Estate plans ? not taxes ? are certain
- By Milt x_Zall
- Oct 20, 2000
The battle over whether to repeal federal estate and gift taxes may be a
long one. For the moment, the federal estate and gift tax system remains
intact following President Clinton's veto of congressional legislation to
repeal so-called death taxes.
But even if estate taxes are eventually wiped off the books or are dramatically
reduced under a future Congress and president, that won't eliminate the
need for estate planning, said Dennis Filangeri, a certified financial planner
based in San Diego, Calif.
Good estate planning is first and foremost a method for ensuring that
your property, however much you have, goes to the people and organizations
you want it to go to in the most efficient and cost-effective way. Even
if you don't have an estate large enough to be vulnerable to the current
estate tax system — and 98 percent of the people who die each year don't — you need to develop a sound estate plan, or the state will do it for you.
Take trusts, for example. Probably nothing is more associated with sheltering
substantial estates from taxes than the use of trusts. It's true that some
types of trusts might disappear, or at least lose their main usefulness,
if estate taxes were eliminated. But trusts serve many other purposes, as
For example, a revocable or living trust doesn't save taxes, but it
avoids the expense and hassle of probate. Families use incentive trusts
to encourage a beneficiary to take certain actions, such as doing certain
philanthropic work or earning a certain level of income in order to receive
distributions from the trust. Trusts may not parcel out money beyond basic
support to a child until the child reaches a certain age. A trust can ensure
that the trust's property is well-managed for a beneficiary who is not financially
mature. Special needs trusts are established for persons receiving public
benefits because of special physical or mental problems.
In a time of high divorce rates and remarriage, trusts such as a qualified
terminable interest property (QTIP) trust can be used to ensure that assets
go to children from a previous marriage. Without such a trust and the properly
written will, the current spouse, and even the spouse's new marriage partner
or new children, could end up with your assets.
Life insurance is another area of estate planning that won't disappear
merely because estate taxes do. Larger estate owners would no longer need
to buy life insurance to provide the cash to pay for estate taxes, nor would
they have to employ strategies such as irrevocable life insurance trusts
solely to keep the insurance policy out of their estates. However, they
may still want life insurance to support surviving children and spouses,
to help heirs pay potential capital gains taxes or to contribute at death
to their favorite charities.
Business owners will continue to have a need for life insurance. For
example, they may want to pass on the family business to a designated heir
while using life insurance to compensate other heirs.
Some observers assume that charitable giving will decline if estate
taxes are reduced or repealed because assets gifted to charity aren't subject
to gift or estate taxes. However, important income tax benefits remain for
gifting during one's lifetime. More importantly, many people give because
they want to give; the tax benefits are secondary.
Finally, the most basic elements of any estate plan, large or small,
will not disappear should repeal of estate taxes occur. All adults should
have a will, for example, whose main job is to specify to whom property
goes upon their death. Do you want Aunt Mary to inherit the china, Brother
Bill to get the golf clubs and children from a previous marriage to inherit
your stocks? A will and an accompanying letter of instructions can make
that clear. Wills also are needed to name guardians for your children.
Additionally, living wills and medical powers of attorney are needed
to ensure that you aren't given certain life-saving treatments you don't
want should you be unable to make the decision yourself. A durable power
of attorney is invaluable for allowing someone to step in legally and financially
on your behalf if you are incapacitated.
So even though the prospect of not having to pay estate taxes may be
appealing, don't make the false assumption that you won't need to do any
Zall, Bureaucratus columnist and a retired federal employee, is a freelance
writer based in Silver Spring, Md. He specializes in taxes, investing, business
and government workplace issues. He is a certified internal auditor and
a registered investment adviser. He can be reached at [email protected]