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Tax Newsletter
January 2002

For many individuals, a significant milestone in the financial and estate planning process is the signing of documents - wills, trusts, etc. This is often the culmination of a long and arduous planning process. Unfortunately, it is generally not the end of the process. Completion of the process may require that title to property be changed, or that beneficiary designations be amended. A trust arrangement will only be effective to the extent that property is transferred into the trust; trust terms will not have an impact on property that is not subject to its reach.

Once all of the necessary steps are taken to implement a plan, this is only the beginning of a life-long planning process. With the dramatic pace of change, both economic and personal, it is important that plans be reviewed on a regular basis. Changes in personal circumstances may prompt a review of an estate plan. Economic changes may affect the dispositive provisions of an existing plan. New tax laws may also require that plans be reviewed.

There have been significant developments in the past year with respect to the phase out of the estate tax. The ultimate fate of the estate tax is still up in the air. Under the law currently in effect, the estate tax gradually phases out over the next few years. It disappears completely in 2010; however, absent additional legislation, will re-emerge in full force in 2011.

Estate planning formula clauses

Until the estate tax is fully phased out, a tax is imposed upon transfers at death that exceed a certain lifetime exemption amount. Thus, in 2002 and 2003, a decedent whose total estate and lifetime gifts exceed $1,000,000 will be subject to estate tax on transfers to individuals other than a surviving spouse. There is an unlimited marital deduction that excludes from taxation transfers to a surviving spouse. The exclusion amount increases over the next several years to $3,500,000, until the estate tax is eliminated in 2010. At that time, estate tax will not be imposed, no matter what the size of the estate transferring at death.

Under current law, a typical planning approach is to provide for a transfer into trust for the benefit of non-spousal beneficiaries an amount equal to the maximum exclusion amount. The balance of the property passes to the surviving spouse.

Thus, for example, upon the death in 2002 of an individual with a $2,500,000 estate, a typical plan might provide for $1,000,000 to pass into a “bypass” trust for the benefit of children and $1,500,00 to pass to the surviving spouse. The amount passing into trust is not subject to tax due to the $1,000,000 lifetime exclusion; the amount passing to the surviving spouse is not subject to tax due to the unlimited marital deduction.

As the estate tax is phased out, the maximum exclusion amount will increase. As a result, larger amounts of property may be transferred to the bypass trust, resulting in less property for the surviving spouse. Once the estate tax is fully phased out, a plan that has not been amended may result in all property passing to the trust, with no assets passing to the surviving spouse!

The scenario is made even more complicated because of the current sunset provision pursuant to which the estate tax would return in 2011.

Because of the changes in the estate tax rules, we recommend that individuals review their estate plans to ensure that the dispositive provisions remain true to their original intent.

Plan implementation

As you review your estate plan, this is also a good time to review the manner in which title to property is held, as well as beneficiary designations on retirement plans and life insurance policies. You may have acquired additional property since the plan was originally implemented that should be in the name of a trust. Family circumstances may have changed requiring modifications to beneficiary designations.

The year 2001 saw favorable developments with respect to the rules for IRA distributions. The complex rules that affected beneficiary designations have been simplified. Beneficiary designations should also be reviewed to ensure that optimal use is made of the new rules.

Review checklist

Items that individuals may wish to review as part of their review process include:

  • Wills
  • Trusts
  • Healthcare directives and powers of attorney
  • Power of attorney for financial management
  • Life insurance policy beneficiary designations
  • Retirement plan beneficiary designations
  • Title to real estate and other assets
  • Contents of safety deposit box

Please feel free to contact us should you have any questions regarding the foregoing.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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