CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Need For Long Term Care Insurance Overstated? The Elder Law Report reported in its January 2015 edition that a study by Boston College suggests that purchasing long term care insurance will make financial sense for fewer individuals than was previously thought. Even though previous research underestimated the probability that people would need long term care, the study found that the research had overestimated the length of the average nursing home stay. Previous studies suggested that long term care insurance would be a rational choice for as many as 40 percent of single individuals, while the recent study suggests that perhaps only the most affluent 30 percent would be likely or able to purchase long term care insurance. I might point out that, personally, I believe that many people, if not most, should evaluate the availability and affordability of long term care insurance, and then make a decision based on their own risk tolerances and preferences. I generally recommend that my clients obtain at least three different quotes from at least two and perhaps even three different vendors, for perhaps as many as nine comparative quotes, at least some of which should be similar to the others to allow an “apples to apples” comparison. I also generally recommend that my clients not make the actual purchase until they have examined a specimen contract, so that they know what the contract says and not simply what the marketing literature suggests. They should allow me to review the proposals, and in particular their preferred proposal, before making a final purchase decision. While I would never discourage a person from purchasing long term care insurance, I do find that many people buy products that are beyond their needs, with benefits that make the product more expensive than it needs to be, which many times makes the product unaffordable with the result that the person decides not to purchase long term care insurance at all. In some instances, the purchase of some insurance is better than the purchase of no insurance. There are many policy variables that can be manipulated to reduce the premium cost.
Life Insurance In The Context Of Retirement Planning. The March 2015 issue of this newsletter suggested that there are instances when it might make sense for a surviving spouse to receive a specific portion of an IRA or other retirement plan, and for the children to receive another portion. Such arrangements might be beneficial in lieu of a trust mechanism through which the retirement benefit might be payable to the trust and then divided between the surviving spouse and the children, or which might provide that the spouse would receive benefits during the surviving spouse’s lifetime with the remaining benefits being payable to the children after the surviving spouse’s death. Another alternative to be considered, which makes sense in some instances, is to provide for the surviving spouse to receive the entire retirement benefit, and for the children to receive other assets, or perhaps even to consider the purchase of life insurance for the benefit of the children. Such an arrangement eliminates some of the risks of utilizing a trust as the recipient of retirement benefits, and allows the surviving spouse to utilize the advantages of the post-death elections which are available to the surviving spouse, such as the spousal roll-over option, and allows more non-taxable benefits to pass to the children. As mentioned in previous newsletters, more consideration should be given to retirement benefit planning than is typically the case. In many estate plans that I review, I find, unfortunately, that a trust may have been created, and for one reason or another, the trust has been named as the beneficiary of the retirement benefit, which is usually not the ideal planning option. When a trust is utilized, the trust must be specifically designed and the plan carefully implemented to achieve particular tax and other planning objectives.
Importance Of Tax Basis In Current Estate And Tax Planning. As noted in previous issues of this newsletter, the current federal estate tax exemption equivalent amount is $5.43 million, which means that with combined planning for a husband and wife, federal estate tax could be avoided on a current estate value of $10.86 million. While tax basis planning has always been important in the context of estate planning, it is now even more relevant since improper planning with basis can result in capital gain taxes to a decedent’s or a lifetime donor’s beneficiaries, when in the past federal estate taxes and perhaps state inheritance taxes were the bigger concern. It is now much more important to give consideration to basis issues than it was before the recent federal estate tax changes. The current capital gains tax rate is 23.8 percent (including the investment surtax which applies to some taxpayers), and since on average when state taxes are taken into account the capital gain tax rate can be as high as 25 percent or more, proper planing to avoid the capital gain tax has become very significant relative to the federal estate tax which is much less likely to be imposed on the typical taxpayer. Since beneficiaries who inherit property will generally receive a “step-up” in basis to the fair market value of the property at the time of death, while if they receive property by gift, they will typically receive a “carryover” basis (i.e., the same tax basis that the donor had in respect of the gifted asset), then in general it will be better for a beneficiary to inherit an appreciated asset than to receive the asset by gift. If a child inherits the appreciated assets, the child will receive a “stepped-up” basis, and can sell the property without capital gain tax consequences except to the extent of post-death appreciation. If the beneficiary receives the property by gift, and later sells it, the child would pay the capital gain tax based on the selling price relative to the tax basis that was “carried over” to the beneficiary as a result of the gift. When property is transferred by means of a trust, it is very important for the trust arrangement to be structured in such a way as to give the desired tax result in the event that the trust sells property. Future issues of this newsletter will address certain important aspects of capital gain tax planning involving issues relating to tax basis.