Financial Planning for June, 2009

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Is Estate Planning Really Necessary?

In 2001, President George W. Bush signed into law a plan to eliminate the Federal Estate Tax in 2010. There was only one catch – it would resurface in 2011. Since the passage of that plan, there have been numerous attempts to make the repeal of the so-called Death Tax permanent, but all attempts have failed.

With a Democrat in the White House and both houses of Congress controlled by the Democrats, it seems extremely unlikely that the estate tax will be repealed. Further, President Obama’s 2010 budget plan envisions rescinding the planned changes in 2010 in favor of extending 2009 estate tax provisions permanently.

This change in the political landscape may seem to herald a new period when estate planning is necessary, but, as most professionals know, estate planning was never really off the table. In the first place, if the 2001 tax law remains unchanged, the estate tax as it existed in 2001 will come back in full force on January 1, 2011. In fact, according to the Congressional Joint Committee on Taxation, the ten year effect of extending 2009 law into the future would be a loss of revenue to the Treasury of $256 billion. Second, there are some good reasons for estate planning besides simply saving taxes. With this in mind, let’s discuss a few of the President’s proposed changes and what this might mean to you.

Current law provides a credit that effectively shields the first $3.5 million of your estate from taxation. Unlike other tax provisions, however, this does not automatically mean a shield of $7 million for those who are married, filing jointly. The $3.5 million exclusion applies to each person. For example, say you and your spouse have a joint estate of $7 million and your will provides for all of your estate to pass to your spouse when you die. At your death, your $3.5 million will pass to your spouse tax free. When your spouse subsequently dies, however, his or her estate will be $7 million. If $3.5 million is shielded by your spouse’s exemption, that leaves a taxable estate of $3.5 million, which translates to $1,575,000 in tax. With a basic planning, this tax bill can be eliminated.

The good news in some current proposals is that the $3.5 million exemption for one spouse can be added to that of the other spouse, eliminating the need to plan for this provision in current law. Even better is a proposal to index the current $3.5 million level to inflation. Both of these proposals are certainly favorable to the taxpayer. If your joint estate is less than the current $7 million, then, does that mean you needn’t worry about planning? After all, the full amount could be shielded by your exemptions and the inflation adjustments should help the exemptions keep pace with your increased wealth in the future, right?


Most estate planning is all about what will happen in the future. As with most things in life, estate planning makes certain assumptions. Among those assumptions is that your estate will continue to grow. Thus, if it is $7 million today, it will be far greater in the future, especially if the economy recovers and enters a high-growth period. Further, your estate should be growing at a rate that far exceeds the inflation rate. If it is not, then it is not invested as efficiently as it should be. Thus, even though both proposals are favorable to the taxpayer, they do not solve all estate planning issues.

Another truth in estate planning is that much of it revolves around the present value of assets placed in trust. Present value is based on interest rates established by the Internal Revenue Service. With rates at an all time low, now can be an opportune time to take certain steps with respect to trusts.

Finally, as already stated, there are some very good reasons to structure your estate apart from tax considerations. Suppose you have a family business that you want to ensure remains in the family. Putting the business in a family partnership and providing for control to pass to qualified family members may keep the company in-tact, while still providing income benefits to family members who are either unqualified to run the business or uninterested.

Estate planning has never really been off the table; the uncertainties surrounding the tax code have simply made it a bit more difficult in recent years. With the new political climate, some of that uncertainty will soon go away and leave estate planners in a better position to judge the long-term effects of their strategies. Meanwhile, with interest rates at an all-time low, now could be a great time to maximize certain strategies. If you have estate questions, give us a call. Our commitment is to help maximize what you pass on to your heirs.

Happy June!


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