Appointments: Make sure the clients have talked with an attorney about who they want to appoint to administer their estate to make sure everything gets where it is supposed to go. Note in your files who this person is and how to contact them.

3. Probate avoidance: If clients have assets that will go through probate, they should talk with the attorney about how much it will cost and how long it will take. A living trust may be the ticket to saving substantial attorney fees and to help speed up the process.

4. What if you don’t die? Every good estate plan includes health care directives and powers of attorney to name an agent to handle matters if you become too sick to do so. As the financial professional, make sure you have these up-to-date documents on file as well.

5. The ticking time bomb (income taxes): So many people forget about doing any estate planning for their retirement accounts (IRAs, 401(k)s, 403(b)s). These accounts many times have never been taxed and if clients don’t deal with it now, somebody will. There are laws and strategies in place now that allow for creating income tax-free dollars so that families can inherit an amount that is equal to that which is now in the client’s account rather than something like 40 percent less when Uncle Sam takes a big bite.

6. Who will be the guardians of the client’s minor children? Have they addressed this issue with the attorney? Who will provide the kids the care they need and has views on life similar to theirs that will provide a nurturing environment?

7. Beneficiary designations: Many clients do not know that their will or trust does not decide where accounts like IRAs and annuities go when they die. The beneficiary designation does. Work with your clients to review these designations; they may not be up to date.