With the uncertainty of a dramatically varying tax-free exclusion between 2005 and 2011 and the continuing potential for permanent repeal of the estate tax, you should review your estate plans more frequently and build more flexibility into plans. Also, remain mindful of the nontax goals of estate planning.
On June 22, 2005, the Wall Street Journal reported Republican and Democratic senators are increasingly confident they will reach compromise on the estate-tax law by the end of the summer, with Senate negotiators reportedly having already agreed to permanently lower the estate tax rate beyond 2010 and boost the tax-free exclusion to more than $3 million per person. Any Senate compromise will most likely pass in the House and would be difficult for President Bush to veto.
State death taxes will likely continue and could increase. Ohio’s estate tax rates range from 2 percent to 7 percent, depending on the size of the estate, applied to estates exceeding $338,333. Varying death-tax laws across state lines will require individuals to update their estate plans for every state where they establish residence.
How might the new estate-tax laws affect your current estate plans?
- Retirement planning. Income taxes on IRAs and retirement accounts will still be in effect. Planning to avoid income taxes and stretch out withdrawals from retirement accounts will still be important.
- Capital gains and income tax savings. Charitable remainder trusts will continue to be a popular way to generate income tax savings and provide a means to reinvest highly appreciated assets to produce increased income without incurring capital gains taxes.
- Family members with special needs. Trusts will still be needed to delay distributions to minor children and provide for disabled children or elderly parents.
- Protection of assets from creditors or lawsuits. Trusts will continue to be used by individuals to shelter wealth from liability or preserve family wealth for spendthrift family members.
- Second marriages. Trusts will continue to be used to hold assets for a surviving spouse’s support, with eventual distribution to children from a first marriage.
- Consolidation of investment and control. For high-net-worth families, trusts provide a means for efficient, diversified investment and control of family wealth.
It is a good idea to make an effort to review your estate plans more frequently and to focus on four specific factors.
- Consider limiting the full funding of credit shelter trusts, intended to hold a decedent’s tax-free exclusion amount, or giving surviving spouses the ability to decide the extent of funding of these trusts.
- Revisit the need for life insurance policies or irrevocable life insurance trusts, previously established to replace funds reserved to pay estate taxes.
- As always, revisit beneficiary designations for IRAs and retirement accounts to ensure flexibility and avoid overfunding the tax-free exclusion amount, particularly if trusts are currently designated as a beneficiary.
- Revisit the need for existing irrevocable plans and be cautious about implementing new irrevocable plans based on tax laws that may dramatically change.
Michael D. Barnes, Esq., is vice president of Johnson Trust Co., a division of Johnson Investment Counsel Inc., one of Greater Cincinnati’s largest independent investment management firms. Managing more than $3.2 billion in assets, Johnson Investment Counsel has been serving clients since 1965. Reach Barnes at (513) 661-3100.