The Top Ten Reasons You Need to Do Estate Planning in 2012 | The Wealth Advisor | Volume 6, Issue 4

Does it seem like you are hearing more about estate planning lately? Well, you probably are. The financial press and estate planning professionals (lawyers, CPAs and financial advisors) have all been working hard to get the word out that people need to act before the end of the year to take advantage of an unprecedented, and perhaps even historic, opportunity in estate planning.

It’s a simple message, but one with tremendous impact: For the rest of 2012 only, which is quickly coming to a close, every American can transfer up to $5.12 million* free of federal gift, estate, and generation-skipping transfer tax.

* Minus certain gifts made in prior years.

Why This Is So Important
To understand why this is such a big deal, we only have to look at history. From 1942 through 1976, the estate tax exemption was $60,000. Then it began increasing yearly, reaching $600,000 in 1987. It stayed at that level for 10 years. During the later part of the Clinton administration, it was increased over 3 years to $675,000 and again stalled, this time for 2 years. Then, in President George W. Bush’s first term a series of increasing exemptions was enacted starting with $1 million in 2002 and ending with $3.5 million in 2009, followed by estate tax repeal for one year (2010) before reverting to $1 million in 2011. Most practitioners expected the Federal government to act to prevent that one year of repeal, but it did not.

Then, on December 17, 2010, Congress and the President reached an unexpected agreement and President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, otherwise known as “TRA 2010.” It was a mixed bag. The good news: It provided an optional $5 million estate tax exemption for 2010 and a $5 million exemption for 2011 and 2012 that applied not just to estate taxes but also to lifetime gifts and the generation-skipping transfer tax. (The amount for 2012 was adjusted for inflation, resulting in the current $5.12 million exemption.) The bad news: The deal was only for two years. On January 1, 2013, the estate tax exemption will drop all the way back to $1 million (unless the President, the House of Representatives and the Senate all agree otherwise before then).

Here’s a table summarizing the history since 1987:


Federal Estate Tax Exemption

Gift Tax Exemption














$1 million

$1 million


$1.5 million

$1 million


$2 million

$1 million


$3.5 million

$1 million


N/A (repealed) or $5,000,000

N/A (repealed) or $5,000,000


$5 million

$5 million


$5.12 million

$5.12 million


$1 million*

$1.4 million*

* Current law, effective January 1, 2013

Are You Missing This Opportunity?
If you haven’t taken advantage of this exceptional opportunity, you are not alone. Some people think the impending change doesn’t apply to them because their estate is less than $5.12 million. (Wrong.) Others think they can’t use the exemption unless they die in 2012. (Also wrong.) Others have thought about it, but just haven’t gotten around to doing anything about it, perhaps hoping that Washington, D.C. will do something again like it did in 2010. Whatever the reason, unless you do something before the end of the year, you could come to regret your inaction.

Here, then, is another explanation of why it really is important for you to plan this year.

The Top Ten Reasons Why You Need to Plan Your Estate in 2012

1.   In 2012, every American has a $5.12 million exemption; a married couple can use both their exemptions and transfer up to $10.24 million out of their estates.

2.   You do not have to die in 2012 to use your exemption. You can use it to make gifts now, while you are living, including making a gift in trust to your spouse so it is out of both estates.

3.   You don’t have to use the full $5.12 million exemption to benefit. Those with $1 million to $5 million in assets can save substantial amounts. Even those with less than $1 million should consider some planning to prevent future tax liability and freeze, for gift and estate tax purposes, the value of those assets.

4.   If you had already used all of your exemption before 2012, you now have more that you can use this year. For example, if you previously used a $3.5 million exemption in your planning, you have an additional $1,620,000 you can use this year. Even if you used $5 million in 2011, you have an additional $120,000 you can use this year. (Remember, married couples can double the amount.)

5.   You do not have to make the transfers in cash or liquid assets, or completely give away your assets. You can transfer illiquid assets like an interest in your business or your home or other real estate to a trust. If you transfer your home, you can continue to live there and take the tax deductions. If you transfer an interest in your business, you can even do it in such a way that you can keep control of the business. By planning now, future appreciation of these assets will not be subject to estate tax, and current depressed values may result in very favorable valuations.

6.   You can leverage your exemption and make it worth much more by using discounts and life insurance. Life insurance proceeds, when structured properly, can be completely free of probate, and income, gift and estate taxes, and can be protected from beneficiaries’ creditors and predators, even divorce proceedings.

7.   There are proven estate planning techniques available now (including discounting, family limited partnerships, grantor trusts, and others) that may soon be eliminated as Congress looks for more ways to raise revenues. Coupled with the $5.12 million exemption and historic low interest rates, for the next 2 1/2 months families can transfer significant assets at little or no tax.

8.   The generation-skipping transfer tax (GSTT) exemption is also $5.12 million in 2012. The GSTT tax is in addition to the federal estate tax and applies when you make a gift or leave an inheritance to someone who is a generation younger than you are (37.5 years for non-descendants). In 2012, a married couple can use both their GSTT exemptions to transfer up to $10.24 million tax-free to benefit their grandchildren and future generations.

9.   If you wait just until January to plan, the amount you can give to your loved ones (current and future generations) may be substantially lower than if you act now. If the President, the Senate and the House of Representatives do not all agree to change the law, not only will the exemptions be lower in 2013, but the tax rates will also be higher, as shown in the chart below.


