Estate Planning For Midsize Estates | David F. Grams & Associates, S.C.

Estate Planning for a Mid-Size estate ($1 - $5 million)

The Family/Disclaimer Trust
Methods of Reducing Taxable Estate

We are in a period of flux with regard to death tax planning which makes planning for the mid-size estate extremely difficult. The small estate can disregard death tax planning and focus on the more personal aspects of estate planning, and the large estate can continue to take full advantage of the myriad tax planning vehicles, but planning for the mid-size estate involves a significant degree of uncertainty.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax will be phased out over the next several years, repealed entirely in 2010, but then reinstated at its present levels in 2011. The following tables show the impact of the Act for selected years on estates of $2,000,000 and $5,000,000, and assumes that both spouses die in the same year and that their estate plan consists of a Family Trust consisting of property with a total value equal to the then estate tax exemption and a bequest upon the first death to the surviving spouse of the remainder of the estate. Utilizing the exemption amount and the marital deduction, there would be no estate tax due until the death of the surviving spouse. However, because the exemption amount continues to increase, it could have the unintended result of disinheriting the surviving spouse.

$2,000,000 Estate

Year	Family Trust	Marital Gift	Estate Tax at Death of Surviving Spouse
2001	$675,000	$1,325,000	$260,000
2002	$1,000,000	$1,000,000	-0-
2004	$1,500,000	$500,000	-0-
2006	$2,000,000	-0-	-0-
2009	$3,500,000	$1,500,000	-0-
2011	$1,000,000	$1,000,000	-0-

$5,000,000 Estate

Year	Family Trust	Marital Gift	Estate Tax at Death of Surviving Spouse
2001	$675,000	$4,325,000	$1,799,000
2002	$1,000,000	$4,000,000	$1,430,000
2004	$1,500,000	$3,500,000	$945,000
2006	$2,000,000	$3,000,000	$460,000
2009	$3,500,000	$1,500,000	-0-
2010	$5,000,000	-0-	-0-
2011	$1,000,000	$4,000,000	$1,495,000

The Family/Disclaimer Trust

In mid-size to large estates, a typical estate plan will use a formula designed to take maximum advantage of the estate and generation skipping transfer tax exemptions but, as the above table illustrates, a change in the exemption can dramatically alter the results of the formula with possible unforeseen and unintended results. Accordingly, the inability to ascertain the tax consequences without knowing the year of death makes it advisable to build flexibility into the estate plan, and the best way to accomplish this is by using a disclaimer estate plan.

A disclaimer estate plan passes everything to the surviving spouse (either outright or in a Marital Trust) and creates a Family Trust for the benefit of the surviving spouse and children which will be funded only if the survivor disclaims all or a portion of the marital bequest.

The benefit of this type of estate plan is that it permits the survivor and his/her advisors to make tax planning decisions following the first death when all of the relevant facts are known.

Methods of Reducing Taxable Estate

In addition to the above method of taking maximum advantage of the estate tax exemption, the size of your estate can be reduced by the following fairly simple methods (see section on planning for large estates for more sophisticated methods of minimizing taxable estates).

Tax-free gifts to spouse to equalize spouse’s estates or classify all property as marital property.
Annual gifts of $13,000 (as of 2009, $26,000 for a married couple) to each child, grandchild (can be outright or in a qualifying minor’s trust), or other individual.
Direct payment of tuition and medical expenses for children and/or grandchildren.