News & Education

Wealth Planning Update - June 2012

When did you last update your estate plan? Has it been more than five years, or perhaps even ten years? Since then, has your financial situation changed? Have you retired? Have any of your beneficiaries gotten married or divorced or experienced financial problems? Are you concerned about estate taxes or probate?

If you answered “Yes” to any of these questions, now would be an excellent time to meet with your estate planning advisor. Under current law, exclusions are high, tax rates are historically low, and the opportunities for transferring wealth to your children and grandchildren are unprecedented. However, current estate tax rules are scheduled to expire at the end of 2012, so the time to act is now.

Here is a brief summary of current estate and gift tax rules:

Considering that the gift tax exclusion has been frozen at $1 million for many years prior to 2011, the increase in the gift tax exclusion to $5.12 million in 2012 represents a remarkable opportunity to pass valuable property to your heirs free of gift tax. Yet, unless Congress acts, these generous exclusions and the low 35% rate will disappear on January 1, 2013. Accordingly, given how short lived this $5.12 million exclusion may be, now is the time for wealthy individuals to consider making significant lifetime gifts.

One of the best ways to accomplish lifetime gifts to children and grandchildren is through a closely-held business entity, such as a family limited partnership or family limited liability company. Such entities often afford discounts for lack of marketability and lack of control. Discounts taken for lack of marketability or lack of control are usually viewed carefully by the IRS, but recent court cases have upheld reasonable discounts.

There are other techniques that may be used to transfer assets to future generations. You may simply make direct gifts of cash or marketable securities. You may also use grantor retained annuity trusts (GRATs), and irrevocable life insurance trusts. GRATs are particularly useful right now because interest rates are historically low. When interest rates are low, more property may be transferred tax-free to the next generation than when interest rates are higher.

As we get closer to the end of the year, the ability to utilize these planning techniques with the current $5.12 million exemption and a 35% transfer tax rate will become more limited, because these strategies take time to employ. In other words, waiting until the last minute will restrict your options and increase the likelihood for material errors.

Now may also be the time to consider whether you should use a revocable trust as your main estate planning document. A properly drafted and funded revocable trust will usually allow you to pass your assets to your beneficiaries without probate. This may be beneficial for your situation.

When updating your estate plan, you should also be sure that your plan is designed to provide protection for you during your lifetime, not just at death. Anyone can experience a period of illness or incapacity. Thus, it is essential that your estate plan include durable powers of attorney for financial matters and health care powers of attorney. In the absence of effective power of attorney forms, it may be necessary for your family to petition the court for the appointment of a guardian or conservator in the event you become seriously ill or incapacitated. This is expensive and time-consuming and can easily be avoided with effective power of attorney forms.

Talking with your estate planning attorney can help you understand your options and choose the strategies that best fit your situation. At DeWitt Ross & Stevens, we are committed to providing comprehensive, cost-effective estate planning advice and doing so in a timely manner. Please call us to discuss your situation. Our Madison office can be reached at (608) 255-8891 and our Brookfield office at (262) 754-2840, or contact us by email at info@dewittross.com.

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