Federal Estate Tax Exemption

Top Estate Tax Rate

Federal Gift Tax Exemption

Top Gift Tax Rate

GSTT Exemption

GSTT Tax Rate


$5.12 million


$5.12 million


$5.12 million



$1 million*


$1.4 million*


$1 million*


* Current law, effective January 1, 2013

10.   If you have a substantial estate and use your entire $5.12 million exemption in 2012, unless the President, the Senate and the House of Representatives all agree to change the law, it would be better to give more this year and pay the gift tax at the current 35% rate instead of paying it at 55% in 2013.

Planning Tip: It will also cost you less to pay a gift tax now instead of paying an estate tax after you die, even if the tax rate is the same. For example, a taxable gift of $1.00 makes you liable for $.35 in gift tax for a total of $1.35. But the same $1.35 in your estate taxed at 35% will net just $.88 to your heirs.

How an Experienced Estate Planning Attorney Can Help
Most estate planning attorneys have counseled many families, and they have seen the results of proper and improper planning. An experienced estate planning attorney can guide you through the estate planning process and will be able to bring in other experienced professionals as their various areas of expertise are needed to help put your plan into place.

You should never give away assets you might need, and any kind of gifting program must be done under careful professional guidance and supervision to be sure everything is done correctly. It is also important to take full advantage of other tax-free gifting opportunities before you start using your exemption.

Make Annual Tax-Free Gifts
Federal law currently lets you give up to $13,000 per year to as many people as you wish without incurring a gift tax or generation-skipping transfer tax.* A married couple can give twice this amount, or $26,000 per year per person. (These amounts are currently tied to inflation and may increase to $14,000 and $28,000 for 2013.)

* Not all gifts in trust are entitled to either or both exemptions and estate planning attorneys knows those rules.

Over time, a great deal can be transferred through annual gifts. For example, if you give $13,000 a year to five beneficiaries for five years, you will have removed $325,000 from your estate for estate tax purposes, not including any growth on these assets. The amount removed from your estate is increased significantly with each additional $13,000 beneficiary or by spouses combining their annual exclusions.

When you give more than the annual tax-free amount, the excess will be considered a taxable gift and will be applied to your federal gift and estate tax exemption (currently $5.12 million). Remember, you can make substantially bigger gifts this year with a higher exemption than you can next year if the exemption is lower.

Make Unlimited Gifts to Charity and Pay Beneficiaries’ Medical Care and Tuition Expenses
You can also make unlimited tax-free gifts to charity and for medical care and tuition expenses as long as payment is made directly to the charitable organization, medical facility or educational institution. The beneficiary does not have to be related to you.

Use Discounts and Advanced Planning Techniques
Your estate planning attorney can help you implement advanced planning solutions that will best suit your goals and objectives, and make the best use of the various wealth transfer techniques that are currently available.

What We Can Expect in 2013
No one knows what will happen with the law in the future, but it is very likely that the gift tax exemption will fall significantly, perhaps to $1 million even if a deal is struck among the President, Senate and House of Representatives. This is true even if the estate taxexemption stays the same or falls to a lesser number, like the $3.5 million proposed by the President’s budget.

Unless the Bush era tax cuts are extended, all taxes (income, capital gain, dividend, estate, gift and generation-skipping transfer taxes) are set to go higher on January 1, 2013. There will also be a new 3.8% surtax on certain investment income and a 0.9% surtax on certain earned income that is part of the Affordable Health Care Act.

The next 2 1/2 months really provide a unique estate planning opportunity to transfer substantial assets--an opportunity that may be gone on January 1, 2013. You owe it to yourself and to your family to meet with us as soon as possible to find out how much you can save by implementing estate planning before the end of this year.


1.   For the rest of 2012, America has a $5.12 million lifetime federal
gift and generation-skipping transfer tax exemption.                                               T          F

2.   Most people have already taken advantage of this opportunity.                                T          F

3.   A married couple can use both their exemptions and transfer up to
$10.24 million out of their estates if they do it before January 1, 2013.                    T          F

4.   You have to die in 2012 to use the $5.12 million exemption.                                   T          F

5.   You have to use the full $5.12 million exemption to benefit.                                    T          F

6.   If you used all of your exemption before 2012, you cannot use more this year.        T          F

7.   To use the exemption while you are living, you have to make the transfers in
cash or liquid assets.                                                                                         T          F

8.   By planning now, future appreciation of these assets will not be subject to estate
tax, and current depressed values can result in very favorable valuations.                T          F

9.   In 2012, a married couple can use both their GSTT exemptions to transfer up to
$10.24 million tax free to benefit their grandchildren and future generations.            T          F

10. There are proven estate planning techniques available now that may soon be
eliminated as Congress looks for more ways to raise revenues.                                 T          F

True: 1, 3, 8, 9, 10
False: 2, 4, 5, 6, 7

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer's particular circumstances.

Highlights of the New Estate Tax Legislation | The Wealth Advisor | Volume 5, Issue 1

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act"). In a nutshell, it did five things: extended current unemployment benefits to 99 weeks, extended current income tax rates (the Bush tax cuts) for all taxpayers for two more years, made significant changes to the estate tax applicable to those dying in 2010, 2011, or 2012, modified the gift tax for 2011 and 2012, and modified the Generation Skipping Transfer Tax for 2010, 2011, and 2012.

In this issue of The Wealth Advisor, we will look at how these temporary changes can affect your estate planning.

