Necessity for Family Estate Planning with or without
Transfer Tax Repeal
Plans for transferring accumulated wealth among family members is not primarily a function of federal or state, gift or estate tax law. Wealth transfer planning should first meet non-tax needs of the family and the wants and desires of the grantor. It is folly to believe, therefore, that a need for family and estate planning will disappear if the federal estate tax is repealed.
Family and estate planning should first consider state law to determine how one's estate will be distributed in the absence of a decedent's Last Will and Testament. Typically, that default "intestate" distribution scheme is not the one that the decedent would select. Each adult who owns property; is married; has children; or who otherwise wants to direct disposition of his or her assets among family, friends, or charity needs a will. Wills also permit a parent to designate who they wish to have custody of minor children. Families with modest estates need wills as much as the very wealthy; the cost of administering an intestate process often are greater than the cost of having a will prepared and administering it. Often, family non-tax planning needs cannot best be met solely by a will. Frequently, lifetime or testamentary trusts will be required to meet the family's needs. Other documents, such durable powers of attorney, directives to physicians, and medical powers of attorney should also be prepared.
From strictly a tax perspective, there is a widely accepted view in this country that accumulated wealth should be taxed at least once each generation. Under current federal law, this objective is met by taxing wealth upon transfer by one individual to another. This is generally accomplished by a unified transfer tax system that encompasses transfers both during lifetime (gift tax) and at death (estate tax). Certain specified transfers are excluded from taxation (transfers to a spouse, or the transfer of wealth below a legislated minimum amount, for example). To preserve the scheme of taxation at every generation, certain transfers that "skip" one or more lower generations become subject to regular gift and estate taxes, as well as generation-skipping transfer penalty taxes. There is also a substantial interplay between the unified transfer tax and the income tax systems with regard to one's "tax basis" used to determine gain or loss on the disposition of property. Many families do not realize that at present levels, the highest transfer tax "bracket" for combined gifts and testamentary transfers significantly exceeds the highest income tax bracket.
Under present law, the unified transfer tax and generation-skipping transfer tax systems are repealed effective December 31, 2009, but only for a one-year period (calendar year 2010). Beginning January 1, 2011, the combined transfer and generation-skipping transfer taxes revert to 2002 law when the combined lifetime and testamentary transfer tax-free amount was limited to $1,000,000 per person. The present state of the law cannot remain the same.
There are strong arguments in Congress to make the repeal permanent after 2009. There are equally strong arguments for preserving the current transfer tax arrangements with significantly increased transfer tax-free amounts to exempt smaller estates from the levy. Estate tax repeal or significant reform also carries with it unfavorable changes in determining "tax basis" in inherited property.
We expect Congressional attention on transfer tax changes to begin in earnest in early 2009. We will monitor those developments in order to assist our clients with their transfer tax needs as quickly as possible as legislation develops and is passed.
Family and estate transfer planning is should not be undertaken lightly. With or without estate tax repeal planning is, and will be, required. The process must involve legal and tax planning professionals.
©2008 Ronnie C. McClure, PhD, CPA