Update to Estate Planning

| February 3, 2013 | 0 Comments

One of the most challenging things about estate planning since 2001 has been keeping up with the changing rules and Congress’ inability to decide on a ‘final’ estate and transfer tax regime.

Well, with the American Taxpayer Relief Act of 2012 (“ATRA”, the fiscal cliff deal), we finally have some clarity, and a set of rules that may even be with us for a while.

One important provision of the fiscal cliff deal was that the estate tax exemption was set at $5,000,000. It also included a provision making this exemption ‘portable’ between spouses. In English, this means that when the first spouse passes away, if one spouse is unable to use their full exemption amount of $5,000,000, their spouse gets to use the rest. With a total of $10,000,000 able to pass to heirs free of estate tax (for married couples), this effectively means that the vast majority of U.S. estates will not be taxed. In addition, these amounts will now be indexed for inflation.

So the obvious question (and one we’ve started to hear more often), is whether or not a Trust is still necessary for estate planning? Could most people save the $2,000 or more that it costs to create a trust and just stop at creating a will? The answer is not as straightforward as it might seem. Here are some reasons why a trust might be a good idea.

There’s still probate. Without a trust, assets passing may be subject to a legal process called Probate. In California, probate can be very expensive. Probate costs are calculated base on the gross value of an estate, which does not include debts secured by an asset. Thus, a mortgage is not counted against the value of property for probate, so a house with an appraised value of $1,000,000 is considered a million dollar estate, even if there is an $800,000 mortgage against the house. The proper use and funding of a trust can help avoid probate or minimize its impact.

Control of your assets. Trusts should contain provisions that direct who can manage your assets and your finances in the event of incapacity as well as after your death. For example, they can be designed to transfer assets at a certain age, rather than immediately upon death. Trusts can also hold assets so that future generations benefit, too. Finally, if you have a child who married a deadbeat, your trust can be designed so that the spouse cannot access your child’s inheritance. Trusts can also be designed to benefit your children and grandchildren, then transfer the remainder to charity, if that’s important to you. The control and flexibility are key benefits of a trust, even if the estate tax planning was the primary purpose for creating most trusts.

Properties held in other states. This combines the two prior benefits. Some people have second homes or investment properties in other states. If you think one probate is bad, how about two in different jurisdictions? Holding your properties in a trust can make the transfer of properties held in different locations much easier.

State taxes. Just because the Federal Estate tax has been dramatically altered doesn’t mean the states taxes are eliminated. ATRA may still trigger adjustments in state tax rates.

Congress can still change the rules. If the only guarantees in life are death and taxes, then a corollary to this is that taxes always change. Congress can always lower the exemptions in order to tax smaller estates in the future.

The bottom line is that while estate planning has often been ‘sold’ as tax planning, it had never been just that. Estate planning, for those who understood it, has always been about dealing with succession planning, control, and incapacity. It is about trying to prepare in advance for one of the most difficult things your heirs will ever have to do.

This column is prepared by Rick Brooks, CFA, CFP®. Rick is Vice President for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick is a member of the local chapter of the Financial Planning Association, the membership organization for the financial planning community, and serves on the Board of Directors of the CFA Society of San Diego. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisers.com. Rick and his family live in Mission Hills.

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