Estate Tax Exemption and Tax Rate
Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount in effect at that time. For 2010, 2011 and 2012, the individual exemption is now $5 million and the tax rate is 35%. So, if someone dies in 2010, 2011 or 2012 and their taxable estate is less than $5 million, no estate taxes will be due (assuming none of the exemption was used during life to make gifts). If the taxable estate is more than $5 million, the excess over $5 million will be taxed at 35%. Those who are married and have planned ahead can use both exemptions (more on this later).

Planning Tip: To determine your current taxable estate, add the value of all your assets, including your home, business interests, bank accounts, investments, IRAs, retirement plans and death benefits from your life insurance policies, and then subtract all of the debts you owe.

It's important to remember two things: These changes are only effective for the next two years. If Congress does not act again before the end of 2012, on January 1, 2013, the estate tax exemption will drop to $1 million (adjusted for inflation) with a top tax rate of 55%. Also, some states have their own death tax, so your estate could be exempt from federal estate tax but still have to pay a state death tax.

Optional Retroactive Planning for Estates of Those Who Died in 2010
As noted above, the new law retroactively reinstated the estate tax for all of 2010. However, the Executor for anyone who died in 2010 has the option of electing to use the law as it existed before the 2010 Tax Act and pay no estate tax, but have a "modified carryover basis" instead of adjusting the basis of all assets to the date of death value (including, in community property states, the surviving spouse's interest).

The "basis" of an asset is the value used to determine gain or loss for income tax purposes when the property is sold. If you give someone an asset while you are alive, it keeps your basis (what you paid for it) so the recipient gets what is called a "carryover" basis. 

For 2010, under the pre-2010 Tax Act law, limits were placed on the amount of asset basis that could be stepped up in a decedent's estate: only $1.3 million in asset value increases were allowed, plus an additional $3 million of basis increases for assets passing to a surviving spouse. In effect, the law substituted paying capital gains taxes for paying estate taxes. Under the 2010 Tax Act, there is a choice for those who died in 2010.

Planning Tip: Executors have until September 17, 2011, to decide if the option is better for the estate, file an estate tax return, pay taxes and make any disclaimers. Electing the "no estate tax/modified basis option" would generally be good for those with large estates that would not be covered by the $5 million exemption. However, each case must be evaluated individually, considering, for example, the amount of estate tax that would be payable now versus income tax that would be due on the gain when the assets are sold at some point in the future; the expected sale date of the assets; and what the capital gains and ordinary income tax rates might be in the future.

Portability of Estate Tax Exemptions between Spouses
The estate tax law provides an unlimited deduction for assets left to a surviving U.S. citizen spouse. Therefore, the first spouse who dies can leave everything to the surviving U.S. citizen spouse and no estate taxes will be due upon the first death. Most married couples like this arrangement because it's easy to administer and all of the assets are available to the surviving spouse. For those who died before January 1, 2011, and for those whose surviving spouses live beyond December 31, 2012, however, a big problem can occur because the estate tax exemption that could have been used at the first death is not available to shield assets in the surviving spouse's estate.

For those couples in which both spouses die between January 1, 2011, and December 31, 2012, the Congress tried to fix this problem with something called "portability." Under the 2010 Tax Act, if one spouse dies in 2011 or 2012, the Executor of the deceased spouse's estate may transfer any unused federal estate tax exemption to the surviving spouse by so electing on a timely filed estate tax return. But, the transferred exemption must be used before December 31, 2012, or it is lost. Also, only the most recent deceased spouse's unused exemption may be used by the surviving spouse, which could impact the surviving spouse's decision to remarry.

For example, let's say that after Jack dies, Jill marries Bill. If Bill dies before Jill does, Jack's unused exemption would no longer be available to Jill. And Bill may have little or no unused exemption to transfer to Jill.

Even with temporary portability, relying on the unlimited marital deduction can cause other problems. For example, by leaving everything to Jill, Jack has no control over how his share of their estate is managed or distributed. Jill can do whatever she wants with the assets, including disinheriting any children Jack may have from a previous marriage. Also, any growth on the assets will be included in Jill's estate when she dies and will be taxed at the rate in effect at that time. (Remember, the estate tax exemption will be just $1 million with a 55% maximum tax rate in 2013 unless the Congress acts.)

If Jack and Jill plan ahead, they can make sure they use both of their exemptions. Their wills or living trusts could include a provision that splits their $10 million estate into two trusts of $5 million each. When Jack dies, his trust uses his $5 million exemption and when Jill dies, her trust uses her $5 million exemption. This reduces their taxable estate to $0, letting them leave the full amount to their beneficiaries. (This tax-planning provision is often called an A-B trust or credit shelter trust.)

There are other benefits to this planning. For example, Jack can keep control over how his share of their estate is managed. He can choose his own beneficiaries, which may or may not be the same as Jill's. The assets in his trust are valued and taxed only when he dies, so any growth on these assets will not be included in Jill's estate when she dies. And even though the assets remain in Jack's trust, they still can be available to provide for anything Jill needs.

Planning Tip: The portability provision may work fine for some couples. But you may still prefer the benefits of the A-B (credit shelter) trust, especially if you have a "blended" family. Also, if you use a living trust and properly fund it (transfer your assets to it), you will avoid probate which, depending on where you live, could save your family thousands more.

Gifting in 2011 and 2012
For 2011 and 2012, the gift tax exemption is $5 million per person ($10 million for a married couple), with the tax rate above the exemption at 35%. This exemption is unified with the estate tax exemption, so any unused amount can be transferred to the surviving spouse under the portability provision.

