By: Westray Veasey
With the new federal estate and gift tax laws, and the repeal of North Carolina’s estate and gift tax system, your clients do not need an estate plan, right? WRONG! The now “permanent” estate tax law provides for a much higher exemption than ever before: $5,340,000 for 2014, indexed for inflation. (Isn’t a “permanent tax law” an oxymoron?). The portability concept that has been around the last few years has also been made “permanent.” Before portability, if the first spouse in a marriage to die did not use his or her exemption, it was lost. So, for example, the first spouse to die with $10,000,000 in assets, all titled jointly with right of survivorship, would not have a taxable estate because of the unlimited marital deduction, but the first spouse’s exemption was lost because without taxable estate, there was nothing against which to apply his exemption. Now, any unused exemption is portable to the surviving spouse. But be careful—there are still many non-estate tax planning issues that should be addressed in this time of increased exemption levels and portability!
Did you know that residents of North Carolina who die without a Will, will pass some portion of their estates to their children, rather than automatically going to your spouse? Did you know that assets passed to children under 18 years of age must be held in a court-supervised guardianship and require application to the court for distributions, and upon a child’s 18th birthday, those assets will be received outright? Did you know that by North Carolina statute, the only place you provide instructions concerning a legal guardian for minor children is in a Will?
With an estate plan, you can thoughtfully designate fiduciaries: guardians for your minor children, the executor for your estate, trustees who can manage and distribute assets to your surviving spouse and/or children outside of the court system. Here are some issues you can address with an estate plan:
- You can plan for incapacity by designating attorneys and health care agents to make health and financial decisions on your behalf.
- You can make a Living Will to establish whether or not to be placed on life support if you are terminal, or in a persistent vegetative state.
- You can address creditor protection considerations: should you have trusts, liability limiting entities, investments in exempt assets, more property and casualty insurance?
- You can make sure you properly plan for your retirement accounts: should you roll over your 401(k) to an IRA, should you convert to a ROTH, who should be the beneficiary of these accounts?
- You can examine your life insurance coverage: do you have the proper amounts to cover your needs, do you have the right type of coverage, and who are the proper beneficiaries of your life insurance?
- If you are involved in a closely-held business, you can determine who is going to take over your interest in the business upon your incapacity, retirement, or death.
- If you have co-owners, you can establish an agreement among owners restricting transfers and providing for buy-outs upon certain events, and make sure you understand the terms and whether a buy-out is funded by insurance.
Consider a married couple with two young children, and one is the wife’s from a prior marriage. They have total net assets of $1,000,000, which includes the equity in a house owned in the wife’s name, and they each have a life insurance policy for $1,000,000 and retirement accounts of $250,000. With a combined estate of $3,500,000, they are under the estate tax exemption amounts and have no estate tax issue to consider, but they do have many planning issues to tackle. Who should be designated guardian and trustee for each child? At the first death, do all assets pass to the surviving spouse outright, or do assets pass to a trust from which the surviving spouse and children can benefit? Should each person’s life insurance and retirement accounts be paid to the surviving spouse outright, or into the trust? Should the house be retitled jointly for creditor protection reasons?
Of course, if your client DOES have a taxable estate, there are even more reasons to develop a thoughtful estate plan, not only to address the issues identified above, but to try and mitigate their estate tax burden. It’s important to note from these examples that estate planning is not just for the very wealthy.