Review Your Estate Plan Now


Today with the economic climate being uncertain and the Obama administration’s priority to make the estate tax permanent, it is a good time to make sure your estate plan does what you want it to do. Today the top marginal estate tax rate is 45 percent for 2009. In 2010 it will be eliminated. The tax will come back in 2011 with the highest estate tax rate at 55 percent. Under current law the amount of an estate that is exempt from taxes is $3.5 million but that will change back to $1 million in 2011. The Obama administration wants to cancel the one-year repeal of the estate tax. According to an article in the New York Times, tax experts think the exemption will be at $3.5 million and the rate will stay at 45 percent.


The Times article, Study Estate Plans Before Laws Shift” by Deborah L. JacobsClose explains six things to consider while reviewing your estate plan:

1. Formula Clauses/ In Your Will Or Trust:

If a will gives a specific amount to a trust it could be a problem because of the change in the estate tax. It is a good idea to change wills or trusts of specific amounts. Because of the recent and pending changes, you should also make sure that any formula clauses still put the correct amount into trusts for your surviving spouse or heirs.


2. Bypass (Credit Shelter) Trusts:


  A Bypass trust lets you place any amount up to the exemption into a trust for your spouse which then passes tax free to children or heirs.  In most Bypass trusts the trust would pay out an income to your spouse and the rest of the trust would go to other family members after your spouse dies. With the exemption being so large much of your estate could go into a trust. The problem is that your spouse’s inheritance would be limited by this. Make sure the trust is set up to allow your spouse access to the funds to alleviate this problem.


3. State vs. Federal Estate Tax:


If you put money into a Bypass trust to avoid federal estate taxes you may still have to pay Pennsylvania state inheritance taxes. If the trust allows distributions for spouse and children you will have to pay this tax. In other cases, the compromise of this tax is optional but may make sense. Be sure to ask your lawyer of the inheritance tax should be paid at death of the first spouse.


4. A GRAT:


A Grantor Retained Annuity trust allows you to avoid gift tax for lifetime gifts that are more than $1 million. You put the appreciating assets in a short-term trust and retain the right to an income for the life of the trust. Your family will receive the appreciation of the assets that are above the rate set by the IRS. Congress is considering changing the law, so consider getting a GRAT today.
For more on GRATs please read this article.


5. Family Limited Partnerships:     


Another giving technique is Family Limited Partnerships. The way a Family Limited Partnership works is that you put assets like real estate, businesses, or securities into this partnership. After these assets are in the partnership you can give away parts of the partnership to your family. These “shares” can only be sold to family members and are subject to other restrictions so the price is discounted. Congress may be ending the discount. If you are interested in these partnerships it is important to act soon.

To read an in depth Wall Street Journal article on Family Limited Partnerships click here.


6. Beneficiary Designation Forms: 


The person you designate on your Beneficiary Designation Form receives funds directly from a retirement account or life insurance which pass outside of your estate directly to that beneficiary. In the financial and bank industry there is an upheaval of consolidation and companies are changing names and records are often lost. Make sure your 401 (K) and or any other retirement accounts as well as life insurance have the correct Beneficiary Designation Form.


It is important to review your estate plan periodically and whenever a life event such as; death, birth, and or divorce occur. The economy and the new administration are changing many things that could affect you and your estate.


To read the entire New York Times article click here.

Research: Whitney O'Reilly Legal Clerk and Assistant Client Relations Manager 

David M. Frees, III
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Attorney, Speaker and Author