November, 2009
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

Our plan for this article is to cover some forward planning ideas which may have an impact on your future estate taxes, control of family assets, and charitable giving.

As you know, the estate tax exemption has been increasing over the last several years. The exemption is now $3.5 million for 2009, and may stay the same for next year. That increase impacts each of your trust documents and can also change your distribution of assets.

For example, John and Becky are a married couple and each of them has a well prepared individual pourover will and revocable living trust. They do have some assets in joint name, but most of their assets are in their individual trust names. John has a personal net worth of $4 million. If John dies in 2009, $3.5 million would go to the marital trust for Becky (because she survived him), and $.5 million would go to his credit shelter trust.

If John dies in 2009 with a net worth of just $3 million, then all of his assets would go to the marital trust and no assets would flow into the credit shelter trust. Discussing the allocation of your assets between these two trusts is important, as exemptions change from year to year.

In Washington D.C. the Senate and House of Representatives has been talking about freezing the estate tax laws at the level of $3.5 million. At this point we do not know what the new rules will be, but we are confident, however, that some changes will be made to the estate tax law after 2009, despite the hint of a freeze.

Over the years, we have learned that estate planning is an important topic not only for older family generations. Newlyweds also need to discuss this subject. Young couples who have just had their first child definitely need to think through the best use of their wills and trusts to protect not only the surviving spouse, but also their new child.

When we think about the future and the distribution of our accumulated assets, many important documents must be addressed. For example, the ownership and beneficiary of all life insurance policies must be accurately recorded and altered to fit your family’s master financial blueprint. The beneficiary of IRA’s, 401(k)’s and company retirement plans must be carefully reviewed to make sure that assets flow properly to future generations.

Joint Ownership With Rights of Survivorship (JTWROS) is a very popular and common way of owning assets for every married couple. However, this common ownership technique usually leads to higher estate taxes and higher probate costs, especially if your estate is large enough to incur federal estate tax. Because of this, we recommend that married couples have some assets in joint name, and some in individual names.

For decades, every state had an inheritance tax that was tied to the federal estate tax program. That connection between the federal government and all 50 states has been totally phased out over the last eight years.

Some states still have an inheritance tax that is very similar to what they had before. Unfortunately, though, some states have elected to adopt a much higher inheritance tax.

Another important topic to address is called “Step Up in Basis”. For many of you, the example that I have used in our meetings with regards to this concept is as follows: what happens with your parent’s home when they pass away?

The home your parents bought many years ago for $50,000 is valued in their estate at $200,000. When you sell that house, your basis will be $200,000. Because the home increased in value over time, it took a step up in basis of $150,000.

In 2010 the provision for step up in basis, however, will be altered. Those two provisions will be: if there is a surviving spouse then that spouse can receive up to $3.0 million in step up in basis for assets that they receive. There will also be a $1.3 million exemption for assets passing to family members.

For estates over $1 to $2 million a lot of thought must go into the drafting of the wills and trusts to take advantage of these exemptions, the ownership of assets between spouses, and the beneficiary designation for all retirement accounts and life insurance policies.

It is very important to document not only what you pay for your assets, like a home, for instance, but also all major improvements that are made to those assets. Major improvements increase your assets’ basis. Financial advisors, accountants, executors, and trustees will need all of the information pertaining to major improvements, regardless of what state you are in.

As I said earlier, looking forward at estate planning changes will become increasingly important as new laws are written in 2009 and as your net worth increases in the future. We will continue to talk about all of these ideas at our meetings. They may not come up every year, but discussing them at least every two to three years is a good idea.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit, call 1-888-849-9559 or e-mail Gary directly at .