With apologies to Shakespeare, while Hamlet was musing about death he said “to be, or not to be- that is the question,” however, maybe Hamlet ought to have thought, “to plan or not to plan.”
The federal estate tax has been on and off the chopping block for years, and now seems to be heading to its ultimate demise. Many people equate estate tax planning with estate planning and therefore assume the elimination of the first logically eliminates the second. This is not the case. Estate planning remains equally as important today as it was (is) with the federal estate tax in place.
Continuing Tax Reasons
While the federal estate tax may be repealed, many states continue to have estate, death, and inheritance taxes that could become more expensive, without the benefit of a deduction against federal taxes for those ancillary taxes.
Since the repeal plans being discussed by Congress do not include the repeal of gift taxes or generation skipping taxes, continued attention needs to be paid to lifetime transfers. In addition, the implementation of a capital gains tax at death on assets in excess of $10 million has also been proposed, and should be considered.
Life insurance trusts will continue to play an important role in estate planning. These trusts shield the proceeds from inclusion in a decedent’s estate, which may continue to be relevant for shielding the trust beneficiary from the proposed capital gains on death tax. In addition, these trusts can be used as the source for covering final expenses or providing an income stream to a beneficiary, which could be protected from a beneficiary’s creditors.
Succession Planning Options
Now that you spent the bulk of your working days building a successful business, don’t you need to consider the ramifications of passing the baton?
Do you have children in the business that are interested in taking over the business? If so, are you giving it to them? Are you selling it to them? Do you want to continue being involved in the business? Do you need or want a continuing cash flow from the business? Or, do you want to incur a current income tax cost for transferring it?
Consider the situation of a business owner who has one child ready to step into the driver’s seat and a sibling, or siblings, that have no interest in the business, or no business acumen. You would need to consider providing a wealth transfer of non-business assets to these children to avoid post-death family discord.
If there is not a next generation to transfer to, do you want to sell to key employees? Will an ESOP be the right tool? Or do you want to consider either a sale to a competitor or the use of a business broker to leverage a strategic market?
Providing for your Family
There is an endless list of questions involved in trying to determine how to provide for your family, starting with a surviving spouse. Do you want to leave them the principal or just the income from those assets? Trusts may provide the flexibility to control depletion of assets and be nimble enough to provide for unanticipated changes.
How would you want to handle your assets if there is a second spouse involved, either not as the natural parent of your heirs or if there are heirs from a spouse’s previous marriage?
When it comes to children, there are no right answers. Is there a child for whom, for your own personal reasons, you do not wish to provide for? How about a situation with one very successful child and one who struggles. Do you want to split your assets evenly, or provide more for the one who needs more?
Beyond the ‘who gets what?’, ‘how?’ and ‘when?’ are the questions no one wants to face. We live in a litigious society and need to plan in advance for events we hope will not occur. Is there a family member who is a spendthrift? Does this person need a trust to dole out a living allowance so there is something down the road for the future? Or, are you interested in protecting your children’s inheritance from potential future spouses or creditors?
The use of trusts for special planning will continue to play a major economic role, regardless of the direction that estate taxes take. Some of the circumstances that will continue to need attention include the use of supplemental needs trusts or qualified disability trusts.
A supplemental needs trust is a vehicle used to allow a chronically ill or severely disabled individual to qualify for Medicaid or other governmental benefits, without reducing these benefits. The trust can provide funds for an individual’s needs not covered by Medicaid, without reducing the Medicaid benefits. While at the end of the individual’s life, the remaining funds would reimburse the state for amounts expended, the funds could provide benefits during a lifetime rather than be consumed in paying for medical care.
Qualified disability trusts are often set up to provide for long term care for disabled family members that would continue following the death of the primary caretaker.
As you can see, estate planning will remain alive, well, and important in a potential post- estate tax era.
ABOUT THE AUTHOR
Ronald B. Hegt, CPA, is a partner at Citrin Cooperman’s White Plains office. He can be reached at 914.949.2990 or at firstname.lastname@example.org.