Preparing your estate plan for changes in tax rules

This article from Heritage Financial Consultants draws on the same core materials that are included in the management consulting program for Levin Group clients. By gaining a deeper understanding of their financial situation and the options available to them, dentists can make informed decisions that will enable them to reach their retirement goals sooner.
— Roger P. Levin, DDS

U.S. estate tax laws have changed four times since 2008. The constant flux can make it hard to know when to adjust your estate plan and what changes to make. Regardless of what happens with these laws, you can still draft an estate plan that stays relevant and reflects your wishes by telling your lawyer that you want something flexible.

Pay attention to the fine print

John G. McCarthy III is a partner with Heritage Financial Consultants.

There is no need to rush to your estate planning attorney every time the U.S. tax code is changed. It's more important to review your estate plan after major life events -- for example, the birth of a child, an illness or divorce, taking on an associate, or selling your practice. You may also want to review your estate plan if you experience a sudden change in your family's finances.

When reviewing your plan, make sure the language used doesn't leave you vulnerable to changes in the law. Inflexible language, for example, can cause problems.

Currently, the first $5.34 million of your estate is exempt from estate transfer taxes; amounts greater than that are taxed at a rate of 40%. Your plan may specify that a trust should be funded up to the current estate tax exemption or a certain percentage of that limit to maximize the benefits of the current law. You might choose to use "AB trusts" -- which are popular for this purpose -- to leave the full amount exempted from estate tax to your children while leaving the remainder of the estate to the surviving spouse. But if the exemption amount increases after you draft your estate plan, you could end up giving your entire estate to your children -- leaving your spouse with nothing.

Stay flexible

While some tax law changes can complicate existing estate plans, other rules are designed to add flexibility to the estate planning process. Case in point: A new provision allows surviving spouses to add any unused portion of their deceased spouse's $5.34 million exemption to their own exemption. That means couples can pass up to $10.68 million from their estate to their children tax-free, without needing a complicated estate plan.

Note, however, that even if the deceased spouse's estate will not be taxable (in other words, is valued at less than $5.34 million), the surviving spouse will nonetheless be required to file IRS Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return," to take advantage of the deceased spouse's unused estate tax exemption. Otherwise, the deceased spouse's exemption will be lost.

Disclaimer trusts provide another way to add flexibility to your plan. With these trusts, the surviving spouse can disclaim, or refuse, any of the inherited assets, landing those assets in a separate, tax-exempt trust that can be passed on to your heirs. The catch is that the ultimate decision rests with the surviving spouse. You can either take your chances by maintaining portability or create a disclaimer trust.

The estate tax doesn't have to cause you stress. Just work with your estate tax professional and financial planner to determine the appropriate solutions for making your estate plan less vulnerable to changes, while still helping you achieve your estate planning goals.

John G. McCarthy III is a partner with Heritage Financial Consultants and a registered representative of Lincoln Financial Securities offered through Lincoln Financial Advisors, a broker-dealer (Member SIPC) and investment advisory. Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice. CRN-1559901-080116

Disclaimer: The comments in this article are not meant to be taken as financial advice. Levin Financial Group recommends that you always consult with your financial planner before making any significant changes in your financial situation.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.