A large percentage of adult Americans do not have a will or estate plan, potentially leaving the state to decide how their property will be distributed upon their death. Advisors can fulfill an important role by working in concert with their client’s attorney and accountant to help bring clarity to the big picture.
Though a will is typically the first document considered in an individual’s estate plan, more than 55% of adults in the United States do not have one, according to a March 2007 Martindale-Hubbell survey conducted by Harris Interactive. Of those individuals without wills, 24% believe they don’t have enough assets to justify planning, 10% don’t want to think about dying, and 9%–double the percent from just 3 years ago–do not know whom to talk to.
Don’t assume clients know
People tend to forget they amass wealth from homes, pensions, insurance policies, investments and 401(k)s. Advisors can provide assurance and clarity that estate planning is worth the trouble by assuring the desired distribution of property and reducing or eliminating tax liabilities for married couples.
Unintentional results can occur if documents aren’t reviewed every 3 to 5 years or when a significant life event occurs. Advisors can help clients pull together “must-have” documents and find forgotten “orphaned assets.” And by offering duplicate documentation retention, advisors can develop long-term relationships with heirs.
By not updating beneficiary designations on life insurance, IRAs or annuities, clients might unintentionally leave assets to ex-spouses or others. Reviewing documents with clients offers the opportunity to address settlement issues and assures updated beneficiary selections. If one spouse has the majority of assets, discuss account balancing and the inclusion of children from previous marriages. Otherwise, assets could go automatically to the current spouse.
Life insurance policies are good tools to address liquidity issues and advisors can encourage clients to explore the benefits of establishing irrevocable life insurance trusts. These trusts are commonly used in estate planning to avoid estate taxation on death proceeds, to shelter property from creditors and protect survivor income.
Uncertain tax laws
The 2001 Economic Growth and Tax Relief Reconciliation Act mandates an estate tax exclusion increase from $2 million in 2008 to $3.5 million in 2009 to infinity in 2010. EGTRRA repeals the Federal Estate Tax for the year 2010. Unless Congress takes action before Jan. 1, 2011, the tax will revert to an exclusion of $1 million; and the maximum rate will go from the current 45% back to 55%. There will also be a significant change in the method for determining the cost basis of capital assets transferred at death from the current step-up basis to a modified carryover basis.
In 2011, the first baby boomers will be enrolling in Medicare. As the demand for government services rise, it becomes less likely Congress will act to eliminate federal estate taxes in 2011 and beyond.
While we can’t predict Congressional action, government program costs or budget surpluses and deficits, advisors can offer guidance based on current taxation. Advisors should create estate plans with sufficient liquidity to allow clients’ estates to pay the federal estate tax should Congress preserve it. If Congress ends up repealing it, clients simply leave additional liquidity for their survivors or favorite charity.