Investing with William Creekbaum: Planning your estate? It's best not to wait

For 2010, the estate tax is scheduled for a holiday, only to return with a vengeance next year. But Congress has other ideas. Here's what I think you can do about your estate plan in the meantime.

A running joke in the estate planning community suggests that this is a great year to die, thanks to the 2001 Bush tax law's estate tax hiatus for 2010. However, if Congress has its way, the joke will soon be moot.

As of early January, the House and Senate let the 2010 repeal stand. But most observers expect lawmakers to reinstate the tax for this year, using 2009 guidelines: Estates exceeding $3.5 million would get taxed on the portion above that limit, and the 45 percent maximum rate would return.

So what's in store for wealth transfer beyond 2011? Lawmakers on both sides of the aisle have floated proposals calling for a variety of exemption levels and tax rates - and it's anyone's guess what will be signed into law. But Washington's lack of consensus shouldn't crimp your current estate planning efforts. Here's two smart ways to keep your sights on this moving target:

• Start early. Thinking of waiting until the legislative dust settles before finalizing your estate plan? I don't think you should do it. Much like retirement planning, in which the best returns are seen on early contributions, the most effective wealth distribution strategy is started well within the prime of your life. Doing so can also save your heirs tens or even hundreds of thousands of dollars.

Gifting is one such long-term strategy. Since the IRS lets you give each of your heirs a certain amount each year with no tax consequences, it makes sense to start early and gift often. You'll chip away at your eventual taxable estate, reduce the all-at-once tax hit on your heirs and perhaps be sharing your wealth when they actually need it most. Another incentive to start early: Upon your death, the government retroactively places your last three years of gifts back into your gross taxable estate.

• Build a flexible plan. Your plan should be able to adapt as laws and other circumstances change. One flexible option is a bypass trust, which can be written to honor your full exemptions, as well as your spouse's, no matter what your exemption level may be at death.

Here's how it works: Working with your attorney, you can place an amount equal to your exemption into the trust - whatever the exemption is at the time - and leave the rest to your spouse. For example, say someone with a $7 million estate passed away in 2009. His will could have specified that an amount equal to his full $3.5 million 2009 exemption go to a bypass trust, with the rest left to his wife.

Since the IRS does not tax a spousal inheritance, the deceased man's wife wouldn't pay estate tax on her $3.5 million. And what about the other $3.5 million in trust? While the wife can't claim those assets, she can draw income from them for life. What's more, since those funds fell under her husband's exemption when he died, the trust's beneficiaries will pay no estate taxes when they eventually inherit the money.

To be sure you're prepared for estate tax code changes, review your plan on a regular basis with your trusted Financial Advisor, attorney and tax professional. Consultations with your financial team can alert you to rule changes that affect you-and inform you of how to adjust your plan to make the most of your financial legacy.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creekbaum@mssb.com or 689-8704.

(From "Estate Tax: What You Need to Know for 2010," CBS MoneyWatch, January 5, 2010.)