The first couple of weeks of January 2008 and the period of 2007 immediately preceding it saw frenetic activity throughout New Hampshire by presidential candidates seeking the support of New Hampshire voters. On January 8, 2008, Senator John McCain of Arizona and Senator Hillary Clinton of New York won the Republican and Democratic primaries, respectively.
This is all fun, important and historic and New Hampshire voters did their job, reinforcing the importance of careful examination of candidates and the unique place that the New Hampshire Primary has in the United States political process.
However, what has this got to do with estate planning and retirement?
As it turns out, the discussion and debate among the candidates points out several important things that all individuals should consider, whether or not they think they have done their estate and retirement planning.
First, there was a lot of discussion of "making the tax cuts permanent", or, coming up with an alternative. What does this mean? In 2001, Congress passed a tax law that fundamentally reorganized the estate tax. This was done at the behest of President Bush and, because there were fewer than sixty votes in the United States Senate, the law enacted lasted only ten years, so it runs out in three more years if not made permanent or amended. There were a number of changes, other than in the estate and gift tax, in the tax code that were enacted that year that also expire in ten years.
Specific to the estate tax, the personal tax credit, the credit against estate tax that is afforded to each individual, became $1 million in 2001, grew progressively so that it is now $2 million , will grow to $3.5 million in 2009, and the entire estate tax will be eliminated in 2010, according to present schedule. However, in 2011, the 2001 tax code, with a $1 million dollars personal tax credit, will return if nothing else is done.
Extensive debate took place during the New Hampshire Primary as to what should happen. Republican candidates generally supported "making the tax cuts permanent," which would result in the elimination of the estate and gift tax in 2010 and thereafter. Democrats, on the other hand, proposed various alternatives, the most common of which was to make the $3.5 million personal tax credit permanent from its enactment date, a proposal supported by Sen. Clinton among others.
Whichever of these proposals finally is enacted, each individual should pay attention to the estate plan he or she has. In the event the estate and gift tax is eliminated, New Hampshire residents and those in states like Florida where there is no state legacy and successions, estate or inheritance tax will have no tax considerations to deal with on death. On the other hand, if the $3.5 million personal tax credit or a personal tax credit at some other amount is enacted, there will be a need to continue to consider tax sheltered trusts and tax planning. Until it is clear what is going to happen, the need for such planning continues. (For those unfamiliar with the tax credit, it is credit for the tax payable on a certain portion of the value of an estate, and the value of a person's estate over that amount is taxed at rather high tax rates.)
The typical estate plan minimizes estate taxes through the use of a "family trust" and either an outright gift to a spouse or a "marital trust." This allows a married couple to take advantage of the personal tax credit of each spouse, currently a total of $4 million and growing to $7 million in 2009. There is an unlimited marital deduction for amounts left to a spouse outright or in a trust controlled by the spouse, which, when combined with a family trust that receives the tax credit amounts, results in no tax upon the death of the first spouse, and the ability to take advantage of the personal tax credit of both spouses. Presently, that allows $4 million of family wealth to pass tax free, and that amount will grow to $7 million if the credit is set at $3.5 million. Individuals should be sure their estate planning is done according to these principles.
On an interesting note, federal law does not recognize same sex marriages or civil unions, and the presumption is that the marital deduction is not available to those in such relationships. New Hampshire's civil unions law was effective January 1, 2008, and the Massachusetts Supreme Judicial Court legalized same sex marriage in 2004. Vermont has had a civil unions law for some years.
It is important that each individual or couple does a "balance sheet" of assets and "net worth" periodically. With inflation, accumulation of wealth and the passage of time, total assets grow and personal net worth expands. What may have been a non-taxable estate relatively recently could become taxable in the event of inheritance, sale of a business, or some other economic windfall.
Further, those who have estate planning documents that include credit-sheltered trusts and other tax planning should examine those documents to see whether they are still current. New Hampshire adopted a new Uniform Trust Act a couple of years ago, and trusts should be examined to make sure they comply with it. In addition, inter vivos trusts that have been signed usually contemplate the transfer of assets to the trust so that all assets will be in the trust prior to death, in order to avoid having to probate the estate of the trust's grantor. We all get older every year and the desirability of funding trusts increases accordingly. A periodic review of what assets are held in what name is important.
New Hampshire enacted a new health care advance directive law that was effective January 1, 2007. The new form that was enacted in that law is becoming common in New Hampshire health care institutions and estate planning. Those who have prior documents are not in jeopardy of having those documents becoming invalid, but should consider whether the new form should be signed so that health care providers will recognize the form readily and not question whether the existing documents are still effective. This same advice applies to durable powers of attorney for financial and business matters, as those with relatively old documents probably do not have requisite acknowledgement forms attached and could result in a question of whether they are still valid.
In short, the discussion of federal law during the New Hampshire Primary serves as a reminder that everyone, with or without an existing estate plan, needs to have one, or review what he or she has.
On another important matter, people with retirement accounts, especially individual retirement accounts (IRA's) should be aware of the emerging law concerning those documents.
Presently, federal tax law provides the right to convert regular individual retirement accounts into "Roth IRAs" for those with relatively limited annual income. Roth IRAs have the advantage of growth without tax, withdrawal without tax and are not subject to the rule that at age seventy and one half funds have to be withdrawn over the lifetime of the beneficiaries. On the other hand, contributions to Roth IRAs are made with after tax dollars.
The substantial advantage of Roth IRAs make attractive a law providing that in the year 2010, there is no limit on the conversion of regular IRAs to Roth IRAs. There will be a tax on the amount withdrawn that can be paid over two years, but then the funds will grow tax free, can be withdrawn tax free and do not have to be withdrawn on a schedule, and the owner may name successive beneficiaries. This law exists now but could be amended, depending on what tax laws are enacted by the Congress on the recommendation of the next national administration. This makes the New Hampshire Primary somewhat relevant to that discussion, as well.
Assuming there is no change, however, present law commends keeping money in IRAs as long as possible and having money flow to beneficiaries. Recent changes in the law allow increased contributions to Roth IRAs, especially for those over fifty years of age. Individuals should determine whether company profit sharing plans have a Roth feature allowing contributions to those accounts, currently at $20,500 per year, and those who have the capacity to do so should consider that as an alternative to traditional savings vehicles.
Since 2006, non-spouse beneficiaries who inherit qualified retirement plan assets have been able to establish inherited multi-generational IRAs that have significant tax and planning advantages allowing funds to grow for an extended period of time prior to withdrawal and free from tax.
All of this commends individual consultation and planning concerning funds in individual retirement accounts since the amount of such funds is significant and often neglected.
Even in times of declining stock markets, rumors of recession and similar gloom and doom, proper planning, proper beneficiary designations and analysis of retirement funds are important.
The attorneys in the employee benefit and estate planning and probate groups at Sheehan Phinney Bass + Green in our offices in Hanover, Concord, Manchester and Boston are available to discuss the estate planning and retirement plan needs of our clients with specificity. It is important to note that "one size does not fit all" and individual analysis needs to be made in figuring out whether estate planning is in place and in planning for retirement plan options. This article is designed to suggest action, and is not intended as individual legal or planning advice.
We look forward to hearing from you.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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