At the end of the 1990s, estate tax planning was primarily driven by stock market explosions, real estate escalation, and widespread concern of people facing tax risks for the first time. Congressional passage of the Economic Growth and Tax Relief Reconciliation Act (EGRTTA) in 2001 may over time eliminate those concerns (not a sure thing), but a new problem confronts many estate plans today. Broad market declines — on top of the telecom debacles of the last two years — followed by uneven recovery to date leave estates falling in size and grand tax minimization plans potentially irrelevant. Alternatively, if one were worried about not getting their will done, can that be ignored now? These are not purely academic issues, but problems that need to be addressed.
Congressional uncertainty — or conflict with administration goals — over the projected step-up in the exemption base and elimination of estate taxes in 2010, leave every estate plan in play. Stock market swings may move estates back and forth from tax exposure to safety week by week. If one now has no risk of paying taxes, that doesn't remove the need for periodic review. Value shifts can place charitable bequests or plans to address second or third generation family members in need of adjustment, even if they are not tax-sensitive. Every estate plan should always be driven primarily by family or donee concerns — as one pays estate taxes only if the estate is substantial (less than 1/2 of 1% of estates). Decreases in the size of the estate may shift the allocation however, so even if that saves taxes, it may not serve the donative intent.
Fractional divisions of an estate may provide more room for flexible structuring of an estate plan by allowing for value shifts. Fixed-dollar gifts that can be funded from whatever source a trustee or personal representative has available may also allow for adjustments that take into account value shifts in assets. Giving particular real estate to one beneficiary, particular stock — especially closely held stock — to another, and a public equity portfolio to a third, can make for a true panoply of varying divisions of one's estate.
Anyone without a will should be concerned about reviewing their estate, even if the size suggests they will never incur estate tax liability. Such an evaluation should involve a professional — whether a lawyer, accountant, financial planner, or insurance agent with estate expertise — since the inclusion of assets in terms of estate tax regulations is not always understood by the ordinary citizen. Providing for children/dependent parents/unmarried partners/pets/second or later marriages generally demand more analysis than the common legislative scheme. The demographic model that fits the basic estate outline contained in the Oregon or Washington statues is not for everyone.
Traditional husband/wife planning that leaves a maximum credit shelter trust with the remainder to the spouse, including jointly owned home, car, etc., may need more review than previously thought. A spouse's separate estate from their own work (in the world of DINK life) or inheritance may overload their estate from a tax perspective, while market changes leave a credit shelter trust underfunded. That scenario may result in a fancy plan with no tax on the first death, but with a big hit on the second that can be upsetting to heirs who thought a balanced plan would minimize total taxes. Couples may need to have annual reconciliation sessions to shift value, which can be done with no tax consequences, in order to keep their estates within expected parameters of their plans and the shifting statutory standards.
Recommendations for lifetime giving — often hard psychological hurdles for depression-born or hardened individuals — may be more difficult since the exemption amount for gifts will freeze at $1,000,000. Charitable trust arrangements that multiply the non-taxable amounts of gifts, and which often provide equivalent returns to non-charitable donees, may have even more attraction. The challenge for foundations and charitable organizations in today's market will be to meet the returns projected and promised.
Whether or not the economy continues a turn around, with an attendant stock market resurgence, real property values will continue to oscillate depending on urban growth boundaries and other sometimes uncontrollable factors, and closely held company values will rise and fall. The planning process must be ongoing and constant, if only to avoid unintended consequences of even the best laid plan.