HOW CONFUSING IS ESTATE PLANNING?
Some time ago, a survey found that 74% of respondents felt estate planning was a confusing topic. A colleague of mine told me, “Clients want certainty and simplicity, but our practice is based on uncertainty and complexity.” That reality translates to confusion for everyone – not just clients but also attorneys. But attorneys do not create uncertainty or complexity by choice. Uncertainty is built into the system, and some degree of complexity is necessary to deal with uncertainty. What do I mean?
First, let’s look at uncertainty. For many years, estate planning revolved around saving taxes, particularly estate taxes. By drafting an estate plan a certain way, attorneys could produce savings of hundreds of thousands of dollars. For example, in 1997, the estate tax exemption was $600,000. This meant if you died with a million dollars, the $400,000 over the exemption amount was taxed at 55% - a whopping $220,000 in federal taxes, and there was likely going to be an additional bite in state taxes. Many people were in that boat – especially if you owned real estate, had an investment account, and did well in the stock market. By designing an estate plan, with just mild complexity, you could eliminate that tax bite.
From 1997 to 2010, the estate tax exemption changed at least eight times. The tax rate changed at least six times, varying from a high of 55% to a low of 35%, and now sits at 40%. Other tax factors involving income tax, treatment of IRAs, and variable state taxes changed. Even the changes in the definition of marriage have had a significant impact on estate planning. Now, the federal estate tax exemption is over $12,000,000, indexed for inflation, so many people are not concerned about estate planning to save taxes. But wait – the current law says that amount will automatically reduce to pre-2018 levels in 2026. So, in 2026, the exemption amount will be $5,000,000 indexed for inflation. Or will it? Current proposals in Congress aim to decrease the exemption even further. Could the estate tax exemption disappear completely, exposing everything you own at death to a crazy high tax? Of course, it could. We just don’t know if or when.
Change is constant, and because you have no idea what the exemption amount will be when you die, it might be a good idea to build some flexibility into your estate plan, just in case. That flexibility can only come with some measure of complexity.
Other considerations we look at include income tax implications. Treatment of IRAs and other tax-deferred savings plans have changed dramatically over the past two years, resulting in bigger income tax hits for beneficiaries. There are ways to help your beneficiaries avoid the income tax hits that come with the transfer of those funds. What about capital gains? There could be changes in what a beneficiaries’ basis is in inherited property. The basis is the value from which a gain is computed for tax purposes. So, if you inherit the house your parents bought in 1965 for $35,000 and the value when they die was $350,000, are you going to be hit with taxes on the $315,000 gain when you sell it? Right now, there is a stepped-up value to the date of death, so you will only be taxed on appreciation from the $350,000 to the value when you sell. Proposals on the table right now call for eliminating the step-up altogether. But when will that tax on appreciation be due to the heirs? One proposal would make it due at the time of death – there may be no choice but to sell the property just to pay the tax.
These are constantly moving targets - the laws change, different states vary, and situations are different for everyone. It is uncertain. Complexity follows uncertainty.
And there are many factors to consider having nothing to do with taxes. A big issue in my practice is dealing with blended families – couples who marry but each has children from a prior relationship. Each often wants their own assets to go to their children, not the children of their spouse. They often want the assets to be used to care for the surviving spouse, if necessary, but then to just go to their kids. Estate planning with some degree of complexity is necessary to achieve this goal.
What about if your children have issues of their own? Sometimes I encounter parents of children with special needs or with, drug or alcohol issues, or mental illness. The parents want to provide for the children but protect them (and their inheritance) as well. Sometimes, the child receives government benefits they need, but those benefits would be jeopardized if the child received an inheritance outright. Through estate planning, you can protect these children and their needed benefits. Some complexity is necessary.
All too often, a parent will tell me, “I love my son and my grandchildren. I don’t trust my daughter-in-law.” Maybe they think the marriage won’t last. Estate planning can be crafted to protect the inheritance your son and grandchildren receive from the daughter-in-law. You can achieve divorce protection, remarriage protection, blood-line protection, and control for the uncertainty of future events.
Is estate planning confusing? In many cases, it can be, and in many cases, it must be if it will be effective. This is why you need an attorney experienced in estate planning to do it right and make it understandable. The same survey cited above found that 42% of respondents said an attorney was their first choice for estate planning information. More than half of the respondents said it was difficult finding someone to advise them. My book, A Legal Guide to Growing Older: Planning for Disability, Dementia, and Death, has a chapter dedicated to the subject of finding advisors as part of your estate planning team. My website, RonaldZackLaw.com, also provides some information. If you are here in Southern Arizona, you can call the Pima County Bar Association Lawyer Referral Service at 520-623-8258. They can direct you to an experienced attorney for a consultation.
Ronald Zack is a certified specialist in Estate and Trust Law, State Bar of Arizona, 2017. If you have questions, please contact at 520-999-3738, ronzack@ronaldzacklaw.com.
