by Julian E. Gray, CELA

For many Boomers, this is the time of their lives when the thought of retirement planning hits home. If things are going well, the college tuition payments are dwindling away, there’s equity in your home and hopefully, those investments survived the “dot com” revolution. Although most financial planners urge us to begin saving in our younger “accumulation” years, the trend is to procrastinate until we’re ready to deal with these issues. Financial planners also urge us to consult with an estate planning attorney to properly integrate their financial plans with a comprehensive estate plan. While there are many good reasons to engage estate planning counsel, tax planning is probably the single most driving force that propels a client into the office to discuss their options.

Many of us have heard about the Pennsylvania Inheritance Tax, whose maximum rate of 15% is fairly painless relative to the 45% Federal Estate and Gift Tax which can radically alter the intended results of anyone’s plan. In 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act (commonly referred to as EGTRRA). In the midst of an apparent repeal of the Estate Tax, the politicians conveniently renamed this tax as the “Death Tax”, a label which has stuck. Since the Death Tax generally applies to estates in excess of $1 million (in 2003), I guess using the term “death” rather than “estate” softens the negative political ramifications associated with removing a tax on the wealthy.

Unfortunately, many people have taken inaccurate information about the Death Tax repeal at face value and chosen not to pursue proper estate and tax planning as a result. If you haven’t sat down on a rainy night and cracked open the text of this new law, you may be unaware that this law contains “sunset” provisions. This means that while the lifetime Estate Tax exemption increases from $1 million this year to $3.5 million in 2009, and then is completely wiped out in year 2010, all good things must come to an end.

Under EGTRRA, the tax relief provided must sunset at the end of year 2010. So, unless some major legislative change occurs before then, the lifetime Estate Tax exemption will return to $1million in year 2011. What does all this mean to those of us trying to minimize Estate Tax exposure? Well, the answer is to die during the year 2010, of course. However, that’s not very practical. Like most of us, I plan to be around to see these rules sunset. So, planning should incorporate the changes in the law that we know about now, not speculation as to future tax law changes or who might be in the White House at the time.

We often encourage clients to have an estate plan review every 5 years or when a major change in their lives or the law occurs. EGTRRA is one of those changes. For example, many Boomers who set up estate plans prior to EGTRRA using what is called the Credit Shelter Trust technique of maximizing the Federal Estate Tax exemption between spouses may be in for a surprise if they fail to review the terms of their Wills and the sheltering trusts incorporated in such Wills. Because of EGTRRA, one of the unintended consequences of the Credit Shelter Trust may be to overfund such a trust to the detriment of the surviving spouse. While this appears to be a common problem, it can be fixed with properly detailed revisions to a current Will or Trust, provided such revisions are completed in a timely manner.

Another area of confusion is the proper treatment of life insurance as it pertains to Federal Estate Tax planning. While there are a myriad of insurance products and scenarios, a common problem exists when people add or drop a large “term” insurance policy. Since the face value of life insurance is included in one’s gross estate for Federal Estate Tax purposes (unlike Pennsylvania Inheritance Tax which exempts the value of all life insurance), the existence or absence of a $500,000 term policy can have drastic effects on the Federal Estate Tax picture. It is also important to understand how to make proper beneficiary designations, both primary and contingent, to minimize Estate Tax exposure.

Think about it for a minute. . . Add up the value of your home, investments and the face value of life insurance policies (including term), and you could be knocking on the door of a Death Tax issue. With a proper estate plan incorporating tax issues, you can slam the door on the Grim Reaper Tax.

Copyright 2003 Julian E. Gray - Published in Pittsburgh Boomers Magazine, (various editions)

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