Future planning Featured

8:00pm EDT May 26, 2009

Many changes to estate tax planning may come about during President Obama’s first term, including legislation that would reverse the scheduled “zero estate tax” in 2010 and instead continue the 2009 exemption and rates.

It appears that the 2009 estate tax exemption of $3.5 million and 45 percent tax rate will likely be made permanent. Very few in Congress would like the rates to return to pre-2001 Tax Act levels — a $1 million exemption and 55 percent tax rate.

The estate planning focus will continue to change, as people realize they will likely face smaller estate tax bills or none at all due to the increased exemption and the economic downturn. The focus is shifting back to estate planning basics.

“For years, estate planning was driven by estate tax planning,” says Roger L. Shumaker, member of the estate planning and probate department at McDonald Hopkins LLC. “As taxes have becomes less of a concern, clients can get back to the underlying issues of estate planning — developing a plan to leave a legacy for family members, friends and favorite charities.”

Smart Business spoke with Shumaker about the basics of estate planning and how federal and Ohio estate tax planning have been affected.

What are the basics of estate planning?

It’s looking at what you want to accomplish during your life via a wealth transfer plan, and determining how to complete those objectives. Then, based on estate assets and whether state and federal taxes are anticipated, you can see what is available and how much should be left to your beneficiaries. There might be room to give to a charity instead of leaving everything to children and grandchildren.

There are some complexities at the higher levels of wealth involving generation-skipping transfer tax planning. You can set up a trust that provides benefits to your children, but the estate taxes are skipped for that generation and passed down to the grandchildren or great grandchildren.

How have federal and Ohio estate taxes been affected?

The federal estate tax exemption is now at $3.5 million. Most of the bills introduced in Congress have the exemption at $3.5 million or above, while one puts the exemption back at $2 million and another at $5 million. It will likely be at least $3.5 million with some rate adjustments or other subtle tweaks to make it easier to plan, although some suggested changes in the 2010 Obama budget could make planning more challenging for wealthier individuals.

While Ohio has an exemption of $338,333, allowing a married couple to eliminate Ohio estate tax on $776,666 with proper planning, assets exceeding the Ohio exemption will be taxed at about 7 percent.

The Ohio tax on the gap between the federal exemption at $3.5 million and the Ohio exemption may exceed $200,000 in the estate of the first spouse to die. With proper planning, this tax can be deferred until the death of the surviving spouse.

How do reduced interest rates and lower market values affect estate planning?

It’s one of the best times to gift or sell assets to family members. You’ll probably get an attractive appraised value for the gifts or sale of an interest in a family business because the earnings multiples are at low levels. Of course, the transferred property would be taxed as a capital gain when sold by the recipient later on.

Reduced interest rates are also important in setting the interest rate that’s charged on an intra-family loan, for example, where the parent as the property owner agrees to finance the sale of the property by making a loan to the family member or a trust. Those rates are at near historic lows, and even for a long-term loan, the minimum required rate is between 3.5 and 3.6 percent.

The rates are so attractive that existing promissory notes with higher interest rates can be renegotiated to the current lower rates. Proper planning can enable you to take advantage of these circumstances, but the principles also work with other properties.

Should I change my existing documents in light of the larger estate tax exemption?

If you haven’t done anything with your estate plan since 2001 or 2002 when the federal exemptions were enacted, you should probably review the plan. It is possible that different planning strategies will reduce taxes and ensure proper distributions to a spouse or other family members.

It is also possible that the larger exemption may result in property being held in trust and not as fully available to a spouse or children than was intended when the exemption was smaller.

What other changes might affect your existing estate plan?

Even people who don’t think they have a tax problem need to keep an eye out for changes in family circumstances, such as health or marital statuses of children. Also, as grandchildren arrive, you may want to give some of your wealth to them.

When many people see their adult children becoming more mature, they often revisit the issue of the estate executor and trustee. People don’t want to place this burden on their young children, so they look outside of the family for an executor and trustee. But as children get older, they might be able to better handle those roles.

Nevertheless, trusts may last for generations so institutional trustees are often the best choice. If clients haven’t looked at their estate plans in several years, it would be a good idea to revisit them to see if any changes need to be made.

Roger L. Shumaker is a member of the estate planning and probate department at McDonald Hopkins LLC. Reach him at
(216) 348-5801 or rshumaker@mcdonaldhopkins.com.