You can still make annual tax-free gifts of $13,000 ($26,000 if married) to as many individuals as you wish each year. (This amount is tied to inflation and is adjusted from time to time.) If you give more than this, the excess is considered a taxable gift and goes against your lifetime gift/estate tax exemption. ($5 million through 2012, $1 million thereafter.)

Generation Skipping Transfers in 2011 and 2012
A generation skipping transfer occurs when some or all of your estate goes directly to a grandchild or a non-relative who is more than 37.5 years younger than you. This can happen intentionally: for example, if you skip the living parent (your child) and leave an inheritance directly to your grandchild, that is a generation skipping transfer. It can also happen unintentionally: for example, if an inheritance is in a trust for your child, he or she dies after you but before receiving the full amount and, under the terms of the trust, your grandchildren will receive their parent's remaining inheritance. That, too, is a generation skipping transfer. 

Skipping a generation can cause the inheritance to be subject to the "generation skipping transfer" (GST) tax. The onerous GST tax is equal to the highest federal estate tax rate in effect at the time of the transfer and is in addition to the federal estate tax. This tax exists because Uncle Sam wants the estate tax to apply when assets are transferred at every generation. So, if you skip a generation, you don't skip the taxes that would have been paid.

For 2010, the GST tax exemption was $1 million with a 0% tax rate, because there was no estate tax. In 2011 and 2012, the GST tax exemption is $5 million ($10 million if you are married and you plan ahead) with a 35% tax rate.

Planning Tip: Remember, there is a possibility that Congress will not act before the end of 2012, and the GST tax exemption will decrease in 2013 to $1 million with a 55% tax rate. With this in mind, if you have a large estate, you may want to use a good portion (or all) of your $5 million GST tax exemption ($10 million, if married) in 2011 and 2012.

Planning Opportunities in 2011 and 2012
Being able to give up to $5 million ($10 million, if married) will allow many individuals to transfer as much as they would want to family members without having to worry about gift taxes. For those with larger estates, planning opportunities abound during this two-year period and, when combined with leveraging strategies, allow for huge amounts of wealth to be transferred. For example:

Grantor Trusts
Using a grantor trust will allow you to transfer substantial additional amounts out of your estate over time. After transferring assets to the grantor trust, you still have to pay the income tax on the trust income, which further reduces your estate. And, by not having to pay the income tax, the trust assets can grow faster. In effect, every extra dollar of income tax you pay is a dollar transferred to the grantor trust.

Leveraging Transfers through Discounts
Quite often, the value of transferred assets can be discounted due to a lack of control and lack of marketability. For example, if you transfer assets to a family limited partnership or limited liability company that you control, an outside buyer would pay substantially less than asset value for shares that have no say in how the business is run and that cannot be sold without your approval. Discounting values through planning strategies like this can leverage your $5 million exemption and further increase its value.

Life Insurance
A very large amount of life insurance can be purchased with $5 or $10 million. If structured properly, the insurance proceeds can pass free of probate, income and estate taxes to younger generations.

Other Items of Interest
* Individual income tax rates will remain at current levels for two more years. If no action had been taken, the top income tax rate would have increased from 35% to 39.6%.

* Tax on long-term capital gains and qualified dividends remains at 15% for two more years. If no action had been taken, capital gains would have been taxed at 20% and dividends would have been subject to the individual ordinary tax rates.

Planning Tip: The danger of the Congress not extending those tax rates beyond 2012 is significant. Remember that the justification for not allowing income tax rates to increase at the end of 2010 was the state of the economy. If the economy is improved as the end of 2012 approaches, those reasons will not exist. 

* The AMT (alternative minimum tax) exemption for a married couple was increased from $45,000 to $72,450.

Now is the perfect time to move forward with your estate, retirement and disability planning. 

The 2010 Tax Act provides tremendous planning opportunities to transfer vast amounts of wealth for families with estates of all sizes, but it is a limited time opportunity that expires on December 31, 2012. At the same time, individuals with estates of less than $5 million and married couples with estates of less than $10 million can focus on planning that concentrates on family goals and objectives without, at least for the next two years, having to jump through hoops to avoid federal estate taxes. Of course, state death taxes and income taxes must still be considered.

We are ready to help you define your personal and financial goals and desires, and take advantage of these unique planning opportunities. Contact our office for a consultation.

Test Your Knowledge

1. Everyone has to pay estate taxes when they die. True or False 

2. The estate tax exemption was set permanently at $5 million with a 35% tax rate. True or False 

3. Basis is the value used to determine estate taxes. True or False 

4. If an estate does not have to pay federal estate taxes, it will not have to pay any state death tax. True or False 

5. If Congress does not act by the end of 2012, the current estate tax exemption and rate will stay in effect. True or False 

6. For those who died in 2010, their estates did not have to pay any federal estate tax or capital gains tax, and all of the assets received a stepped-up basis. True or False 

7. The new provision for portability of the estate tax exemption between spouses occurs automatically; nothing needs to be done. Trueor False 

8. The unlimited marital deduction lets you leave everything to your spouse and no estate taxes will ever be due. True or False 

9. I can leave my grandchildren an unlimited amount of assets when I die completely tax-free because the IRS considers grandchildren to be special. True or False 

10. The top income tax rate and long-term capital gains tax rate increased to 39.5% for 2011. True or False 

Answers: All of the above are false.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer's particular circumstances.

