Trusts and Estates Magazine, January 2001 

Why Families Will Plan With
Or Without The Death Tax

Families will  continue to plan for the passage of assets from one generation to another  in a prudent, practical manner whether or not they have to account for  gift and estate taxes.

When  many wealthier families plan their estate, the most common complaint is "Why am I setting up a complicated structure of trusts, partnerships,  limited liability companies, and corporations that need to be maintained  for many years, that I don't want and that do not assist me in achieving  the objectives of my family in the passing on of my assets and family  values." The answer from family advisors, be they family office managers,  attorneys, accountants, financial planners, insurance agents, trust officers,  or others, almost uniformly is that the complex planning is necessary to minimize the otherwise horrific impact of the gift, estate and generation-skipping  taxes (the "death taxes"). This focus in planning on avoiding  transfer taxes will change if the death tax is repealed because families  will then actually plan to achieve their objectives of passing assets  from one generation to another in a prudent, practical manner. Death tax minimization will no longer be a concern (of course, planning will still be necessary to minimize income taxes) but planning will still be important. Families will put assets in trusts, corporations, limited liability companies, or partnerships only if that is the best vehicle to operate within. Families  will spend more time discussing their estate plan objectives with their  family members and be more prepared to carry on the wishes of the family  because they will have added flexibility without the restrictions of the tax law. Parents will be able to distribute or gift equally or not, outright or in trust to each of their children without regard for the gift or estate  tax rules. Family members and advisors will worry more about more important  issues such as 1) planning for disabled family members; 2) protecting assets from creditors; 3) distributing different assets to family members;  4) the succession of family businesses; and 5) charitable planning.

Providing for Minor  and Disabled Family Members
Families will continue to appoint agents to make decisions for them when they are unable to do so. Family members need to have durable powers of  attorney for health care and property in each state that they reside and family advisors will help with understanding the law in each state. Advisors will continue to assist family members in planning for the guardianship of their children and help to make sure that the necessary provisions are made to provide the financial assets that allow for adequate care of each child with guidance on how funds are paid and who makes the decision.  Deciding who is the guardian of the children and who is the guardian of  the assets can be a difficult process in which family members often desire  assistance. Advisors can give them guidance using the experience they have working with other families. Special needs family members will continue to present the unique estate planning challenge of providing for that  family member, but not allowing the state, if the family member is in a state-supported program or facility, to seize the assets.

Gifts to Family  Members

Giving to children and grandchildren will be easier without the death tax but will require  more thought and structure. No longer will there be the limits of the $10,000 annual exclusion or the current $675,000 applicable worry. But  parents and grand parents will still need to make decisions about giving  property out right or in trust - and if in trust, the terms of the trust.  One concern is the need to protect assets from creditors.

With the eventual  repeal of the so-called "death tax", families will spend more time discussing their estate plan objectives with their family members and be more prepared to carry on the wishes of the family because they  will have added flexibility without the restrictions of the tax law.

Everyone is aware  of the increasing amount of litigation and the increasing size of judgments.  Spendthrift trusts will protect beneficiaries from such judgments and  will also provide protection in the event of the divorce of a beneficiary.
Another decision is the possible use of incentive provisions. The core of the concept is the use of trust property to encourage certain behavior or achievement by the trust beneficiaries or to reward beneficiaries for  reaching certain benchmark goals. Crafting the appropriate incentive provisions will require, as now, the close advice of the family's advisors.

Planning for the Distribution of Tangible Items
The division after death of tangible items is one of the most stressful  and difficult exercises that a family will go through. Most of the conflict arises because of the personal attachment of more than one family member  to a particular item and not the financial value of the property. Conflicts over tangible items can create breaks in a family beyond repair. An advisor can assist the family member in identifying those specific items of family significance and help the family develop a plan for the distribution of  those assets in an orderly manner.

Marital Agreements
Divorce, unfortunately, is commonplace. Planning vehicles, such as pre and post nuptial agreements, can help to set the financial ground rules for new relationships and ease the uncertainty and confusion of new spouses.  They have always been important, especially in second or later marriage situations and where large amounts of money are involved, and will continue  to be so with or without the death tax.

Revocable Trusts
Revocable trusts will still be drafted and used to avoid probate (which  can, in some states, be time consuming, costly, and tedious), provide privacy as to an individual's dispositive scheme, and provide for the  management of an individual's assets in the event of incapacity.

Succession of  Family Businesses
Family businesses are usually faced with a succession problem when a family  member decides to leave the business or a family member dies. This problem is often solved through a buy-sell agreement. The need for buy-sell agreements will continue even if the death tax gets repealed. Advisors can help craft  buy-sell agreements so that an arrangement is reached in advance as to  how to value the business and set the terms of the sale or purchase. They can also assist in the purchase of key man life insurance in the event  a partner in the business dies. They can assist in determining whether  the business or individual should own the life insurance.

Charitable Giving  will Expand
Families will have more funds to give to charitable organizations since  they will not be burdened with a 55 percent tax and will be able to use less complicated structures to do so, they will continue to use foundations  since that gives them a less professional structure, longevity of their giving objectives, and many times anonymity. In fact, the number  of foundations should increase since more money will be available for charitable gifts.

In planning for the  elimination of the death tax, families should not assume that it will happen until it becomes law and they should stay current with their estate plans based on the present law. As is well known, the current proposals call for a ten-year phased-in repeal. In anticipation of repeal of the entire death tax, it might be useful to make sure that any trust that  is formed can be terminated or amended to take account of possible changes. This can often be done through the use of a trust protector. Gifting early is still one of the best forms of estate planning and it should be continued.  One caveat is to avoid gifts that incur actual taxes. Flexibility should be provided in insurance policies so that, if the death tax is eliminated, the policies can be wholly or partially cashed in, since less insurance  will then be needed. It will be important to keep information on the cost basis since the present repeal proposals call for a return to the carryover  basis. This will require a capital gain tax to be based on the original basis of the asset at the sale or disposition of the asset.

Families want to pass on the values that they inherited or developed as well as the businesses  and assets that they established or enhanced. They will do that with or  without the death tax. But it will be much more satisfying and rewarding for estate planners and family members without the complication of the death tax law. They will focus more time and energy on positive planning as opposed to negative planning and the end product will be a happier  family and a happier estate planner.