Some Financial Professionals and clients will choose to move forward with a Will-Centered Estate Plan, believing there are benefits to the taxation of the estate during probate. This, however, is a myth. While prior to 1991, there were some inequities in the income tax treatment of Trust-Based Estates vs Probate (Will)-Based Estates; this is no longer the case.
The fact is, regarding federal income tax, the client’s estate will be taxed the same whether they have a Trust or Will.
Here are a few important tips regarding Estate Planning:
Because property avoids probate does not mean it will avoid estate taxation.
Probate fees are levied on the gross estate in probate, while estate taxes are based on the net taxable estate.
Even though there are those in Congress vying for the repeal of the Federal Estate Tax (FET) or a significant reduction, it is better to plan for the law as it stands today while including flexibility for what it may become tomorrow.
For most clients, the benefits and overall costs of a Trust-Based Estate plan far outweigh that of a Will-Based Estate Plan.
Understanding the ramifications of using vs transferring the deceased spouse's unused exemption is vital. While the estate might not be at or near the exemption limits today, that might not be the case later in the client’s life.
Once the estate factors in life insurance, proceeds from employee benefits and IRA’s they may be over the FET exemption limits.
Work with your tax professional to better understand these provisions if you feel your clients may fit the description above.
There are a few things Financial Professionals can do to help clients combat or avoid unnecessary complications later in life:
Complete thorough client reviews that include assets held away, employee benefits, and life insurance benefits from both personal and employment-based policies. Think of these reviews as planning drills. They are a necessary component of a thorough review.
Ensure your clients have a well-qualified tax professional, an EA or CPA, to discuss these matters with.
Remind them that their Trust-Based Estate Plan from Encore has flexibility that allows their trustee to make the best decisions possible at the time and that you will be there with the tax professional to help guide the trustee.