Musings from the CEO
In my last column, I discussed the current fate of estate and gift tax law. The emphasis is on the prospective most significant increase in tax rates and lowering of individual exemptions that we have seen in our lifetime. For those individuals with large estates, this creates a sense of urgency for estate planning to be done between now and the end of 2012.
Today, I’d like to bring it down a notch and discuss more traditional estate planning concepts that apply to a broader cross section of individuals/clients.
I am a firm believer in trusts, hence the moniker a “trust and estate lawyer”! For the vast majority of our clients that means leaving their estates to their spouse, but directly to trusts that are created by their Wills. These trusts are most often controlled by, and for the benefit of, the surviving spouse. When property eventually goes to children, we believe that in most cases it is far more beneficial to have trusts created for your children, regardless of age, that will last for their lifetime.
If the document creating the trust (Will or trust agreement) is properly drafted, your spouse or child can be the trustee of his or her trust, effectively exerting all of the control over assets that they would have had if they inherited property outright. However, the estate tax savings for future generations, the potential avoidance of generation skipping tax, the income tax flexibility, the protection from creditors, the protection from divorce, the preservation in the family, and the avoidance of probate are some of the reasons that it is desirable to allow the property to flow from generation to generation in trusts, as long as there are any significant assets worth protecting.
The 2010 tax law introduced the concept of “portability”. This simply means that if one spouse dies and his or her estate does not use all of their estate tax exemption, the remaining unused portion can be carried over to the surviving spouse to be used in that estate. There are numerous limitations and weaknesses in relying on portability, and we suggest that clients continue to have Wills that leave property to surviving spouses in trust(s), generally a combination of a Credit Shelter Trust and a QTIP Marital Trust.
Life insurance trusts are very common in many estate plans. It almost always seems to be a good idea to get life insurance out of estates now. As we get older, our clients acquire a lot of insurance for estate liquidity purposes. If we maintain insurability, it is always good to have these policies reviewed to make sure that you are allocating resources as prudently as possible. There may be situations where it would be prudent to prepay premiums.
Another method of reducing an otherwise taxable estate would be to consider a Roth conversion of a traditional IRA as a technique to get taxes out of a taxable estate, in a situation that would otherwise involve an asset (the traditional IRA) that will be subject to both income taxes and estate taxes upon the death of the owner.
Clients with more modest estates need to combine estate planning with Medicaid planning. What can be done to protect assets if one of the spouses has to go into a nursing home? First of all, both spouses should have a current Health Care Directive as a necessary part of their estate planning documents. Considerations should be made to move investments to the name of the healthier spouse. The healthier spouse’s Will can create a special needs trust in the event that he or she predeceases the spouse with health and living assistance concerns.
A part of estate planning should consider the need for long term care insurance. The sweet spot to acquire long term care insurance seems to be when a couple is still in their 50’s.
The couple can consider a lifetime QTIP Marital Trust. This would combine estate tax planning with Medicaid planning. The lifetime QTIP is a method to protect the home in the event of Medicaid stepping in. We also have a technique referred to as an Irrevocable Income Only Trust (IIOT) which can be established to start the five year look back rule for Medicaid. Finally, once a spouse is moved to a nursing home, continued planning should be done for the independent spouse.
Besides Wills that create trusts for the surviving spouse and lifetime trusts for descendants, the Irrevocable Life Insurance Trust to remove life insurance proceeds from anyone’s taxable estate, the Health Care Directive, and any “special” trusts created for Medicaid planning, everyone should have a comprehensive General Power of Attorney. These power of attorney forms should be “durable” so that the document remains in force after disability or incapacity. In Georgia, these documents can be drafted so that they do not spring into effect until they are needed.
Remember that the more you plan, the more you save and the smoother the probate process will be for your loved ones. The old adage is that “…we haven’t got an estate tax, what we have is, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”
If you have any questions about estate planning, please contact Hoffman & Associates at (404) 255-7400.
