The 2010 Basis "Step-Up" Rules

With lingering uncertainty as to the economy and the federal estate tax, many clients - and their advisors - are wondering what planning they should do now, if any. No one can predict how quickly we will experience an economic turnaround or whether Congress will act on the estate tax. However, there are many non-tax reasons why clients should plan today, irrespective of the economy or their estate tax. And for those clients who may be subject to estate tax, we know that it is generally better for clients to act now rather than to wait, particularly given our historically low interest rates and some of the structural estate and gift tax changes proposed by the IRS.

This issue of The Wealth Counselor explores some reasons why it is in clients' best interest to act now and discusses strategies that may create the biggest opportunities for clients - and you - today.

Planning Needs Unrelated to the Economy or Estate Tax
Many planning needs are unrelated to the economy or the estate tax. They include:
Disability and retirement planning;
Special needs planning;
Divorce protection;
Spendthrift protection;
Creditor protection; and
Second marriage protection.
These planning needs may be even more significant for clients with fewer assets than for wealthier clients.

Disability Planning
As America's population ages, disability planning takes on ever-increasing importance. Here are some sobering statistics about Americans age 65 and older:

43% will need nursing home care;
25% will spend more than a year in a nursing home;
9% will spend more than 5 years in a nursing home; and
The average stay in a nursing home is more than 2.5 years.
Plus, the rate of nursing home cost increases greatly exceeds the inflation rate. Clients with estates that would not have been taxable in 2009 are, or should be, very worried about how they will pay for that kind of care if they need it.

Planning Tip: Careful consideration of long-term care insurance is critical for most clients.

Also of concern is who will care for your clients and whether they will they care for them in the way your clients desire. For many, there is a strong desire to stay at home as long as possible. For others, the companionship found in an assisted living facility makes that choice preferable. Still others need care that cannot be provided at home at all or only at prohibitive cost. Incapacity will deprive a client of the ability to implement his or her goals and objectives.

Planning Tip: A trust with carefully drafted disability provisions is the best way to ensure that each client's planning meets his or her personal goals and objectives.

Special Needs Planning
This is another area unrelated to the economy or the estate tax. According to the U.S. Census Bureau, in 2000:

51.2 million Americans reported having a disability;
13-16% of U.S. families had a child with special needs;
15 out of every 1,000 children born in the U.S. had an Autism spectrum disorder; and
Between 1 and 1.5 million Americans had an Autism spectrum disorder.
Because of medical care advances many special needs that used to mean shortened life expectancy no longer do, so many more special needs children are outliving their parents. Planning that fails to properly plan for a special needs person can have disastrous consequences, including loss of means-tested government benefits. A Special Needs Trust that incorporates specific care provisions is a critical component of the planning for a special needs person who requires ongoing support.

Insurance on the life of a special needs person's parents or grandparents can provide the trust funds necessary to pay for the care of a special needs beneficiary that is not provided by means-tested and other government benefits.

Planning Tip: Clients with special needs children or grandchildren are typically very motivated to plan for them.

Beneficiary Protection Planning
Protecting an inheritance from being lost in a divorce or to a beneficiary's creditors is a serious client concern. The potential for creditor attack or for beneficiary dissipation of an inheritance is greater during difficult economic times. Many older generation clients fear that their children and grandchildren lack strong financial decision-making skills.

Divorce rates exceed 50% nationally. Many clients today express concern about their children and grandchildren divorcing - they don't want the assets they worked so hard to accumulate winding up in the hands of a former daughter- or son-in law, etc. Divorce rates increase in difficult economic times, making this planning even more important now.

Blended Family Planning
A higher divorce rate leads to more second and subsequent marriages - each with a higher statistical probability of ending in another divorce. With blended families (i.e., with potentially his, her, and their kids), it is critical that each parent's planning protect his or her children in the event that parent leaves a surviving spouse. Failure of blended-family parents to do this type of planning practically guarantees that somebody's kids will be disinherited or a messy probate will result.

Planning Tip: Carefully drafted estate plans protect beneficiaries from divorce, creditors and themselves. Such plans can also provide for children from prior marriages, which is often the only way to ensure that these beneficiaries actually receive any inheritance.