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The Best Time to Review Your Estate Plan? RIGHT NOW.

Written by: Alexandra T. Breed

(Published in the Laconia Citizen, April 2011)

As the saying goes, there is nothing certain in life but death and taxes.  Be that as it may, even these realities pose lots of uncertainties.  None of us knows when our time will come, and the tax consequences we face largely depend upon the time of our death.   
 
The best any of us can do about either is to be prepared.  When it comes to the latter, that means keeping our estate plans current, and updating our plans when the laws change. 
 
At the end of 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Tax Relief Act” or “Act”). Under the Act, the federal estate tax (which was suspended in 2010) is reinstated with the applicable exclusion amount (“exemption”) of  $5 million for each individual and a top estate tax rate of 35% for estate assets over the exemption amount. This law will automatically expire on December 31, 2012 unless Congress votes to reauthorize it. The exemption amount will drop back to $1 million for each individual on January 1, 2013, with a 55% estate tax rate.
 
Let’s take a look at the specific provisions of the Act and what you should do to take advantage of the change in your own estate plan.
 
Exemption Amounts. Under the Tax Relief Act, the estate and gift tax exemptions are reunified. This means that as of January 1, 2011 the gift tax exemption for gifts made during life will increase from $1 Million (where it has been for the past 10 years) to $5 Million for each individual, and the rate for gifts over that amount is 35%.

Why this might matter to you:  This increase in the gift tax exemption offers significant new planning opportunities for those individuals who wish to make lifetime gifts to family members or others which exceed $1 Million. The “annual exclusion” gift amount (i.e. gifts that can be made to anyone without reporting the gift to the IRS) will remain at $13,000 per person.
 
Portability. One of the striking features of the new Act is the concept of “portability” of the estate and gift tax exemptions. The Act makes it possible for spouses to “stack” exemptions by the transfer of any unused portion of a decedent’s $5 Million estate tax exemption to his or her surviving spouse. The effect of this law is to allow a couple, with careful planning, to shelter up to $10 Million from federal estate taxes. For example, if one spouse dies in 2011 and fails to use her entire $5 Million exemption, the surviving spouse will be able to use the decedent’s unused exemption, which can then be added to his own $5 Million exemption. 

Why this might matter to you:  Despite the fact that portability of exemptions may be available, married individuals should continue to have separate estate planning trusts for a variety of reasons (asset protection and reduced estate tax liability to name a few), with the uncertainty of the law after 2012 being the most important.
 
GST Tax. Another important provision of the Act is the increase in the generation-skipping transfer (“GST”) tax exclusion amount to $5 Million. The GST tax is an additional tax on gifts and transfers to “skip persons”, generally including grandchildren.
Why this might matter to you:  From now through 2012, grandparents have a unique opportunity to pass onto their grandchildren up to $5 Million in assets without incurring a GST tax.
 
GRATs. The 2010 Tax Relief Act does not include any new restrictions on Grantor Retained Annuity Trusts (“GRATs”) or the use of entity discounts in estate planning transactions. A GRAT is an irrevocable trust that pays a fixed annuity to the grantor for a defined period and then pays the remainder to a non-charitable beneficiary. Typically a parent might use a GRAT to transfer appreciating assets to children at a very low gift tax rate.

Why this might matter to you:  In this era of low interest rates and high gift tax exemptions, GRATs are an important and popular estate planning tool.
 
IRA Roll-Over. Of course, the provisions of the 2010 Tax Relief Act are not limited to estate, gift and GST taxes. One significant feature of the Act extends the IRA “roll-over” to charity.
Why this might matter to you:  This provision allows individuals who are 70 ½ or older to make qualified distributions of up to $100,000 from an IRA directly to a qualified charity.
 
GENERAL ESTATE PLANNING CONCERNS
 
Although estate taxes play an important role in almost every estate plan, they are secondary to accomplishing your primary goal of providing for the future success of your family, both personally and financially. Estate planning also involves having “advance directives” in the event of incapacity during life, as well as probate avoidance, asset protection, business continuity, guardianship, and a host of other issues. It is important to have an estate plan which protects the wellbeing of your family and achieves your personal goals, regardless of the tax environment. Estate planning should go far beyond simply having a will.
 
For instance, a common way to avoid probate and the attendant cost and delays is to use a revocable trust, also known as a "living" or "inter vivos" trust.  An individual may avoid probate by creating and funding such a trust during life. Your will, together with the trust, governs how and to whom you wish to leave your estate, including when and under what circumstances. Trusts may have many other benefits than simply avoiding probate. Trusts may also protect the family assets from spendthrifts and creditors (such as divorcing spouses) and provide for minors and special needs.

Another important set of documents are the so-called “advance directives” which allow you to select a person to make health care and financial decisions in the event you are incapacitated. Many people are surprised to learn that family members (including the spouse or the parents of children over the age of 18) are not authorized to make decisions on behalf of an incapacitated family member. The New Hampshire Durable Power of Attorney for Health Care allows you to designate a person (called your agent) to make health care decisions if you become incapable of making such decisions. The health care decisions that the attorney-in-fact makes includes the release of medical information, placement in a nursing home or medical facility, and the authorization or termination of medical and life-sustaining procedures. You can state your wish to be an organ donor or to donate your body for medical research.   The Living Will portion of the document permits you to avoid the unnecessary prolongation of life in the situation in which you do not wish to be kept alive by life support when there is no hope for your recovery as determined by two physicians or a physician and an ARNP. The General Financial Power of Attorney operates in the same manner as the Health Care Power of Attorney discussed above, but pertains to financial matters. Without these documents, your family will be forced to go to court to get a guardianship, which is expensive and time consuming.

The role of your estate planning attorney is to help sort out your financial and personal priorities and clarify your goals. Although tax savings is important, the long-term security and protection of your family is, in the end, the principal purpose of estate planning. Make a resolution to give your estate plan a check-up soon in order to take advantage of the potential tax savings offered over the next two years.

Alexandra T. Breed is a Director in the Trusts and Estates Department of McLane, Graf, Raulerson & Middleton, Professional Association.  She can be reached at 603-230-4417 or [email protected].  The McLane Law Firm is the largest law firm in the State of New Hampshire, with offices in Concord, Manchester, Portsmouth, as well as Woburn, Massachusetts. 

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