As April 15 approaches following massive changes in the tax laws with the Tax Cuts and Jobs Act, one consistent thought follows. Over the years as the tax code changes both for estates and individuals and corporations, proper planning considers not just taxes but the ultimate goals of the taxpayer whoever that taxpayer might be. Tax planning is part of the puzzle but it is not everything.
As one example, wills drafted for the upper tax brackets in years gone by often read more like mathematical equations than documents conveying assets and belongings to children and grandchildren. This was largely because of adjustments made to maximize tax benefits under the laws. Many of those documents are no longer relevant because of changes to the federal tax code and we no longer see so many A-B trusts or similar planning techniques. One question to be asked then as now – did they or do they accomplish the planning goals of the maker?
If anyone thought the new federal tax law would make planning easier, it has not. This complicated document is taking time to digest even by the IRS.
Estate, retirement and disability planning is not just tax planning. Tax planning has to be incorporated into the overall goals and both the goals and the laws are likely to change over time.
Regardless of tax consequences, whenever a person asks the questions – what do I own? How can I maximize what I own? Where will my assets be going? Who will care for my minor children or disabled relatives if I die? If I become disabled? Will I have enough to pay for my childrens’ education, for my retirement or for my disability or my spouse’s disability?– he or she is asking the ultimate questions to satisfy his or her needs.
Viewed this way, estate planning goes far beyond the drafting of a simple Will or even a complicated Trust. Depending on the objectives, either simple or complicated might do the trick. More massive documents do not necessarily accomplish the desired result.
Regardless of tax objectives, Wills and Trusts are personal documents. Sometimes people will decide the best result for tax purposes is not the same as the desired result for personal reasons. This is only one reason why you cannot safely just open a form book and write a Will.
As one example, an unmarried couple might know there may be certain tax benefits associated with being married (or not). Pennsylvania requires a 15% inheritance tax when an unrelated party inherits but only 0% if married. A couple might still decide to remain unmarried for other reasons.
When designating a beneficiary for an IRA, for tax purposes it might make sense to name the youngest potential beneficiary but that might not be what you want.
Decision making is not something that is over and done with at the completion of a single document or at one time. It can become better focused over time and even good plans can be improved upon.
On the other hand, no one has to feel inadequate for failing to start.
Everyone who has assigned a beneficiary to an insurance policy or an IRA has begun. It is just that some people are farther along than others.
Probate vs. Non-Probate Assets. The first question to ask is how assets are designated or titled. This can override even a well-drafted Will.
A Will covers only probate assets.
Many people think they can designate the beneficiaries of their life insurance in a Will. It does not work this way. If there is a designated beneficiary to a life insurance policy, that person or entity is the recipient of the proceeds. Similarly, if an individual designates someone as beneficiary of his IRA or describes a bond as POD (Payable on Death), the asset follows the designation. That asset cannot be passed under the Will unless the Estate is the beneficiary. Also, by the way, inheritance taxes are still due even on POD or TOD and on joint assets even though they pass directly.
When analyzing an estate plan, regard has to be given to the complete picture – the result not only of the mathematical calculations implied in the Will but also the personal result for all individuals involved.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.