Ordinary Middle Class Americans Will No Longer Need a Tax-Planned Will With Trust Language:
The Senate votes to make permanent the repeal of the Estate Tax for individuals with estates worth less than $5 million and couples with estates worth less than $10 million in 2010.
History: Ever since 2001, the Estate Tax has been in a kind of limbo and tax and estate planners have had to live with the uncertainty. Back then Congress wanted to pass a huge estate tax roll-back for the richest 1% of Americans. Instead of taxing estates over $1 million, they raised the exemption from tax in stages from $1 million in 2001 to $3.5 million in 2009.
That meant that a person who died in 2009 with an assets (including life-insurance benefits) worth less than $3.5 million would pay no tax.
But, because they couldn't pay for a permanent repeal of the tax (which would cost over $100 billion over a ten year period), they left it to expire in 2011! If that happened, the exemption amount would go right back to what it was in 2001. $1 million.
This tax never should impact normal Americans, the middle class. It was designed to prevent the very top 1% from passing vast fortunes on from one generation to another and creating a permanent American aristocracy of wealth and privilege like Medieval Europe.
The Problem: But, people with a house that had gone up in value (or someone living in a high priced area like New York or San Francisco) or people who had a life insurance policy for their families could easily find their estate being taxed if they had more than $1 million in assets.
The Uncertainty: That has meant that people wanting a simple will have had to put extensive and expensive "tax planned will" language in their wills, simply because the law was uncertain!
What IS a Tax-Planned Will?: A normal tax-planned will has about 10 pages of contingent trust information and the heir might wind up having to administer a trust rather than just using the assets they inherited from their spouse. They probably would not want that. For one thing, it means paying an accountant to file a trust tax return every year. For another it means more book-keeping requirements. The trust administrator also has a "fiduciary relationship" to the heirs, which in this case has some absurd and unintended consequences.
The Latest News: Then in March 2009, the Senate passed the Lincoln-Kyl amendment, which would raise the exemption from $3.5 million to $5 million and make this tax-exemption permanent. It will cost $100 billion over ten years time, but at least it would prevent middle-class people from having their estates taxed!
Frankly, I don't know anybody with ten million dollars in NET assets (after deducting what they paid for those assets). So a husband and wife who have a large house, perhaps a vacation home, plus a large $1 million insurance policy no longer have to worry about this tax. Each can shelter $5 million tax free.
Of course, people who might have an estate worth more than $5 million would have to hire a lawyer to draft a tax-planned will. But, they can afford it!
The rest of us now can get by with a simple will!
What's Left? At this point many people can get by with a will they get from a form. If they just want to leave all their assets to their spouse and don't have any minor children this will work just fine (of course there are other issues like powers of attorney so they might wish to consult a lawyer). I write about those issues in another article on this site.
What If You Have Minor Children Or Elderly Parents?: But, if they have children or elderly parents who might need special care then a form will off of the internet probably won't work very well. In this case you probably need a lawyer to draft your will.
Those situations are called "contingent planning." You might die before your child reaches 25 years of age for instance. Here in Denver, Colorado alone there are tens of thousands of families with minor children! Every single one of them ought to have at least SOME form of life-insurance to protect their families in case of death.
Many if not most of them have other assets like a 401k plan, a home, or other assets they might not want their children to inherit at age 18! But, kids reach the "age of majority" at 18! That's when the law says that all assets MUST be distributed to them (in many states)!
Result: "Hello, Tahiti!" And "How do you like my new Porche?" Not many 18 year olds have the ability to properly handle a sudden lump sum payment of several hundred thousand (or more) dollars!
Solution: A simple will with contingent trusts for your children until they reach the age of 25 or 30 might be desirable. But, this kind of will needs careful drafting so that it works in your state. Someone has to know what they are doing in creating it for it to work right.
Worse, if you have "a will" that really doesn't do what you THINK it is supposed to do, you'll never find out! Your heirs will find out when they inherit a big mess years from now!
