Considerations in Drafting Estate Plans Year End 2002

Here are a few thoughts to consider when drafting new plans or reviewing existing ones in the next few weeks:

• With the $1,000,000 applicable exclusion amount continuing into 2003 and the probability that at least some of the provisions of the Economic Growth and Tax Relief Act of 2001 (EGTRRA) will be made permanent (including full repeal of federal estate tax), fewer clients will require federal estate tax planning. (This won't have as great an effect on estate planning services as may appear at first blush. In 2002, a TOTAL of only 107,100 federal estate tax returns were filed - far less than 1% of deaths occurring in 2002. If permanent repeal passes, the changes in step-up rules, the impact on business transition issues, the need for review and update of existing plans, and the continuing need for estate planning for many other reasons will make this area of practice a continuing fast-growth and high demand area.) It is important that we educate existing and potential clients that increasing federal estate tax exclusions or potential repeal does not negate the need for estate planning or review of existing plans. In many cases, it's more important than ever for plans to be reviewed and updated.

• In some cases, plans can be simplified considerably. For clients whose estate will realistically never exceed $1,000,000 - even after life insurance owned by the client, potential inheritances, increases in asset values, etc. are considered - it may be advisable to eliminate complex federal estate tax planning language to make the estate plan more easily understood by the client. Simplification, when feasible, increases the chance that the client will review and internalize the plan, and will notice if provisions are not appropriate to carry out current wishes.

• In other cases, where potential growth in asset values, future inheritances or other factors could create a taxable estate, incorporating more flexible provisions such as disclaimer, rather than mandatory funding, may be appropriate. If mandatory funding of trusts was included in the plan, the $1,000,000 applicable exclusion amount, as well as future increases or full repeal, could result in unnecessary restriction on assets no longer required to eliminate tax, creating unintended results or major issues.

• As economic factors and the phase out of the state estate tax credit put pressure on state treasuries, state estate taxes may become a much bigger concern. Each client's estate plan should be reviewed in light of current, pending or probable future state legislation which may significantly impact individual estate plans, including those who previously would not have had to be concerned about federal estate tax issues since many state estate taxes now apply to smaller estates.

• Prior to year end decisions regarding transfers to family limited partnerships or other entities, old assumptions about federal estate tax must be revisited. For example, if the rationale behind the FLP was to transfer value and future growth from the taxable estate, and to create minority discounts in valuation of assets transferred, additional funding of those entities may or may not be appropriate. If increases in exclusion amounts or ultimate repeal eliminate federal estate tax for this client, and if retention of interests by the client will provide a greater sense of security for the client, as well as obtain step-up-in-basis at death, then it may be beneficial for the client to retain assets. For the period during which the future of federal estate tax is uncertain, term life insurance held in an irrevocable life insurance trust could provide liquidity with which to pay any tax which could arise if repeal is not extended (with ILIT provisions appropriately restricting direct payment of tax with proceeds to eliminate pull-back into the taxable estate).

Many clients with estates of varying sizes are in need of information and estate planning services. As a profession, we can fulfill this need - creating estate plans which save dollars, preserve family relationships, and carry out the client's wishes - while building successful and satisfying practices in a non-adversarial environment.