Many clients ask what they should do in light of the uncertainty surrounding the death tax. For 2009, the death tax rate is 45%, and applies to assets exceeding a value of $3.5 million. As a result of the Tax Relief Reconciliation Act of 2001, the death tax is due to be repealed and set to 0% in 2010; however, a sunset provision will reinstate it to its initial top rate of 55% (2001), beginning in 2011, on assets exceeding a value of $1 million. Congress may or may not change the estate tax laws—your guess is probably as good as mine.
For me, estate tax laws are only some of many uncertainties I contemplate when devising an estate plan. In fact, uncertainty overshadows the entire estate planning process—it’s a given. We do not know when a client will die, the value of their estate at the time of death, which spouse will die first, whether a child will predecease a parent, and what the death tax laws will be at the time of death. About all we know is that we do not know the answers to these questions.
You can combat this uncertainty several ways. First, your estate plan should not be a one-time endeavor. Ideally, you should develop a good working relationship with an attorney you trust, and review your plan at least every two to three years. Additionally, if family or financial circumstances change significantly, you should review your plan at that time. By doing this, you should only have to tweak intermittently certain pieces of your estate plan. Of course, major changes resulting from, among other things, divorce, marriage and changes in the tax laws may require an overhaul, but events of this kind happen infrequently.
Putting a good estate plan in place and keeping it up-to-date is not necessarily inexpensive. However, compared to a potential financial disaster in having a poorly drafted or out-of-date estate plan, or none at all, the cost is certainly worthwhile. Worse yet, is the added burden on family members at the worst time, the loss of a loved one. A good estate plan will provide at least some certainty at the worst possible time.
Secondly, you can combat uncertainty by building flexibility into your estate plan. Your estate plan should be as flexible as possible, to anticipate different scenarios and adapt to changes in circumstance. We do this by being thorough, while at the same time, being accommodating to change, with the understanding that certain decisions will go unanswered until we have the information to answer them.
Nothing exemplifies all of this more than accounts that pass by beneficiary designation, i.e., retirement accounts and life insurance policies. Be thorough by treating the beneficiary designation with the same importance you place on your Will. For a lot of people, retirement accounts and life insurance proceeds make up the largest part of the estate. Because they pass by beneficiary designation, your Will, more than likely, will not determine how these assets are distributed.
You can be more accommodating and flexible to change by disregarding the standard custodian beneficiary form. Use your own form. For example, assume an individual sets up a retirement account naming his one child as beneficiary. If the individual has two more children and does not change the beneficiary for this account, the entire account will pass to the first child, upon the individual’s death. Typically, your Will contemplates the birth of future children and treats them similarly to children already born and includes them in your Will, but it does not control your beneficiary choices. I use similar language in the beneficiary form to anticipate the birth of future children so that they are treated equally with existing children.
Most of my clients want language in their Will that would pass a deceased child’s share to his or her then living lineal descendants. Although beneficiary forms are getting better, the standard beneficiary designation form may or may not provide for this. Even if it does, many people do not know it does.
Finally, make sure your estate plan covers all the bases. A lot of people (although, not enough) have Wills, but their estate plan lacks the overall coordination that is vital. For most people, that means having a Revocable Trust and/or a Will, a financial power of attorney, durable power of attorney for health care, living will, HIPPA waiver, titling assets properly, and properly naming beneficiaries on life insurance and retirement accounts. For others, it may involve even more complex planning and documents.
By now, I doubt I need to preach the importance of keeping your estate plan up to date. Unfortunately, we all have heard the horror stories of someone dying without a Will, or someone dying with an outdated Will. Everyone should understand the need to keep his or her Will up-to-date, but it does not end there. Despite all the uncertainties that you cannot control, there is no excuse for not coordinating your estate plan and providing for circumstances you can control.