The Importance of Re-evaluating Your Estate Plan

Newsletter | Aug 7, 2017 | Hook Law Center

For decades, estate planners have drafted estate plans around the federal estate tax, looking for ways to minimize or avoid the payment of estate taxes on death. Because the estate tax exemption amount was as low as $600,000 as recently as 1997 and did not top $1 million until 2002, estate tax planning affected a large proportion of Americans. Entire estate plans were created solely to avoid the payment of estate taxes on the death of the first spouse to die and to maximize the use of the estate tax credits available to each spouse. Typically, such planning resulted in the creation of a credit shelter trust upon the death of the first spouse to hold the then maximum estate tax credit amount and any remaining assets would frequently pass to a marital trust for the benefit of the surviving spouse. If the estate was in excess of $1 million, there may also be generation-skipping trusts created for the benefit of grandchildren. Such plans had numerous advantages, including protecting assets passing to the spouse in the marital trust for the remainder beneficiaries (typically children) and step up in basis for the assets in the marital trust upon the death of the surviving spouse. However, there are disadvantages as well for estates where the marital trust made up a larger share of the overall estate than the available credit shelter amount because a marital trust can only be for the benefit of the surviving spouse. In addition, the accounting and income tax filings for the multitude of trusts created under such plans could be cumbersome and confusing. In a time where the maximum federal estate tax rate was 55%, the complications were justified by the tax savings.

Now that the estate tax exemption amount (and the generation-skipping tax exemption amount) is $5.49 million per person (or $10.98 million for a married couple), many of those old tax driven estate plans may no longer be appropriate or wanted because the assets of the couple are well-below $10.98 million. If the first spouse to die has an estate less than the estate tax exemption amount, the credit shelter trust will absorb all the assets, leaving nothing to fund the marital trust. Because the assets in a credit shelter trust are not includible in the estate of the surviving spouse, there is no step-up in basis for those assets upon the death of the surviving spouse. And depending on the family dynamics, it may not be appropriate for the children or grandchildren to be equal beneficiaries with the surviving spouse as is the case in many credit shelter trusts, However, such a plan made more sense when originally drafted because the credit shelter trust was assumed to be much smaller than the marital trust. With the fall in the top rate of the estate tax to 40% and the increase in the exemption amount to almost $5.5 million, and the increase in the income tax to 39.6% with a top capital gains tax rate of 20%, it has become very important to consider the income tax consequences of an estate plan for most Americans.

If you currently have an old estate plan, it will be important to consult with a knowledgeable estate planning attorney to determine if your family circumstances may be better suited to simplified plan. While there are still many reasons, like creditor protection for your beneficiaries and probate avoidance, to create trusts, if the only reason you wanted a trust in the first place was the avoidance of estate taxes, it is time to draft a new plan. Even if your remain subject to estate taxes, your old plan was created for a different environment for securing the marital deduction and it may behoove you to revisit your plan to see if it can be simplified to some degree.

But what if you have one of these old plans and your spouse has died? Don’t despair. There are tools in our toolbox that can help. We may be able to “decant” (or transfer) the trust to a new trust which gives the surviving spouse a general power of appointment over the assets in an old credit shelter trust. Such a power, even if never exercised, will allow a step up in basis for the assets in the trust on the death of the surviving spouse. In other circumstances, it may be appropriate instead to distribute the assets outright to the surviving spouse in order to diminish administration costs and obtain a stepped up basis upon the death of the surviving spouse. For trusts created to take advantage of the generation-skipping exemption, under the right circumstances, it may be possible to grant a general power of appointment to strategically include the assets in the estates of several members of a generation (perhaps children, perhaps grandchildren) to take advantage of multiple estate tax exemption amounts and receive basis step-ups for the assets.

By finding ways that we can increase the basis of assets without increasing exposure to estate taxes, we can dramatically lower the amount of capital gains taxes that your beneficiaries may have to pay if the assets are to be sold in the future. If you haven’t re-visited your estate plan in the last few years, it will be worthwhile to visit with the attorneys at the Hook Law Center to see how we can simplify your plan and hopefully lower the taxes that your beneficiaries will have to pay.

Ask Kit Kat – Traveling with Service Animals

Hook Law Center:  Kit Kat, what can you tell us about traveling with a service animal?

Kit Kat:  Well, I don’t know a whole lot about it, but I read an interesting article recently in The New York Times about the matter. The article had to do with traveling in airports with service animals and how areas for the animals to relieve themselves beyond security checkpoints vary tremendously. I hadn’t thought much about that particular aspect, but it certainly could prove to be problematic, depending on the type and quality of areas offered.

Michael May, chief executive of Lighthouse for the Blind in Seattle, who is blind himself, has traveled through quite a few US airports. One he praises is Washington Dulles International Airport. On the other hand, O’ Hare International Airport in Chicago is not high on his list. Dulles has 2 post-security relief areas—one off of Concourse B and one off Concourse D. Each is over 200 square feet in size. Built in 2010, they have artificial grass and water systems in the floor that wash away the waste. O’ Hare’s, in contrast, has one area off Terminal 3 which is ‘a little, 2-by-3 box meant for Chihuahuas or small pets, not my guide dog,’ which is a 55-pound golden retriever.

Laurel Van Horn, director of programs for the Open Doors Organization, was critical of Terminal 4 at Kennedy International Airport. She found the relief area ‘small and narrow.’ She thinks the central placement of a fake fire hydrant limits overall space and can snag the animal’s leash.

So it appears some work needs to be done in providing these spaces. The law is relatively new (since 2009 for American carriers and 2010 for foreign carriers). Airports are experimenting with the best options given the space available in each location. Another thing the airports have to contend with is use of the areas by other animals such as security dogs and travelers’ pets. Sometimes there is conflict between the different groups. Service animals and security dogs can have different personalities. Miami International Airport has come up with a clever solution. It has 4 relief areas which are used by 1 animal at a time. “Each has a door with a window and a ‘vacant/in use’ sign with Braille and tactile lettering,” according to Laurel Van Horn of Open Doors.

Planning ahead of time, and selection of particular airports if that choice is available, then may ease some of the stress of travel. Just another thing to consider when making one’s travel plans, especially if that includes travel with a service animal. (Jane L. Levere, “When a Service Animal Has to Go, Airports’ Options May Be Wanting,” The New York Times, Business Day section, July 24, 2017)

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