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Why estate planning continues to matter

Early in January 2013, Congress enacted and the President signed the American Taxpayer Relief Act of 2012, or the “2012 Tax Act,” and averted what many called “the fiscal cliff.”

With the passage of the 2012 Tax Act, there are those who wonder if estate planning will remain an important consideration given that many estate and gift tax planning provisions that were enacted are “permanent.” However, we know that individuals have needs in addition to potential estate and gift tax planning, and estate planning encompasses much more than tax planning. Here are a few items to remember as to why estate planning continues to matter.

2012 Tax Act. With the passage of the 2012 Tax Act, provisions now exist that will encourage individuals to continue focusing on estate planning. For example, for the foreseeable future, the gift, estate and generation-skipping transfer tax exemptions are unified, with exemptions of $5 million per person ($10 million for married couples), indexed for inflation, and a tax rate of 40 percent. This means that the exemption for 2013, as indexed, is $5.25 million per person. There are those that may rely on the “permanence” of these provisions. However, as has been seen in the past, nothing tends to be permanent with Congress and commentators have been quoted that ‘permanent’ is in the eye of the beholder. With that said and given the continued uncertainly as to when Congress may next change course, including, but not limited to, passing additional provisions that reduce the availability of some advanced estate planning techniques, individuals who are considering making life time gifts to family members, including grandchildren, are well advised to make those gifts sooner rather than later and take advantage of the continued higher exemptions. For example, transfers of closely held business interests may be accomplished by utilizing the increased exemptions and applying valuation discounts that are available.

In addition, the 2012 Tax Act allows married couples to transfer any unused Federal estate tax exemption to a surviving spouse. This “portability” provision has also been made “permanent,” but the executor must file an estate tax return in order to claim the unused exemption. Failure of the executor to file the estate tax return timely may result in future application of estate tax to the surviving spouse’s estate, if exemptions decrease and/or the estate increases, and the possibility of liability for exposure to the estate tax. In addition, individuals must understand that if a surviving spouse remarries and the new spouse dies, only the unused exemption of the second deceased spouse can be used. Therefore, the application of the portability provision must be analyzed at that time to determine whether it best fits the circumstances.

Finally, even though much of the news surrounding the 2012 Tax Act has been at a national level, individuals living in Maryland and the District of Columbia need to remember that lower exemptions from estate tax exist. For example, both Maryland and the District of Columbia have exemptions from estate tax of only $1 million per person. Thus, proper planning is essential to minimize the impact of those taxes.

Incapacity and special needs planning. Beyond estate and gift tax planning, many worry about what happens if they become incapacitated whether through an illness or accident. Planning for long-term care has gradually become and continues to be a major consideration in any estate plan. Individuals want to ensure that during any period of incapacity they have the appropriate fiduciaries in place to manage their financial and healthcare affairs. Without adequate planning, families may have to resort to the guardianship and conservatorship process, a court driven process, to gain access to assets and make important decisions. Furthermore, those without proper estate planning may find themselves and their hard earned savings wasted by family members, and therefore, not used or available for their care. Although conservatorship proceedings may be necessary in certain circumstances, a financial or durable general power of attorney would permit an individual to appoint an agent to act on their behalf with respect to their property, finances and personal affairs.

Moreover, planning for health care is also a necessary part of any estate plan, particularly now after the enactment of health care reform. Studies have shown that only between one-fourth and one-third of Americans actually have an advance medical directive or health care power of attorney. These studies have shown that in dealing with end of life circumstances, individuals who have had the detailed conversations about their health care ultimately reduce the emotional and financial costs associated with their end of life care, and therefore, reduce the overall burden on surviving family members. A healthcare power of attorney or advance medical directive allows an individual to appoint an agent to make medical decisions on their behalf.

Without the appropriate financial and medical powers of attorney in place, individuals are relying on their family members to make the “right decisions,” which may not be in the best interest of the actual incapacitated individual. For example, sufficient assets may exist to keep an individual at home with the aid of home health care providers, but without specific direction in an estate plan and a trusted named fiduciary, those who have control of the finances, whether by default under state law or by familial relationship, may decide to sell the home and move the individual to a low-cost facility in order to preserve an inheritance for future generations (i.e., the person in control of the finances). This result does not satisfy the individual’s ultimate financial and health care goals.

Alternatively, individuals may use a revocable living trust to plan for incapacity and specifically outline how they want their assets used for their benefit and for the benefit of those who depend on them, including family members with special needs. Special needs planning can be accomplished through estate planning. Without such planning, special needs family members may not receive the care and support that was intended.

Finally, within the 2012 Tax Act, the Commission on Long-Term Care was created to “develop a plan for the establishment, implementation, and financing of a comprehensive, coordinated, and high-quality system that ensures the availability of long-term services and supports.” Members of the commission should represent the interests of consumers, older adults, family caregivers, health care workers, private long-term care insurers, State insurance departments and state Medicaid agencies. However, the ongoing debate surrounding the debt limit, deficit reduction and the potential need for cuts to Medicare, Medicaid and other government funded programs should encourage individuals to be more proactive in their estate planning in order to ensure their goals and objectives are met utilizing the resources available to them.

Conclusion. Estate planning encompasses much more than tax planning or planning for what happens immediately after one’s death. The laws are constantly changing. An individual’s family situations may change as well as their goals and objectives over time. Thus, estate planning should have a priority in their lives.

- By Catherine F. Schott Murray 

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