Estate Planning for a Mid-Size estate ($1 - $5 million)
Despite the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, we are still in a period of legal flux with regard to death tax planning, which makes planning for mid-size estates especially difficult. The current estate tax law expires in 2013 and, if Congress does not pass a new one the law will revert to what it was in 2001. The exclusion amount may go up, or it may go down. You are taking a big risk by not planning as if your estate will be subject to the tax.
Individuals with small estates can disregard death tax planning and focus on the more personal aspects of estate planning; taxes aside, there still remain many other reasons for carefully crafting an estate plan. Individuals with large estates must continue to employ the myriad tax planning vehicles. But, planning for a mid-size estate involves a significant degree of uncertainty because of the uncertainty of the changing tax laws.
The following tables show the impact of the changing laws on estates of $2,000,000 and $5,000,000. The examples assume that both spouses die in the same year and that their estate plan consists of a Family Trust 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. Using 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
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$5,000,000 Estate
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| 2011-2012 | $5,000,000 | -0- | -0- |
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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.
- Make annual tax-free gifts of up to $13,000 ($26,000 for a married couple) to each child, grandchild, or other individual. Such gifts can be made in trust.
- Direct payment of tuition and medical expenses for children and/or grandchildren.
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Estate Planning for Large Estates ($5 million and higher)
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Typical Estate Planning Documents for All Estates, Regardless of Size
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