In this year of a presidential election, most of our clients are curious about what the presumptive presidential candidates think about the federal estate tax.

As we all know, the next president will face daunting tax and fiscal policy challenges as nearly all the Bush tax cuts are set to expire at the end of 2010; specifically, the estate tax is scheduled for partial repeal in 2009, full repeal in 2010, and restoration in 2011.

A recent Internet search revealed Senator Barack Obama has publicly opposed full estate tax repeal. Senator Obama's campaign website states that he will, "... protect tax cuts for poor and middle class families, but he will reverse most of the Bush tax cuts for the wealthiest taxpayers." Notwithstanding the foregoing, Senator Obama supports raising the exemption from taxation on estates up to $3.5 million per person.

Our Internet search on Senator McCain's stance revealed that he has long sought permanent and immediate reform of the estate tax, however, he supports raising the exemption from taxation on estates up to $5 million per person, while cutting the tax rate to 15 percent.

In short, it seems that both candidates would increase the estate tax exemption and reduce the estate tax rate compared with current law in 2011 and beyond, although Senator McCain would cut the tax much more than Senator Obama.

Nevertheless, while there is still some uncertainty as to the exact positions of Senator Obama and Senator McCain, waiting to see what the new president will do before making an estate plan is not advisable, since regardless of who wins in November, the federal estate tax will most likely be with us in some shape or form in 2010 and beyond.

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. HEART applies to certain U.S. citizens who relinquish their citizenship and long-term residents who terminate their permanent residence status (known as "expatriation"). An individual is a long-term resident if he or she was a lawful permanent resident in at least eight out of the fifteen taxable years ending with the year in which the residency termination occurs. Essentially, HEART applies to any person who becomes an expatriate on or after June 17, 2008, who:

• Has an average annual net income tax liability that exceeds $139,000 adjusted annually for inflation for the five preceding years ending before the date they lose their U.S. citizenship or terminate their residency;



• Has a net worth of $2 million or more on such date;



• Fails to certify under penalty of perjury that he or she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit any proof of compliance with the IRS demands.

One frequently overlooked aspect of estate planning is the preparation of the beneficiary designation form for life insurance policies, retirement plan death benefits, other forms of employee death benefits, and commercial annuity agreements, which, collectively, we will refer to as "contract assets." It all seems so straightforward, you may say. How could the beneficiary designation form play such a key role in estate planning? Here are ten of the most common beneficiary designation blunders.

Blunder #1: Failure to properly integrate estate plan and beneficiary designation. Frequently, clients believe the terms and conditions of their will or trust controls the distribution of their contract assets. This is not necessarily the case. The beneficiary designation form may name an individual as the primary or contingent beneficiary and then the contract assets will be distributed to the named individual. Proper integration of the estate planning documents and beneficiary designations is imperative.

Blunder #2: The client's "estate" is named as beneficiary. If the estate is named the beneficiary, your IRA money will go through probate, and your family (excluding your spouse) will be required to withdraw the money within five years. Income is bunched into less then five years and an estate pays income taxes at higher rates than individuals. Consequently, the heirs have lost the opportunity to stretch out the IRA distributions (and income taxes) over a much longer period. Post mortem tax planning becomes unnecessarily complex and expensive. Since failure to designate a beneficiary for an IRA results in the "estate" being the default beneficiary, this blunder most commonly occurs when IRAs are transferred by the owner to a new custodian and neglects to include the beneficiary designation for the new account.

Blunder #3: Clients fail to keep this information current. It is always a good idea to periodically review your beneficiary designation information and update it as necessary so your benefits are distributed according to your wishes. This is especially important following major changes in your life such as marriage, divorce, or the death of a loved one.

Blunder #4: Client's waste their unified estate and gift tax credit. If you name your spouse the beneficiary of contract assets, those accounts will be included in your estate, but not subject to estate tax on your death due to the unlimited marital deduction. Be aware, however, that when your spouse passes away, the entire amount of the asset is included in the surviving spouse's estate for estate tax purposes. Proper estate planning requires an analysis of whether the contract assets may be needed to fund an individual's estate tax exemption.

Blunder #5: The client's Durable Power of Attorney does not address beneficiary designations. Make sure your Durable Power of Attorney specifically authorizes changes in IRA (and qualified plan) beneficiary designations (and life insurance beneficiary designations). This is critical if the IRA owner or life insurance policy owner becomes unable to act on his own behalf. Under a standard Durable Power of Attorney you can add provisions to allow your attorney-in-fact to make beneficiary changes.

Blunder #6: Use of Disclaimers. A client must carefully select contingent beneficiaries. A contingent beneficiary, or secondary beneficiary, is the person who will receive the contract assets if the primary beneficiary dies before the IRA owner, annuitant or insured person. The obvious planning reason is the possibility that the primary beneficiary dies first. But, if the primary beneficiary is alive at the owner's death, the primary beneficiary can "disclaim" some or all of the contract assets. In that case, the law pretends that the primary beneficiary died before the owner, thereby clearing the path to redirect contract assets to the contingent beneficiary. This can be very useful when planning to preserve the owner's estate tax exemption.

Blunder #7: Naming minor children as beneficiaries. Until a child reaches a certain age, which varies according to state laws, minors can only inherit limited amounts. It is advisable to designate a trust for children as the beneficiary of their interest in contract assets. Properly established trusts should have detailed directions on how to manage the windfall for the minor. If a minor beneficiary's interest of an estate exceeds $15,000, court guardianship proceedings must be commenced, at great costs, and the court will determine when the assets can be used for the benefit of the minor.

Blunder #8: Failing to remove divorced spouse. You cannot disinherit your spouse during the marriage. Each spouse has an "elective share" in the estate of the other. If you attempt to disinherit your spouse during the marriage, he or she can elect to take his or her elective share (about one- third of the estate).

Most settlement agreements contain provisions wherein each spouse waives his or her respective rights of election and any interest in the other's estate. If you should die before an agreement containing these waivers is signed or before the court enters a judgment of divorce, your estranged spouse can (and probably will) exercise the right of election and inherit from you.

The only way to ensure that your estate goes to your intended beneficiaries and not your estranged spouse is to make sure that the divorce settlement agreement is promptly signed. Moreover, you should check all of the beneficiary designations of your insurance and retirement plans. If your former spouse is named as a beneficiary, he or she will be paid when you die.

Blunder #9: Improper use of trusts as beneficiaries of IRAs. Click here to read "The Trustee's and Beneficiary's Guide to Florida Trust Accountings" in the February 2008 issue of the Wealth Planning and Preservation Update, which discussed how best to use trusts as beneficiaries of IRAs.

Blunder #10: Improper beneficiaries of life insurance. If estate taxes are anticipated, the use of an Irrevocable Life Insurance Trust is a common method of meeting the tax burden. This is a separate irrevocable trust sometimes referred to as an "ILIT" and is funded by annual exempt gifting of premiums to beneficiaries, employing "crummy powers" to convert deferred gifts into present interest gifts used to purchase life insurance policies. This type of trust, if properly drafted and funded, is not subject to estate tax, and provides funds to pay anticipated estate taxes with leveraged dollars. The use of a "second to die" type policy, which pays out at the death of the survivor of grantors, if there is more than one grantor, substantially reduces the policy premiums. These ILITs require the owner and the beneficiary to be the ILIT rather then an individual, the estate or a revocable or testamentary trust.

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This publication is intended for general information purposes only. It is not intended to constitute individual legal advice to any specific client.