Market declines increase the need for estate plan reviews
The unified credit amount has increased in 2009 to shelter up to $3.5 million of bequests (up from $2 million in 2006-2008), and the annual gift tax exclusion rose to $13,000 (from $12,000 in 2006-2008). This good news means that taxpayers can transfer more of their wealth to their loved ones free of gift and estate tax. The bad news, however, is that many taxpayers have less wealth than they did a couple of years ago because of declining financial markets, real estate values and business volume.
Financial reverses justifiably make taxpayers, especially retirees, nervous about the need to alter their lifestyles, and this includes changing their gift-giving and even testamentary plans. For those at the "lower levels" of affluence (i.e., net worth of a few million dollars), an estate planning review can be especially important to align estate plans with updated realities.
Consider this scenario: Michael and Anne are married. Michael's will provides that the amount of assets that can pass tax-free by virtue of the unified credit goes to two adult children and the remainder goes to Anne. The will was drafted a few years ago, when the tax-exempt amount was $2 million. At that time, Michael's assets were steadily rising in value; they peaked at about $6 million early last year. But since then, his investments have taken a hit; he is currently worth $4 million. (Anne's personal net worth is relatively low.)
If Michael were to die this year with this will in place, the children would get $3.5 million but Anne would get only $500,000 - considerably less than she would need to maintain her current lifestyle over her life expectancy. This probably is not what Michael intends. Thus, he should consider revising his will to be sure Anne gets more.
An alternative to changing the will is to ask the children to make qualified disclaimers should they inherit any part of the estate that Anne would need for her customary lifestyle. In short, a qualified disclaimer is a written statement from an heir, made within nine months of the decedent's death, renouncing all or part of a bequest.
The disclaimed property is then treated as passing directly from the decedent to the next in line to get the bequest (in this case, Anne, the remainder beneficiary). The strategy, however, may not be suitable if the children - perhaps children from Michael's prior marriage - have a less-than-harmonious relationship with Anne.
Taxpayers in other situations can make the most of diminished investment values by giving some of their shares of stock, real estate or other assets as lifetime gifts. More shares of stock in a down market, for instance, can be sheltered from gift tax by the $13,000 gift tax exclusion.
Likewise, the current low-interest-rate environment is a favorable time to establish grantor retained annuity trusts. With a GRAT, a taxpayer funds a trust whose terms provide for the grantor to make a gift of a future interest in the property and retain an annuity for a period of years that is paid from the trust. Based on a low interest rate, the value of the annuity is relatively high, so the future gift is assigned a low value for gift tax purposes. Yet if the trust outperforms the interest rate assumption, the beneficiary of the future gift will receive more than projected based on the current low interest rate. Estate tax savings can also be achieved if the taxpayer survives the duration of the trust.
Bob D. Scharin is senior tax analyst for the Tax & Accounting business of Thomson Reuters.
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