Jensen Law Office, PLLC 10402 Holman Road North  Seattle, WA 98133 Website

Estate Planning You Can...and Should...Do In 2010 | The Wealth Advisor | Volume 4, Issue 2

With the current economy and uncertainty about the federal estate tax, many people are finding themselves sitting on the fence, wondering if they should do any estate planning now, or if they should wait. You may be surprised to know that there are many non-tax reasons to plan your estate that have nothing to do with the economy or estate taxes. And if your estate may be subject to estate taxes in the future, this year can be a perfect time for many people to plan, specifically because of historically low interest rates and changes that have been proposed by the IRS and Congress. 

Let's look first at planning needs that are not related to the economy or to the estate tax. 

Disability Planning
It's a fact that most of us will need some kind of assistance with our daily living activities for at least some time before we die. This kind of care can be provided in your home, in an assisted living facility, or in a nursing home. All can become very expensive. 

Home health care can easily run over $20,000 per year. That's at $16 per hour, for just 25 hours a week. 

Depending on the skill required, number of hours needed and where you live, it can cost considerably more. Assisted living facilities can cost more than $25,000 per year; the more services you need, the higher the cost. Nursing home facilities, with round-the-clock care, are easily $50,000 or more a year.

Take a look at these statistics for Americans age 65 and older:
  • 43% will need nursing home care;
  • 25% will spend more than a year in a nursing home;
  • 9% will spend more than five years in a nursing home; and
  • the average stay in a nursing home is more than 2.5 years.
Planning Tip: Most insurance plans and Medicare do not currently cover long-term care. That means the cost will need to be paid from your assets. Consider purchasing a long-term care insurance policy to protect your assets. 

Besides the cost of long-term care, you may also be concerned about who will provide the care you need and where you will receive it. You may prefer to stay in your home for as long as possible, or you may enjoy the companionship and social aspects of an assisted living facility. However, incapacity can deprive you of the ability to make your desires known and implemented.

Planning Tip: Your trust can include disability provisions that will make sure your desires are clearly expressed and carried out. It's best to take care of this now, while you are able to communicate your wishes.

Special Needs Planning
Here are some more eye-opening statistics. These are from the U.S. Census Bureau report in 2000. (It will be interesting to compare these when the latest Census reports are available.)
  • 51.2 million Americans reported having a disability;
  • 13-16% of U.S. families had a child with special needs;
  • 15 out of every 1,000 children born in the U.S. had an Autism disorder;
  • Between 1 and 1.5 million American had an Autism disorder.
Thanks to medical care advances in recent years, many with special needs now outlive their parents and/or caregivers. Planning that does not include specific provisions for the special needs person can have disastrous consequences, including the loss of valuable government benefits.

Planning Tip: A Special Needs Trust is a critical component of planning for families with a special needs person. This trust can provide the ongoing support the special needs person requires without jeopardizing government benefits.

Planning Tip: Insurance on the life of a parent, grandparent or other relative can provide the trust funds necessary to pay for care and extras that are not provided by government benefits.

Inheritance Protection Planning
Protecting an inheritance from predators, creditors, divorce and irresponsible spending is a major concern for many parents and grandparents today. Many feel that their children and grandchildren lack strong financial skills, and difficult economic times can make inheritances more vulnerable to creditor claims and/or maintaining a lifestyle beyond the beneficiary's means.

Difficult economic times also increase the likelihood of divorce, which is already at a 50% rate. Most people do not want to see their hard-earned money ending up in the hands of a former daughter- or son-in-law.

Planning Tip: Your trust can include provisions to protect inheritances from divorce, creditors and from the beneficiaries themselves.

Blended Family Planning
More divorce leads to more marriages and blended families - his, hers and, sometimes, theirs. Each parent needs to make sure his/her children are protected, especially if you will also leave a surviving spouse. Not doing so can cause your children to be unintentionally disinherited or, at the very least, create a messy probate battle. 

Planning Tip: Your trust can include provisions that will allow you to provide for your surviving spouse and make sure your children (and grandchildren) receive the inheritance you want them to have.

Planning for Estate Taxes
Yes, you do need to plan for estate taxes now, even though we currently do not have a federal estate tax in 2010. Here's why:

1. Most states now have their own inheritance/death tax, so even though your estate may not have to pay a federal tax, it may have to pay a state tax. This is true whether you die in 2010 (when there currently is no federal estate tax), or if your estate is small enough that it will be exempt from the federal tax. Depending on where you live, an estate as small as $388,000 could be subject to a state death tax.

Planning Tip: Don't assume your estate will not have to pay estate taxes. Now is a good time to find out about your state's death/inheritance tax and plan for it.

2. Chances for permanent repeal of the federal estate tax are essentially zero. With all its spending programs, Congress is going to want/need every tax dollar it can get its hands on. The only questions are when will Congress act and what will it do. The more time that passes this year, the less likely it is that Congress will change anything for 2010. That's because both parties will probably make the estate tax an issue for the mid-term elections in November. If Congress does nothing this year, the estate tax will return in 2011 with a $1 Million exemption and a 55% tax rate. Compare this to the 2009 estate tax that had a $3.5 Million exemption and a 45% tax rate. There is no question that more people will be paying more in estate taxes.

Planning Tip: Don't wait until 2011 to plan. You could become physically or mentally incapacitated before then due to an illness, injury or accident. Plan now while you are able to do so.

