Rarely has the estate planning environment been as uncertain as it is now.
The current estate tax law is set to expire after 2025. After that, the lifetime exemption will be cut in half and other changes will be made if Congress doesn’t act.
Key income tax breaks also will expire after 2025 without congressional action.
In addition, this November’s election results could bring tax code changes sooner, and there is a range of possible outcomes.
The economy and markets also increase estate planning uncertainty.
The value of your assets and reliability of your income influence the details of the plan.
Most people, when faced with such uncertainty, decide to wait it out. They won’t take action until the legal and financial picture is clearer.
Waiting isn’t a good strategy. You’ll need an up-to-date estate plan.
The key in times of high uncertainty is to have a plan with some built-in flexibility.
Just as you don’t want to have no plan or an outdated plan, you don’t want an inflexible plan that can’t adapt to rapid changes. You want to give your executor and heirs some choices.
Fortunately, there’s an estate planning tool that is made for uncertain times.
Adding this tool to your plan ensures you have a current plan and that the plan details can be adjusted by your executor and heirs as needed.
It is a somewhat obscure tool. Many estate planners do not make much use of it.
But you should give it strong consideration today. I am talking about a qualified dis-claimer, or simply a disclaimer.
A disclaimer is when the person who’s named to inherit something effectively says, “No, I don’t want it.”
When that happens, the next person in line to inherit receives the property, unless he or she also disclaims it. If the second person in line disclaims, the third person in line receives the property.
The next person in line doesn’t have to be an individual. It can be a trust, a charity, or other entity.
The IRS has a few simple rules concerning when a disclaimer is effective for tax purposes, making it a qualified disclaimer.
The disclaimer must be in writing and made within nine months after the date of death of the estate owner.
Also, the disclaiming person can’t have accepted any interest in the benefits being disclaimed.
A qualified disclaimer can reduce the family’s estate, gift and income taxes.
The disclaimer allows the estate to adapt to tax law changes even if you didn’t have time to update the plan documents.
It also can get money or property into the hands of family members who need it without it having to pass through other family members first.
A typical family estate plan has a husband and wife with wills that leave all or most of their estates to whichever spouse survives.
After that, the property passes to the children of the marriage and then the grandchildren.
Suppose the wife is the surviving spouse and after examining the situation, preferably with the assistance of an estate planner and financial advisor, finds she doesn’t need all the money she’s slated to inherit.
She decides there’s no reason to make the children or grandchildren wait to receive part of the estate.
Also, it seems likely that the income and estate taxes imposed during the rest of her life will reduce the after-tax amount eventually inherited by the others.
So, she disclaims part of the inheritance. A disclaimer is not an all-or-nothing tool.
The wife in this case can disclaim inheriting specific assets or portions of specific assets.
A traditional IRA is a good use of a disclaimer. The surviving spouse might conclude that in her tax bracket, the required minimum distributions from the IRA will trigger a lot of income taxes on income she doesn’t need.
So, she disclaims being the beneficiary of the traditional IRA. Or she could disclaim inheriting part of the IRA.
Her adult children are next in line to inherit it. They aren’t required to take distributions for up to 10 years.
That allows them to continue the tax deferral of the IRA.
There’s a double benefit if they’re also in a lower tax bracket than their mother.
So, when they do take distributions the taxes will be lower than if the distributions were made to their mother.
In next week’s issue of Retirement Watch Weekly, I’ll bring you part two of this timely estate planning development, including how you can best prepare your estate during these uncertain times.
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