Gallet Dreyer & Berkey, LLP | If My Estate Is Less than $5 Million, Then I No Longer Need to Concern Myself about Estate Planning, Right...?
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If My Estate Is Less than $5 Million, Then I No Longer Need to Concern Myself about Estate Planning, Right...?

12/10/2012 | Winter 2012 Newsletter
Ever since President Obama signed “The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” into law on December 17, 2010,1 effectively exempting from Federal Estate Tax taxpayers having taxable estates of less than $5 million 2 ($10 million3 for married individuals), we are often asked this question.

The answer, of course, is no, you must still concern yourself with estate planning, even if your estate is less then $5 million. It is important to have a properly structured estate plan, to ensure your assets pass in the manner you choose and to take advantage of available tax advantages — even if your estate is less than $5 million.

First and foremost, there are non-tax reasons. A properly planned estate will enable you to make sure that your assets pass as you want them to and will not leave this to chance. Planning your estate properly may also permit you to protect your assets from the reach of your children’s (or more remote issue’s) creditors, spouse, etc.

Significant tax reasons also remain. First and foremost, the so-called $5 million “exemption” is scheduled to expire on December 31, 2012. If allowed to expire the “exemption” will be reduced to $1 million. Married couples will not have a $2 million “exemption” since the provision that permits a spouse’s unused exemption to be used by their surviving spouse is also scheduled to expire. It is important to remember that there really is no “exemption.” Rather, the law permits a credit against the tax which would otherwise be payable equal (assuming that no taxable gifts have been made during one’s life) to what the estate tax liability is on $5 million. For there to be a taxable estate, the assets must pass to someone other than a surviving spouse since there is an unlimited deduction for transfers made to one’s spouse, whether made at death or during your life. Assets that are transferred to a decedent’s spouse will be subject to estate tax upon the spouse’s death at their then value. Those clients having assets that may appreciate significantly over time would benefit significantly from including a provision in their will which establishes a properly structured trust that will benefit the taxpayer’s spouse while she is alive, but not subject the assets remaining in the trust to estate tax upon the surviving spouse’s death.

Residents of states such as New York, which impose their own estate tax, have an even greater reason to plan their estates properly. Take, for example, a couple with combined assets of $2 million, all of which are held jointly with a right of survivorship (for example, a home, their checking and savings accounts, etc.) Upon the first death, there would be no estate tax payable since all of the assets will pass to the survivor by virtue of the manner in which the assets are owned — often referred to as a “will substitute.” For this purpose, New York State follows federal law. Upon the survivor’s death, and assuming the value of the assets remained at $2 million, the estate would be subject to a $99,400 New York State Estate Tax. Had the couple in our example merely changed the manner in which they owned their assets from a joint tenancy with a right of survivorship to a tenancy-in-common (and assuming the assets did not pass to the surviving spouse at the first death), each would have had a taxable estate of $1 million. The combined New York State Estate Tax would have been zero, a savings of almost $100,000, for their family. Of course if the federal exemption is allowed to return to $1 million, or if the value of the asset increases, the savings would be even larger. If the couple wanted to make sure that the survivor had the benefit of all the assets during the survivor’s lifetime, each of them would have created a trust within their will which would hold the assets for the benefit of the survivor and then ultimately either pass the assets to, or continue to hold the assets for the benefit of, the couple’s children.