3. Congress will almost certainly eliminate several wealth transfer techniques that will affect your ability to transfer assets to your beneficiaries at discounted values. Combine this with interest rates that are at an all-time low and depressed property and investment values, and you have an exceptional planning opportunity that can save substantial amounts in estate taxes and provide more for your loved ones.

For example, let's say you wanted to use a Family Limited Partnership (FLP) or a Family Limited Liability Company (FLLC) to, among other things, transfer a family business, farm, real estate or stocks to your children. In exchange for transferring the asset to the FLP or FLLC, you will receive ownership interests. You will have a fiduciary interest to other owners, but you can keep control as the general partner (FLP) or manager (FLLC). You can also give ownership interests to your children, which removes value from your taxable estate. And since these interests cannot be easily sold or transferred their value is often discounted. In other words, since most people would not pay full price for an asset they could not sell or transfer, it's value is worth less than the value of the underlying assets. This lets you transfer the underlying assets to your children at reduced value without losing control.

Other Planning Options
There are other planning options that let you transfer assets at discounted values and benefit from historically low interest rates. Here are two: 

  • Grantor Retained Annuity Trust (GRAT): Lets you transfer an income-producing asset (stock, real estate, business) to a trust for a set number of years, removing it from your estate, while you receive the income it produces. When the trust term ends, the asset will go the beneficiaries of the trust. Because they will not receive it until then, the value of the gift is reduced (discounted). If you die before the trust term ends, some or all of the asset may be included in your estate for estate tax purposes.
  • Charitable Lead Trust (CLT): This charitable trust lets you transfer an asset into a trust for a set number of years or until you die. During this time, the charity or charities you select will receive the first or "lead" right to receive a stream of equal payments from the trust. At the end of the trust term, whatever is left in the trust (the remainder) will go to the beneficiaries of the trust, typically your children or grandchildren. Because the gift to the beneficiaries is delayed, the value is substantially reduced, resulting in little or no estate tax on the asset. CLTs are particularly suited for hard-to-value assets (such as real estate or family limited liability company interests) and assets which are expected to grow rapidly in value.
Planning Tip: While strategies like these have been used effectively for years to reduce estate taxes, it is no secret that the IRS is not fond of having to accept discounted values. With Congress looking for every possible way to increase revenue, many of these strategies could soon be eliminated. For example, a current proposal in Congress would eliminate GRATs with a term of less than 10 years, making it more likely that the GRAT assets would end up back in your estate. 2010 is an exceptional year to make good use of these strategies, while we still have them.

Planning Tip: Making gifts now can save estate taxes later.

Currently, each year you can give up to $13,000 tax-free to as many individuals as you like; you can double that amount if your spouse joins you. For example, if you have three children and six grandchildren, you can give them a total of $117,000 ($234,000 if your spouse joins you) each year. If you give more than this, it will be applied to your $1 Million lifetime gift tax exclusion ($2 Million if your spouse joins you). After that has been exhausted, you will pay a gift tax, but it is currently 35%. That's a lot less than estate taxes, which have historically been 45-55%. 

Plus, any appreciation on gifts you make now is also out of your estate. Say you transfer $1 Million to your children today. Assuming these assets grow at 10%, in ten years they will be worth $1,930,690. If you wait and give the $1 Million to your children when you die, and we assume the estate tax exemption is $1 Million, the $1,930,690 will be subject to federal estate tax of at least $418,810, leaving just $1,511,879 for your children.

Planning Tip: Using a Grantor Trust can provide even more for your children.

A Grantor Trust is a separate irrevocable trust that you can establish for estate planning purposes. The rules are different, which can be used to your advantage. For example, without getting too technical, the IRS defines a Grantor Trust one way for income taxes and another way for estate and gift taxes; in other words, the rules don't match. By using this long-standing "wrinkle," in the tax code, transfers of assets by gifts and sales to irrevocable trusts can be "supercharged," letting you transfer even more to your children estate tax free. For example, if you used a Grantor Trust and paid the income tax, the same $1 Million gift would grow to $2,592,742, which is $663,052 more than if the gift were made directly to your children and they paid the tax.

Take advantage of the rare planning opportunities that exist now, that can save substantial amounts in estate taxes and provide more for your loved ones. For more information about estate planning in 2010, please contact our office. 

Estate Planning Word Search

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer's particular circumstances. 

You have received this newsletter because I believe you will find its content valuable. Please feel free to contact me if you have any questions about this or any matters relating to estate planning. 

Jensen Law Office, PLLC 10402 Holman Road North  Seattle, WA 98133

No Estate Tax in 2010: What Does this Mean to You? | The Wealth Advisor | Volume 4, Issue 1

What a mess Congress has created! We are now in a year where there is no federal estate tax - but hold the cheers. Congress has substituted another method of taxation that will collect more taxes from many of our clients and families than the estate tax. Additionally, as has been reported in the local and national media, including the Wall Street Journal and New York Times1, these changes will, for some, greatly alter the planned for and anticipated distributions among family members and heirs.
These changes impact people of all levels of wealth, and the new tax will impact an estimated ten times more Americans than the estate tax. 

How Did We Get Here?
A brief review of the law will help explain why this is so significant. The much-heralded 2001 tax act, signed into law by President George W. Bush, gradually reduced the maximum rate of the federal estate tax (and the equally onerous generation-skipping transfer tax on transfers to grandchildren) from 55% to 45%. It also gradually increased the amount of property that you could pass free of federal estate tax from $675,000 per person in 2001 to $3.5 million per person in 2009. That means that with basic estate planning, a married couple could pass up to $7 million free of federal estate tax, if they both died in 2009. 

