- All the traditional nontax reasons for estate planning continue to be important.
- TRA 2010 may disappear in two years and important planning opportunities may be lost.
- TRA tax benefits, current low interest rates and depressed values create the perfect opportunity to protect wealth forever.
- A "wait and see" approach may turn into "wait and pay."
Whoever thought it could happen—a 35 percent transfer tax rate, $5 million estate, gift and GST exemptions, and estate tax portability? So who needs to do any planning, as Congress has eliminated the headache of complicated planning, at least for married couples with up to $10 million in assets? Right? Wrong! Now that the initial excitement of the Tax Relief Act of 2010 is over, it is time to "get real" and focus on the fact that the wealthy still need to do appropriate planning, and that the next two years are the perfect time to get it done. Here’s why:
1. The wealthy still need appropriate estate planning.
Although estate planning may be somewhat different under TRA 2010, proper planning is still essential for all effected. Obviously, with the higher tax exemptions there may be less emphasis on tax planning, but the traditional reasons for proper wealth transfer planning still remain, including:
- Personal and family goals
- Financial, retirement and long-term care planning
- Income tax planning
- Asset protection planning
- Business succession planning
- Life insurance planning
- Charitable planning
2. Keep in mind that TRA only lasts for two years.
Don’t be lulled into a false sense of security. Unless Congress acts to extend the TRA 2010 wealth transfer provisions, all of TRA’s great tax benefits will disappear at the end of 2012, and we will be back to a $1 million exemption and a 55 percent tax rate. If TRA 2010 sunsets, the wealthy will get hammered! The moral of the story is to shift wealth into self-controlled trusts now—out of the estate tax system and asset-protected forever.
3. Planning for wealthy clients.
TRA 2010 provides a golden opportunity for wealth transfer and asset protection planning for the following reasons:
a. Large gift, estate and GST exemptions—$5 million.
b. Low wealth-transfer tax rates—35 percent.
c. State tax issues remain and continue to be very complex.
d. There are significant income tax planning opportunities regarding basis step-up as well as planning for residency and domicile to minimize income and estate taxes.
e. Asset values are depressed, at least temporarily.
f. GRATs continue to be viable without limitations on the length of the GRAT and minimum remainder interests.
g. QPRTs are still available.
h. Congress did not change the opportunity for appropriate wealth planning with valuation discounts.
i. We are in a historically low interest rate environment.
j. All of the GST relief provisions are still in place.
k. Life insurance planning can be supercharged with higher gift tax exemptions, and existing planning, including premium financing and split-dollar planning, can be modified appropriately.
l. With very few estate tax returns being filed because of the higher exemptions, proper planning greatly reduces the risk of audit and subsequent litigation.
Keep in mind that the IRS repeatedly has attempted to eliminate or severely limit these aforementioned tax-mitigation opportunities, which may disappear at the end of 2012.
4. Planning for mid-range clients. With TRA 2010, tax authorities estimate that fewer than 5,600 estate tax returns will be filed (and actually pay a tax) each year for 2011 and 2012. Obviously the federal estate tax will affect very few people. Nevertheless, even for mid-range clients, the 2011 to 2012 window is a golden opportunity to do wealth-transfer and asset-protection planning.
a. The most important axiom in modern wealth planning is to own everything in trust forever. The planning opportunities suggested for wealthy clients also apply to the mid-range client.
b. Mid-range clients in states such as New York (where the state gift and estate taxes are "decoupled" from the federal tax system) will run into state tax problems without appropriate planning. For example, New York has a $1 million exemption, and the federal exemption is $5 million. Without proper planning, clients can end up paying a significant amount in state taxes even if their wealth is under the federal $5 million threshold.
c. Clients often own assets in two or more states. Therefore, planning must be done to coordinate the various state property, inheritance and tax laws.
d. Inflation and investment returns may push the estate above the federal threshold for taxation.
e. Estate tax portability for married couples is complex. Further, it’s probably not that useful, and it requires timely filing of an estate tax return and proper planning.
f. Because the federal tax opportunities may disappear at the end of 2012, planning should be very creative and flexible to allow clients the opportunity to put appropriate planning in place now. Such planning will include options and "what if" scenarios in reaction to changes downstream without unnecessary and costly additional planning at a later time.
Conclusion:
Regardless of the size of the estate, wealth transfer planning is still engulfed in uncertainly and many of the wealthy are concerned about planning costs and complexities. However, these people must be made to understand that "wait and see" is a fool’s game given the complexities of current planning issues and the extraordinary planning opportunities under TRA 2010. As nationally known estate planning attorney Marty Shenkman quipped, "wait and see" may unfortunately result in "wait and pay." Favorable tax laws, low interest rates and creative planning opportunities all indicate that now is the perfect time for all to complete their financial and estate plans.
It is IMPORTANT TO UNDERSTAND that the information and illustrations provided is for discusion sake only and is subject to change and legislation. It is incomplete and specific current details will need to be provided and drafted by a competent attorney.