Planning Considerations: What Should You Do?

Planning Considerations: What Should You Do?

v Clients should update their estate plans during the transition period with a view to how and when the new laws affect their plans. v "Credit shelter" (also called "bypass trust," "marital deduction," or "A/B" plans) and generation-skipping formula clauses need to be reviewed to make certain that the plans are properly balanced as exemptions increase.

E.g., a number of clients, particularly those in second marriages, leave the amount of their estate tax exemption to their children at the first death, with the balance of the estate passing outright or in a marital trust for the spouse (or perhaps to charity, if they are unmarried). At the current estate tax exemption of $675,000, this might be fine, but as the amount passing to children at the first death gradually increases to $3.5 million, some clients might wish to rebalance the plan. E.g., in more substantial situations, clients who previously might have rebalanced their assets to take advantage of husband and wife's $675,000 estate tax exemptions, may have to re-title assets to take advantage of the increasing estate tax exemptions (i.e., $1 million beginning next year; $1.5 million in 2004; $2 million in 2006 and $3.5 million in 2009). E.g., generation-skipping wills allocate remaining GST exemptions into sometimes restrictive lifetime GST trusts for descendants (or perhaps direct gifts to grandchildren). As these exemptions increase, clients may want to review the allocation of the GST exemptions in their wills between GST trusts and outright gifts.

v Sound estate and gift tax planning should continue during the transition period. Unlike the scheduled increases in the estate tax exemption, other than the lifetime exemption increase in 2002 to $1 million (which does allow the opportunity to do some additional tax-free giving starting next year), the gift tax exemption remains static – and, in fact, with the potential elimination of "Crummey trusts," gifting may be curtailed down the road. If substantial estate tax relief is not forthcoming as a result of a Congressional or administration "change of heart," then those clients who sit on the bench during the next 10 years may lose significant planning opportunities. v Lifetime trusts and trusts created under wills need to be very flexible so that trustees can react to these scheduled law changes and to events after 2010, when the estate tax repeal may or may not continue. Clients will want to revisit their documents to determine if they should be redesigned to be more flexible. v Trust flexibility may be especially important to individuals with non-citizen spouses, and to those with "qualified domestic trusts" in their wills. Due to the phase-out in 2010 of the supplemental estate tax payable at the subsequent death of the non-citizen (and in 2020 for lifetime principal distributions to the spouse), these trusts may need to be revisited to assure that principal distributions can be made freely. v With the increased benefits of college savings plans (Section 529 plans), parents and grandparents may want to rethink their annual gift strategy in order to take advantage of the unique gift and income tax opportunities made available by these plans. v With the possibility of a "carry-over basis" regime beginning in 2010, taxpayers should make an effort to organize their financial records to track (and prove) the basis of assets.