Then, in 2010 only, the 2001 tax act repeals the estate tax. But like a horror film character who just won't die, under the existing law the estate tax returns again on January 1, 2011 - only at a much lower $1 million exemption and a higher maximum 55% tax rate! This strange "now it's gone, no it isn't" effect is the result of a rule in Congress that attempts to limit budget deficits. 

A New Tax Replaces the Estate Tax
To pay for this one-year vacation from the estate tax, Congress replaced the estate tax with an increased income tax. Before 2010, any assets that pass to someone when you die would be valued at fair market value at the date of death. Thus after death, when a surviving spouse or heirs sold any assets (like securities or a home) that had increased in value, they would not have to pay income tax on any of that growth that occurred during your life. (This is referred to as a "step-up in basis.") For many heirs this means huge income tax savings, oftentimes tens of thousands of dollars or more. 

But in 2010 property that passes at death does not automatically receive this step-up in basis. Instead, each individual has a limited amount of property that can be "stepped-up" in value at the time of death. Property that does not receive this step-up value will be subject to tax on the total increase in value from the date you first acquired the property. This means that the property could be exposed to tens of thousands of dollars of income tax liability for your heirs!

Not surprisingly, these rules are convoluted and in many cases very different from the old law. In fact, Congress attempted to institute a similar tax structure in the 1980s and it was repealed retroactively, because it was too difficult to administer. Because of past experience as well as the anticipated difficulties in calculating such a tax, the common belief was that Congress would change the law before January 1, 2010. But it didn't. 

What Should We Expect from Congress Now?
No one knows what Congress will do next; everyone assumed that Congress would act before December 31, 2009. But Congress was preoccupied by the health-care debate then, and it is very possible that Congress will continue to focus on health care and other pressing matters up to the time of the mid-term elections in early November. In fact, some cynics have suggested that Congress will not act until the end of 2010 or later because Congressional members up for re-election will make repeal of the death tax a campaign issue. These same cynics argue that both Republicans and Democrats will blame the other for this mess, with neither wanting to fix it. If that happens, we may not see anything from Congress regarding the estate tax until 2011, at the earliest. 

How Are You Affected?
This law can affect you in several ways. For married couples as well as single clients, we need to first make sure that your estate plan divides and distributes your property according to your desires, and not by the provisions dictated by Congress. For more than 50 years it has been common to use a written mathematical formula to divide the assets of a married couple when the first spouse dies to maximize estate tax savings. Similar formulas have been used to provide funds for charitable causes and to benefit family and friends. But in 2010, when there is no estate tax, these formulas will not work. If a spouse is not your sole beneficiary (for example, if you have children from a prior marriage), the existing formula could result in the disinheritance or substantial reduction of resources provided for the surviving spouse. 

What Should You Do?
We encourage you to meet with us as soon as possible to review your estate plan and make any changes that are necessary for this law. We need to ensure that your property is positioned to receive the maximum step-up in basis increase available under current law. This is a time that demands a new approach to your planning with new thinking and building in flexibility to see that your wishes are fulfilled no matter what Congress will throw at us this year or next. We have solutions that will meet your planning objectives with the least amount of tax impact. 

Estate-Tax Repeal Means Some Spouses Are Left Out, January 2, 2010 Wall Street Journal, and A Bizarre Year for the Estate Tax Will Require Extra Planning, January 8, 2010 New York Times

Don't Make the Same Mistakes You've Seen in the Headlines | Wealth Advisor | Fall 2009

Wealth Advisor - Volume 3, Issue 4

Now is the time to update your existing estate plan, or proceed with implementing a comprehensive estate plan. Why? First, we now know with certainty that the federal estate tax is not going away, and thus we should establish a plan that avoids or at least minimize this voluntary tax.

More importantly, if you don't you just might end up like the host of celebrities who have made the headlines recently because they either had no estate planning or because the planning they did have was woefully out of date or otherwise inadequate.

As the recent celebrity examples demonstrate, estate planning is not just about planning to avoid estate tax. Instead, estate planning is about accomplishing what is important to you and your family, like: passing values to your children and grandchildren; passing property in a way that creates a lasting legacy; and protecting your privacy.

Pending Changes to Federal Estate Tax Law: Does It Really Matter?
As we approach year-end we continue to hear scuttlebutt from Capitol Hill that Congress will enact some estate tax legislation before January 1, 2010. As you may recall, this is "necessary" because under current law we are scheduled to have no federal estate tax for those who pass in 2010. Note, however, that in 2010 the estate tax would be replaced with a system that would tax a greater number of Americans when they sell appreciated assets (like stocks and real estate) - a system that Congress tried once before, but it failed miserably! 

The consensus from Washington, D.C. is that we will see a "patch" that simply extends current law through the end of 2010. What will happen then, however, is anyone's guess. The cynics suggest that because 2010 is an election year, both Republicans and Democrats may be encouraged to do nothing. If that happens, the current law will expire, and beginning January 1, 2011 we would revert to a $1 Million federal estate tax exemption and maximum estate tax rate of 55%.

