Growing Asset Values May Shift Estate Plan Off Target


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Will your future estate owe federal estate tax? How much will the tax be? The answers depend on the overall worth of your investments, home, life insurance, business and other assets when you pass away.

The total value of your assets is a primary consideration in planning your estate and an influence on the choice of strategies that may reduce potential estate taxes. Your total worth is not static, as asset values are always changing. If your worth has significantly increased or decreased, your present estate plan may no longer be tax efficient. Increased tax liability may make it costly to ignore changes in the value of your assets.

Complicating matters even more is the scheduled repeal of estate taxes in 2010. Estate tax planning continues to be important until then, however. The repeal is in place only for 2010 or the old estate tax rules return.

Your Present Plan’s Assets

Your estate plan probably addresses assets that have grown in value since you put the plan together or last revised it. Your investments—those that are taxable and those in your tax-deferred retirement plan—may now be worth a lot more. The value of your home or your business also may have increased significantly.

The Assets Added Since Making Your Plan

Since the completion of your current will and estate plan, you may have added more assets (for example, more life insurance). Unless you make very careful arrangements to avoid it, your taxable estate will include the proceeds of the new insurance. You may also have inherited investments or other assets. Your estate will include any of that inheritance remaining at the time of your death.

The value of your estate will be the combined worth of your assets at the time of your death, or soon after. It won’t matter if an asset cost you much less. On the other hand, until 2010, the tax law will aid your heirs by allowing a “step up” in the tax basis of any inherited asset to its value at your death. If your heirs decide to sell the inherited assets, the “step-up” rule may help reduce the capital gains taxes they will have to pay.

After 2009, only a limited step-up is available—as much as $1.3 million of estate assets will be eligible for assets passing to a surviving spouse. Otherwise, the decedent’s basis generally will be carried over to inherited assets.

How Large Is Your Potential Estate Now?

To quickly estimate how much your potential estate is now worth overall, you can add the market values of your assets and subtract any debts you owe from the total. Your estimate may be a lot higher than the total assets that are the base of your present estate plan. Once you have a better idea of your present estate size, you can look at the potential federal estate taxes.

Anticipating Tax Liability

When your estate plan was written, the size of your assets may have called for a plan that anticipated no taxes and confined itself to estate settlement and distribution of assets to your beneficiaries.

Also, your plan may have arranged for reliable asset management. Such a plan will need revision now if your total assets are more than the current unified credit exclusion equivalent amount.

A strategy that uses one or more trusts may reduce or eliminate these taxes. A trust strategy may also help ensure that the assets sheltered from taxes will be professionally managed.

Did your current plan anticipate some tax liability for your family? You may have already arranged to eliminate the taxes by using a trust.

Compare the amount of estate assets you project now with the amount your current plan allows. Your present plan may not be able to avoid all the tax liability if you have been fortunate enough to have substantial asset growth.

Other tax-saving strategies (for example, using a charitable remainder trust) may be desirable because of new asset circumstances. With a larger estate, it is more likely your estate’s investment assets will require a professional manager’s care.

Your estate plan may need to be reviewed annually, based on the value of your net worth and the complexity of the assets you own. Keep your plan on target and talk to your advisor team today.

These articles are reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.