As many of our readers in Texas know, there are many reasons that a person decides to create an estate plan. For some, one of the most important reasons for estate planning is to limit the amount of taxes that heirs will have to pay after the death of an individual. This goal has been made more challenging recently due to the ever-changing estate tax exemption amount that went from $0 to $5 million between 2010 and 2012.
Some involved in estate planning in Texas and elsewhere have turned to an estate-planning tool called a formula clause to assist in limiting taxes on heirs. Using this type of clause, each heir of an individual would inherit just the amount of the estate tax exclusion for the year of the death of the grantor, with the remainder of the estate passing to the surviving spouse. This would, thus, allow the inheritance to pass to one’s children estate tax-free.
However, problems with this type of estate planning tool have recently surfaced. One example is the year 2010 when there was no estate tax limit. This meant that heirs of individuals who died during the calendar year 2010 did not have to pay estate taxes on any portion of their inheritances.
The problem came when an estate-planning tool contained a formula clause. In 2010, a formula clause may have meant that a surviving spouse would not inherit any of a deceased individual’s estate. This is due to the fact that the clause would have given all of the estate to heirs due to the lack of an estate tax for that year.
For many in our state and elsewhere, estate planning can involve many complicated issues and challenges. It is always a savvy decision to secure professional guidance when designing an estate plan in order to take advantage of the current tax provisions. In addition, once an estate plan is created, it would do well to continue to review the plan annually to make sure that the intent of the documents is adequately reflected and in line with all applicable changes to tax law.
Source: Reuters, “Dramatic estate tax battle delivers fresh lessons,” Amy Feldman, July 31, 2012