While we don't know the details, the fact that we will have an estate tax means that we should all take steps to minimize or avoid it. In addition, more and more states are enacting separate state estate taxes (usually with much lower thresholds) as a way to generate revenue, so state estate tax will ensnarl many who do not plan to avoid it.

Celebrity Examples of What Not to Do with Your Estate Planning
When it comes to estate planning, it seems that folks generally fall into one of three broad categories: (1) those who have done no planning; (2) those who have done some (often inadequate) planning; and (3) those who have done good planning, but who should have it reviewed and possibly updated. The recent spate of celebrity cases that have been in the news lately serves as a pretty telling primer on these various categories. As you consider the lives and stories of these famous people, how do you stack up? You may find that this winter is a good time to revisit your estate planning to make sure your plan is as it should be.

Leaving It to Chance with No Planning
Steve McNair seemed to have it together. A Super Bowl quarterback, 3-time Pro Bowl selection, and one of football's most prolific passers, McNair was killed at the age of 36. Surely thinking that his whole life was ahead of him, McNair did no estate planning at all, leaving his substantial wealth (nearly $20 Million) to be argued over - publicly - in the Tennessee probate courts. His children, assuming they are given substantial shares of his estate, will not enjoy the gift their father could have given by providing a framework in which they could grow into their inheritance. 

When McNair's children turn 18 - the legal age of majority in Tennessee - they will receive their inheritance outright; they will be free to do what they please with the money. Can you imagine turning an 18-year-old child loose with several million dollars? 

Even if you don't have millions, do you want your loved ones to be able to do with their inheritance as they please, knowing that you can provide them with predictability and guidance to help them protect and preserve what you leave behind?

Inadequate, or "Do-It-Yourself" Planning
Studies indicate that nearly 70% of all Americans have done no estate planning at all. But even of those roughly 30% of people who have done some estate planning, many have done a very poor job, designing an estate plan that inadequately represents their wishes or worse, causes confusion, delays, and unmet expectations.

Heath Ledger had a will. It was a simple, three-page document created before he made his mark in the film industry and made his millions with his Oscar-nominated performance in the movie Brokeback Mountain. When he died at age 28, his estate and his family had far outgrown his inadequate estate plan. His will provided that his estate should be divided equally among Ledger's parents and his siblings, and failed to provide anything for his infant daughter. Although she will surely ultimately be provided for, by relying on a will (and a very deficient one), Ledger assured his family a legacy of confusion, frustration, and public litigation.

The worst offenders feeding this category are those who sell "one size fits none" form estate planning documents, either online or in stores. These folks sell documents to well-intentioned individuals who are proactive and motivated enough to do something about their estate plan. But the key to this mistake is that it approaches estate planning as a document transaction. Sure you get a "will" or a "trust" and some other documents, but do they really represent your goals? Will they properly instruct your family when they need to? As in Heath Ledger's case we may have only one chance to get estate planning right. Printing and signing documents without thoughtful legal help is a disaster waiting to happen.

Imagine that your child is getting married and you need a new suit. Will you go to the corner discount retailer and pull something off the sale rack? After all, they advertise "always the low price." You'll have a jacket, pants, the whole ensemble. But is that really the right solution for you on this special occasion? Isn't it more appropriate to see an expert who can learn about your tastes, your needs, your best features, and deliver what you really need, something you can be proud of?

By the same measure, buying documents - from a retailer or from an attorney - is not estate planning. Although estate planning requires documents to make a plan legally effective, the art of effective estate planning comes through professional, comprehensive advice that only focused and dedicated estate planning professionals can provide.

Outgrown Estate Plans

Now some time has passed since you bought that new suit for the special occasion. One grandchild, maybe two are born and things have changed. Maybe you've lost a few pounds (or, heaven forbid, gained a few!). What has happened to that nice suit? Sure it's a little musty, but never the worse for wear. But no matter how hard you try, it just doesn't fit like it used to.

Just like a finely tailored suit, an estate plan can get outgrown, too. The estate plan that you spent time, effort, and money to get just right will not automatically evolve as your life changes. Even when you have a great estate plan in place you must remain vigilant. The current battle over Michael Crichton's estate illustrates this point precisely.

Crichton was the creator of movie hits like Jurassic Park and the television series ER. Understanding the importance of sound estate planning to preserve peace of mind for his family, Crichton apparently had a robust estate plan in place. And then life changed.

Michael Crichton had prepared carefully, incorporating a premarital agreement with his fifth (and surviving) wife to make sure that he fully provided for his child from a previous marriage. However, Crichton and his wife were expecting a new baby when Crichton died unexpectedly late last year. Though he had apparently gone to great lengths in earlier planning, the fact that he failed to provide for his unborn child has cast a cloud of uncertainty over Crichton's estate. It appears that despite his earlier efforts, Michael Crichton is bound to leave a legacy of distress, uncertainty, and litigation for his family.

Unlike Heath Ledger and Michael Crichton, you may be certain that you will not have children later in life. But do you know with certainty that your loved ones will not become a spendthrift, develop a creditor problem (50% of marriages end in divorce), or receive government benefits such that an outright inheritance would result in disqualification of those benefits?

Where Do YOU Stand?
Although none of us like to embrace our mortality, as responsible adults we have to prepare ourselves and our families for the inevitable. Whether you're a millionaire or of more modest means, you want to leave a lasting legacy of family harmony, good memories, and caring protection for those you love. Estate planning can be challenging, and should never be done alone. Take the time to discuss your needs with a team of well-trained, attentive estate planning professionals now.