2010 Letter to our Friends and Clients

Dear Friends and Clients:

Now that the current tax law is still in effect, we want you to be familiar with the estate tax provisions, and how they affect your estate plan. As you can appreciate, these tax provisions will have a tremendous impact on how we structure your family's estate plan.

Summary of New Estate Tax Provisions

The estate tax exemption has finally reached $3,500,000 in calandar year 2009 and now, in 2010, it will ramain so. In addition the top estate tax rates are reduced. For 2010 the estate tax exemption amount will remain at $3,500,000 per person. However, as strange as this may sound, the original $1,000,000 estate tax law may still be reinstated in the calandar year 2011. You will note, the increase in the exemption and reduction of the estate tax rate has been gradual over the last few years. Most of the increases occured in the later years with repeal to occurr in calander year 2010. However, the repeal did not happen.

While the current rules may technically be reinstated in 2011, we feel it likely that changes will occur prior to that happening, probably in 2010 under the current Democratic Administration the estate tax exemption amount will probably stay at $3,500,000. Whether the changes will be helpful or not will depend upon the economic conditions and composition of the Congress and White House at the time.

Planning Steps

In light of the uncertainty in the estate tax laws, it is essential that you maintain flexibility in your estate plan. It is important to structure your estate plan to avoid the pitfalls created by the new law, yet take advantage of available opportunities and preserve traditional planning options in the event that these estate tax savings fail to materialize.

Beware of the Following Tax Trap: Most traditional estate planning techniques for married couples provide that some of the assets of a spouse who dies first pass into a Credit Shelter or Bypass Trust (A-B Trust) for the benefit of the survivor. However, under new law, you may not need or want this Trust. In fact, the tax formulas used in creating these Trusts can accidently result in disinheriting your spouse. This will become a larger problem as the estate tax exemption increases. A combination of the Disclaimer Trust (or Survivor's Choice Trust) discussed below and the proper titling of your assets will avoid this trap. Therefore it is essential that your situation be reviewed to make certain that your wishes are carried out.

Disclaimer Trust (or Survivor's Choice Trust): Many of our married clients will benefit from an estate planning approach that we call the Survivor's Choice Trust. Here is how it works. Each spouse makes the other the sole beneficiary of their estate. However, at the death of the first to die, the survivor has a choice. The survivor can receive the assets outright, or the survivor can disclaim the assets so that these assets will pass into a trust that will have similar characteristics to that of a Credit Shelter or Bypass Trust (A-B Trust). The decision does not have to be made until after the death of the first spouse. The advantage of this approach is that the estate planning decisions can be made when we know what the law will be.

Note: A disclaimer is an estate planning technique which is implemented after an individual dies. However, it must be done on a timely basis and before any assets are accepted. Therefore, while this approach is very flexible, it places an increased emphasis on post-mortem estate planning. Therefore, it is essential that if someone dies, the family members review their options promptly, and BEFORE exercising control over the assets.

Dynasty Trust: Given the increased flexibility in transferring assets to your family, it may also be beneficial for your family to keep the assets in trust so that your children and grandchildren can have protection from creditors and marital problems. In addition, your child can have significant control over the trust and decide how much of the assets to use during their lifetime or for the health, maintenance, support and education of their family. This is an excellent long-term plan to preserve your hard earned money for your children and grandchildren.

Retirement Plan Beneficiary Designations: Many of us have a large percentage of our assets in retirement plans. With the recent liberalization of the retirement plan regulations, you can now make changes to distribution elections that previously became irrevocable upon reaching age 70 1/2. The new option can dramatically increase the amount of assets passing to your family. However, to obtain these benefits you must make certain that your beneficiary designations are set up properly. We can show you how to maximize plan benefits.

Gifting Strategies: The uncertainties associated with the new estate tax law now make it important to pursue estate planning strategies to remove assets from your estate in the event that the repeal of the estate tax does not become permanent. New estate planning opportunities will enable you to shelter assets from creditors, and from the estate tax, and permit you and your family to direct who will recognize trust income. There will be significant planning opportunities to structure trusts to shift income to the family members in the lowest income tax brackets. These techniques will provide tax savings on an annual recurring basis.

Nursing Home Planning (Medi-Cal and/or private Long Term Care Insurance): Another problem of major concern that should be addressed at this time is the need to protect the family assets from being dissipated by long term illnesses and exceptionally large nursing home bills. We strongly recommend that you review your situation and perhaps that of older members of your family. We will be pleased to review the options which can preserve and protect your family's assets in these difficult situations.

Summary: The key to estate planning as a result of the new tax legislation is flexibility. Many estate planning documents can be simplified but we must make certain that you do not accidently disinherit your spouse, and also address the possibility that estate tax repeal may never occur. Therefore, many of our clients will be able to pursue the Survivor's Choice approach described above. However, clients with larger estates should still plan on addressing the estate tax through conventional planning techniques. In addition, gifting strategies should still be pursued, especially those that will shift income to other family members.

For those reasons we are continuing to offer our clients a free consultation to come in and review their plans with us. We look forward to seeing you in the near future and, as always, appreciate your friendship and confidence. Our warmest regards! Test

-Print Article-