NEW TAX LAW

The Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”) is law. The estate tax will be repealed, maybe. Under the Act, every citizen will receive a $1,000,000 credit against estate tax beginning in 2002 – which will increase to $1,500,000 in 2004; $2,000,000 in 2006; and $3,500,000 in 2009. In 2010, the estate tax is repealed.

So, how does the new law affect your estate plan? If the estate tax is repealed, why bother planning at all?

One thing that many people don’t know about the Act is, it expires on December 31, 2010. In other words, under the new law, the estate tax is only repealed for one year. If Congress doesn’t renew the law, we will be back to the law that existed prior to the Act, which means that in 2011, everyone will receive a $1,000,000 credit against estate tax.

That could be a real problem for people who fail to plan for estate tax because they believe the tax will be repealed. It is impossible to predict what the make-up of the federal government will be nine years from now – Republican?, Democratic? – and more importantly, there’s no way of knowing what the economy will be like nine years from now. Congress may be looking for additional revenues in a down economy and may find those revenues in a new estate tax. They’ve done it before.

In the recent past, many people have experienced tremendous increases in their personal wealth. Whether this growth has come in the form of 401(k) plans or real estate, individuals who fail to plan for tax may find themselves paying hundreds of thousands of dollars in estate tax.

But even with the death of the estate tax, the need for an estate plan is alive and well. In fact, there are a number of reasons why everyone should have an estate plan in place.

One document in an estate plan is a Will. The primary purpose of a Will is to indicate how you want your assets to pass after your death. In dealing with hundreds of clients, I’ve learned that few estate plans are alike.

Some people want to leave disproportionate shares of their estate to their relatives. Some want to disinherit a relative altogether. Some want to make sure that a relative has the right to live in the family house for the remainder of their life, or for a given period of time. Some people have minor children and need to leave their share of the estate in trust; others have disabled children who receive government entitlement benefits and need to leave their share of the estate in a Special Needs Trust, which will allow the child to receive an inheritance and continue to receive their benefits. In short, the dispositive provisions of a Will can be varied and somewhat complicated.

A Will also allows you to waive the requirement of a bond. A bond is like a policy of insurance. If your Will doesn’t specifically waive the requirement of a bond, then after you die, the Surrogate will require that your estate purchase a bond. The bond could cost several hundred to several thousand dollars, depending upon the value of your estate.

A Will allows you to choose your executor. You may have several children. Perhaps one of your children possesses all of the qualities to be a good executor, while the others don’t. Perhaps one of your children would be the absolute wrong choice for the person to be in charge of the administration of your estate. Without a Will, any of your children could be in charge of your estate, whether they are right or wrong for the job. But a Will allows you to make the right choice.

The other pieces of a proper estate plan are financial powers of attorney and advanced health care directives, a living will and a health care power of attorney. Together, these documents enable others to carry out your wishes.