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 the need for family and estate planning disappeared with a $5 million exemption amount and portability.

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.

For estates of individuals dying, or lifetime gifts made, in 2011 and 2012 the maximum estate, gift, and generation-skipping tax rate is 35 percent on taxable transfers in excess of $5 million. Absent further legislation, the maximum rate will be 55 percent on taxable transfers in excess of $1 million for estates of individuals dying, or lifetime gifts made, after 2012. In addition, “portability” of the “deceased spousal unused exclusion amount” to a surviving spouse will be repealed after 2012 without further legislation. Bottom line is that is that we still have considerable uncertainty regarding our transfer tax system which makes it extremely difficult to do long-range estate tax planning. Repeal of the transfer tax system after 2012 is highly unlikely.

Family and estate transfer planning is should not be undertaken lightly. Without regard to the estate or gift exemption amount or the marginal transfer tax rate, planning is, and will be, required. The process must involve legal and tax planning professionals.

©2011 Ronnie C. McClure, PhD, CPA