We would like to urge our clients and friends to consider revisiting your existing estate plans to ensure that your plan continues to accomplish your current family objectives, takes advantage of the ever-changing estate tax rules and is being properly implemented. The following are ten reasons why you might consider reviewing your plan:
1. Has your plan been updated in light of the sweeping tax law changes in 2001? As we reported in a prior UPDATE, federal tax law changes enacted in 2001 will result in the gradual increase of the estate tax exemption to $3.5 million in 2009 (it is currently $1 million), the complete elimination of the tax in 2010 for that year only, and the reinstatement of the tax with a $1 million exemption in 2011. In addition, the generation skipping transfer tax exemption (currently $1,120,000) will be similarly increased, eliminated and reinstated. Although many plans will not require revision as a result of these changes since the elimination of the taxes has not yet been made permanent, in some instances revisions and/or retitling of assets may make sense. If your plan was drafted before these changes were enacted, you might consider reviewing the plan.
2. Are changes to your estate plan required as a result of the decoupling of New Jersey's estate tax from the federal estate tax? Since New Jersey now bases its own estate tax on the federal regime that was in place in 2001 (when the federal estate tax exemption was $675,000), a plan which makes full use of the increased federal estate tax exemption at the death of the first spouse will result in the imposition of New Jersey estate tax. In 2003, this New Jersey estate tax at the first death is $33,200; in 2004 and 2005 it will be $64,400; in 2006 through 2008 it will be $99,600; and in 2009 it will be $229,200. Larger estates will still pay less combined federal and state estate taxes by making full use of the federal exemption. However, for more moderate estates (e.g., between $1,350,000 and $2 million), it might make sense to add a disclaimer provision to the wills to give the fiduciary flexibility to allow for post-death adjustments to minimize the overall state and federal estate tax consequences (see prior article in this UPDATE for further details).
3. Have your family or financial circumstances changed significantly since you last reviewed your plan? If your family or financial circumstances have changed significantly (e.g., divorce, death of a spouse, death or incapacity of a person named in your documents as fiduciary, agent or sole beneficiary, a substantial increase or decrease in wealth due to inheritance or other means, etc.), then it may be time to review your plan. Some of these changes can affect not only wills, but also powers of attorney, living wills, trust agreements, etc.
4. Have you taken care of your favorite charities in your estate plan? If you are charitably inclined, you may wish to consider the best way to achieve your charitable objectives. There are many vehicles available to accomplish charitable planning to gain income tax and estate tax advantages.
5. Are you properly administering your irrevocable life insurance trust? If you have established an irrevocable life insurance trust to remove life insurance proceeds from your estate for estate tax purposes, the trust must actually own your life insurance and be named the policy beneficiary. Failure to complete the appropriate assignment and change of beneficiary forms and file them with the insurance company will result in inclusion of the proceeds in your estate. In addition, it is important to ensure that (1) "crummey" withdrawal notices are being sent to the beneficiaries each year that a transfer is made to the trust (this is necessary to obtain the benefit of the gift tax annual exclusion for the transfers made to the trust to pay the premiums), (2) premiums are being paid through a checking account opened in the name of the trust, and (3) in the case of insurance trusts intended to be exempt from generation-skipping transfer tax, GST exemption has been allocated to the trust on a timely-filed gift tax return.
6. Have you recently reviewed the beneficiary designations of your benefit plans? It is important to remember that IRAs, 401(k) plans, life insurance and other arrangements that require a beneficiary designation to be completed do not pass through your will, but rather pass according to the beneficiary designation. Therefore, it is important that beneficiary designations be revised, if necessary, in order to ensure that the funds from these arrangements will be disposed of in a manner that is consistent with your overall tax and non-tax estate planning objectives.
7. Have you reviewed the title to your assets to make sure that the title is consistent with the plan in your will? It is important to remember that property owned with another person as joint tenants with right of survivorship or, for married couples, as tenants by the entirety, does not pass through your will, but rather automatically passes to the surviving joint owner. Therefore, retitling of joint assets may be necessary if you intend a particular asset to pass through your will. This is often important to accomplish estate tax planning that is incorporated in wills. For example, for married couples whose wills contemplate the use of a "bypass" or "credit shelter" trust on the death of the first spouse, you should ensure that your assets are properly titled so that there is sufficient value in each of your individual names to fund the bypass trust in your respective wills. Additionally, if you intend to have your estate pass primarily through a marital/QTIP trust, you may not achieve that result if most of your assets are jointly titled or pass by beneficiary designation outright to your surviving spouse.
8. Are you taking advantage of the low interest rate environment in your gift plan? Due to record-low interest rates and the current uncertain gift and estate tax environment, many lifetime wealth transfer techniques that leverage the $1 million gift tax exemption have become more attractive. These include the gift to a grantor retained annuity trust, the sale to an intentionally defective grantor trust, the gift of interests in family limited partnerships and limited liability companies at discounted values, and other techniques. You may wish to consider reviewing your plan to determine whether any of these techniques would make sense for you.
9. Have you revisited your annual gift plan since the introduction of 529 College Savings Plans? Section 529 College Savings Plans are state-sponsored savings plans designed to help families save for future college costs. As we reported in a prior UPDATE, under tax law changes enacted in 2001, distributions from a Section 529 Plan are not subject to income tax so long as the distributions are used for qualified higher education expenses (prior law only deferred tax on the growth in these accounts until the money was distributed). An individual can give five years' worth of gift tax annual exclusion gifts to a Section 529 Plan in a single year. A married couple can therefore fund a single plan with $110,000 free of gift, estate and GST tax in a single year. Given the benefits of Section 529 Plans, you might want to review your annual gifting program to determine whether a Section 529 Plan is right for you.
10. Are you complying with the formalities of your family limited partnerships? For plans which include family limited partnerships or limited liability companies, it is important that proper books and records be kept for these entities and the formalities of the agreements be complied with (this issue is more fully explained in an article below).
