Minding the estate

By Leonard Wiener

It's not only the rich who have to worry about what they've amassed

You may think estate planning is about taxes. Not entirely, says Kevin Flatley--it's also about control. Wealthy clients, says the director of estate planning at Citizens Bank in Boston, "may set up a plan to save tax, but what really makes their eyes sparkle is the way they can manage the assets after their death." What if a spouse remarries? How much should a son-in-law get? A "generation-skipping" tactic that provides income for a daughter, with the assets passing to the grandchildren, can save taxes--and also keeps money away from a daughter's ex or other unintended hands
Besides, estate taxes simply aren't an issue for most people. Currently, roughly 2 percent of estates are taxed. That is due in part to canny maneuvers, but the bulk of estates are exempt anyway. For 2004, the first $1.5 million of an estate, after deductions for such items as charitable bequests, is excluded. And thanks to a new law, the exemption is scheduled to rise while the tax rate falls. By 2010, no one will pay a dime.

But planners are edgy. The estate-tax bite will gradually diminish until it vanishes in 2010--but at midnight on December 31 of that year, it will reappear as if the phase-out had not happened.

The expert consensus is that the full return of the tax will be rescinded before the witching hour. Some in Congress are pushing for permanent repeal, but budget deficits and political sensitivities make that a long shot--the tax did raise $23 billion in 2003. Stephen Pappaterra, director of wealth planning at the Philadelphia office of PNC Advisors, says he's simply assuming there will be a tax of some sort. As an alternative to outright repeal, many planners expect an exemption of perhaps $3 million and a top tax rate well below the 55 percent in force before the changes.

Adding to the muddiness, states whose estate tax has been linked to the shrinking federal levy are scrambling to cut the tie or otherwise make up the loss. And a new federal tax on gifts totaling more than $1 million during your lifetime means still more planning complexity.

A matter of trust. Whether or not your estate is large enough for all of this uncertainty to concern you, Flatley's point about control is relevant even for modest estates. One tool that can handle an estate and also help manage your assets before you die--regardless of tax consequences--is a living trust.

The details vary, but the idea is simple: You set up a trust that kicks in when you can no longer handle your own affairs or when you die. It has several big advantages. Funds and property can be distributed quickly, family affairs can be kept private, and costs can be trimmed because assets passing through a living trust after death do not have to go through probate.

A living trust isn't the only way to avoid probate and make transferring assets simpler. Bank accounts and other assets can be jointly owned, going to the survivor. And there is life insurance.

Source: USNEWS