Q: Since the tax reform act became effective, I feel like I am riding in an ambulance because it seems like I am being chased by financial planners, trust officers, insurance solicitors, and seminar promoters. What are you telling your clients about what to do with their estate documents?
A: In the good old days (a few months ago) estate attorneys tried to take a picture of a client's current situation and create documents to reflect that reality, but in such a way that the documents could be easily and inexpensively altered as factors changed.
Today however, "what ifs" must be considered. For a couple, the possibility of one of them passing away before 2011 and the survivor then having a taxable estate of more than $675,000 should be discussed.
Say what, you ask?
First, most of us are much richer for tax reasons than we realize. Assets such as the face amount of insurance, retirement accounts, the true fair market value of appreciated assets, etc., all need to be included in determining a taxable estate.
Each person can pass on tax free $700,000 this year; $1,000,000 in 2002 and 2003; $1,500,000 in 2004 and 2005; $2,000,000 in 2006, 2007, and 2008; and $3,500,000 in 2009. Then in 2010 there will be no estate tax (although there will be a tax on the increase in value of assets while owned by the deceased and deemed part of the "taxable" estate).
A tax document (either by Will or by trust) simply ensures that a couple can enjoy and use their assets but can pass on the highest amount of each estate that is tax exempt in the year each dies. Thus if one person died this year and the survivor died in 2011, with proper planning $1,375,000 ($700,000 in 2001 and $675,000 in 2011) can pass tax-free. Without proper planning, a tax would be imposed on $700,000 ($1,375,000 - $675,000) for an estimated combined state and federal tax of maybe as much as $300,000.
However, here the advice does get to be a bit fuzzy. I am telling my clients, if you have tax documents and if it is possible that one person will die during the next nine years and the other survive past 2011, then consider keeping your documents. If a couple's taxable net worth is less than the projected tax exemption and it is certain both will die before 2011, then simplify your estate by putting everything in joint tenancy, having a simple Will, and making sure unsupervised court administration is used to settle the estate at the second death.
But here is the kicker. Even if there is no tax exposure now (a couple's net taxable worth is less than $700,000) and won't be above the exemption through 2010, but the taxable value of one or both could be in excess of $675,000 in 2011, then a tax document (a Will or a trust) should be discussed.
Now, in no way am I trying to defend what you have been receiving in solicitations. I am shocked myself as to some things I have seen in the name of helping and giving information. But as you can see the waters have become muddier and everyone seems to have his or her own idea of what to do.
It does not hurt to consider a new approach or a different idea, but go back to your attorney, CPA, etc. (people who you have trusted in the past) for a second opinion to be sure that the "light at the end of the tunnel" is the right solution and not just someone's dog and pony show about to run you over. Also remember your CPA and/or attorney can always be sued if what they do is wrong. That is not necessarily the case with solicitors, especially if the company goes out of business, or the "expert" has moved away or is based out of state, etc.