A young stand-up comic named Bill Cosby had an “LOL” kind of
moment in his act many years ago when he talked about the patient undergoing
open heart surgery, under local anesthesia, lying on the operating table
reading the newspaper. While engrossed in the sports section, the patient hears
the surgeon’s calm, measured voice, “Probe … swab … scalpel
… scalpel … oops!” Startled, the patient nervously asks the surgeon,
“Oops? Did I hear you say ‘Oops’? I know what I meant when
I’ve said ‘Oops’ before. What did you mean when you said
New estate tax laws
Life is rife with “oops” moments. We try to plan for them as
much as possible, but still they occur. Congress imposed a country-wide
“oops” on taxpayers when it failed to enact new estate
tax laws to take effect in 2010 as most
estate tax practitioners had fully expected. It took until
December 2010 for Congress to settle the estate tax question as part of the
extension of the Bush tax cuts. As it currently stands, instead of a 55% tax
and just a $1 million per-person exemption, we now have a $5.12 million
per-person exemption (in 2012) and a 35% tax.
Moreover, the new law contains a portability feature that allows for any
spousal unused exemption to be passed on to the surviving spouse, thus creating
a $10.24 million estate tax-free umbrella. Even better, the estate tax and gift
taxes are once again “re-unified” so lifetime gifts of up to $5.12
million per person are now permitted.
However, the law as written has a 2-year Cinderella-like lifespan so
that after 2012, the old law returns. As a consequence, many of us have visited
with, or should be visiting with, our estate attorneys to determine what, if
anything, we need to do.
Take advantage of changes
What have you done or what do you plan to do? If you do not take
advantage of the new, more generous provisions of the estate tax law, you may
be creating a great big “oops” in your estate.
For example, what if your son is sued for malpractice and should under
no circumstances receive any of your estate assets outright as your trust so
dictates? What if your daughter hits the $100 million lottery and does not need
(or want) the money forced on her from your estate? Might it be better to
spread that wealth among your other children?
What if future income tax or estate tax laws change multiple times,
perhaps after you die, and your estate trust(s) cannot adjust to those new tax
realities? What if your attorney made a drafting mistake in creating your
irrevocable trust, an error for which your children and grandchildren will
someday pay the unforgivable price? What if your trustee cannot be trusted and
needs to be changed? Without an “oops” provision in your documents,
inequities like these can be problematic at best, destructive at worst.
In other words, if such irregularities occur within your irrevocable
trust — or in your revocable trust that becomes irrevocable at your death
— is your estate plan doomed to failure? Maybe, maybe not.
Some estate trusts permit minor flexibility but not so much as to impose
detrimental tax results on the assets within the trust. Sadly, many older
trusts are carved in stone with little opportunity to be modified to conform to
federal, state or local tax law changes, to trustee or beneficiary
modifications, or even to appoint trust assets (in your trust) to another trust
established by you. When was the last time you took out your estate documents
to check? If never, now may be as good a time as any.
Build flexibility into your planning
What can be done to build flexibility into your estate planning and its
documents when the Murphy’s law of inevitability makes certain provisions
of your documents outdated or unworkable? Many estate attorneys now recommend
the use of a “trust protector” to help mitigate the problems that can
occur when changes to an irrevocable document need to be made. In my book, The
Physician’s Guide to Avoiding Financial Blunders
(www.slackbooks.com/avoidblunders), I introduce this fairly recent concept of
A trust protector is inserted into estate documents such as irrevocable
trusts or even revocable trusts (remember that these become irrevocable at your
death) to monitor the trust, the trustee, the beneficiaries and federal, state
and local tax laws to make sure your intentions as the grantor of your trust
are being carried out as planned by you. The trust protector is usually someone
you know and trust implicitly, is someone independent of both the trustee and
the trust beneficiaries and someone who in no way can benefit from the assets,
income or other economics of the trust.
For instance you can empower the trust protector to carry out the
actions outlined in the accompanying table. These actions may enable your trust
to remain effective and vibrant for as long as the trust exists, even if that
spans several generations.
Because the concept of trust protector is relatively new in domestic
trusts (it has been present in foreign trusts for a while), its use is not yet
widespread, but it is increasing. So, because you should be looking at your
estate documents now in light of the latest changes in the estate tax laws, ask
your attorney if you should add such a provision to any new documents he or she
may draft for you. You cannot add a trust protector to existing documents
without serious difficulties, so think in terms of new documents only.
Finally, change is inevitable, especially in tax and state law. You
create wills and trusts to carry out your estate wishes over years and years,
decades perhaps, maybe even multiple generations. Those documents may have the
potential weakness of not adapting to ever-changing financial and economic
landscapes as well as evolving personality, family and risk management issues.
Adding a trust protector — or, as I call it, the “oops”
provision — to your plans may overcome that deficiency. It would permit
necessary changes to be made in your irrevocable estate documents during your
lifetime or after you have passed through the pearly gates so as to fully carry
out your legacy wishes. Then, having added this to your estate plans, unlike
Bill Cosby’s “oops” patient, you can go back to reading your
favorite sports or feature page.