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Making Your Estate Plan Flexible

Build flexibility into your estate plan so heirs can avoid the pitfalls of changing tax laws.

Death and taxes may be certain, but getting a handle on the death tax is anything but. Die this year, and the federal government says $1.5 million of your estate can pass to your heirs sans tax. The exemption rises to $2 million in 2006 and $3.5 million in 2009, before the tax disappears entirely in 2010. A year later, it reappears-with a $1 million exemption.

It gets more complicated still. Most states once had their own estate taxes written in lock step with federal law, frequently with the same exemption levels. With the federal law changing year by year, though, legislatures haven't been able to keep pace. So state death taxes are now all over the map: Oregon and Washington, for example, apply estate taxes at $850,000 this year.

To deal with the uncertainty, you could rework your estate plan each year to account for tax-law changes at the federal and state levels. Or, more simply, you could build enough flexibility into your plan so that your survivors can adjust to the tax circumstances, regardless.

Married couples have the most options. If you pass everything on to your spouse when you die, that transaction is tax-free. But when your spouse later dies, he or she receives only one person's estate-tax exemption. If, instead, you use your exemption at death and your spouse later uses his or hers, your heirs receive twice the pretax assets.

For financial planners and lawyers, it's routine to write a will that captures both spousal exemptions by putting some or all of the first spouse's estate into a trust at the time of death. Legally, the trust assets never become the property of the second spouse, so both spouses can use exemptions. Even the best-laid plans can quickly become obsolete, though, with all the tax-law changes. With that in mind, next month we'll consider an increasingly popular way to address the uncertainty: the use of disclaimers.


Scott Bernard Nelson is deputy business editor at The Oregonian and a freelance writer in Portland, Oregon.

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This article was originally published in the July 2004 print edition of Entrepreneur with the headline: Will Power.

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