As the old saying goes, “The only things certain in life are death and taxes.” Over the next three years, however, both are a little less certain. Clients, financial planners, and insurance agents are all waiting and wondering what will happen to estate taxes in the coming years. As of today, the federal estate tax exclusion is $2 million but it is scheduled to increase to $3.5 million on Jan. 1. Under these circumstances, even death is less certain given the strong incentive that high-net-worth individuals have to survive until January 2009, if not until 2010 when the federal estate tax is set to disappear completely. Of course, Congress has enacted legislation reinstating the death tax with only a $1 million exclusion in 2011. Add to this mix the presidential election in November, and the stage is set for confusion. How should we advise our clients? Should we even proceed with estate planning in these uncertain times?
The uncertain future of the estate tax
Few people believe that Congress will permit the total repeal of the estate tax, even for one year. Sens. Barack Obama and John McCain have both recently announced their intentions regarding the federal estate tax and can be expected to reach an agreement with Congress to retain the tax in some form. As was recently reported in the Wall Street Journal, Obama is proposing a $3.5 million exclusion in 2009 and thereafter, with a top tax rate of 45 percent, effectively repealing the estate tax for virtually all Americans. McCain proposes raising the exclusion to $5 million per person, exempting estates up to $10 million for a married couple, and lowering the top tax rate to 15 percent, in keeping with the current capital-gains rate, to ease the perceived burden on small-business owners.
Under either plan, only a tiny fraction of existing estates would be required to pay federal estate taxes.
Even if the vast majority of estates in the coming years are not required to pay federal estate taxes, that does not mean that estate planning is unnecessary. Many states have enacted their own tax legislation decoupling them from the federal system. Maryland, D.C., and New York, for instance, have only a $1 million exclusion. Tax planning is still necessary to create substantial tax savings for clients in these states. More importantly, though, estate planning has many purposes beyond tax planning. It is for business succession planning, asset protection planning, keeping assets within the family bloodlines, protecting special-needs beneficiaries, and, importantly for our gay and lesbian clients, for making sure that the intended beneficiaries inherit at all.
Your wealthy clients
For wealthy clients with estates larger than $5 million, estate tax planning continues to be critical. Married clients in particular must plan in order to take full advantage of the exclusion limits, using the bypass or credit shelter trusts we’ve traditionally used for clients with estates larger than $2 million. Tools such as grantor retained annuity trusts (GRATs), private annuities, and qualified personal residence trusts (QPRTs) also continue to be useful in freezing the value of a client’s estate while allowing anticipated growth to pass essentially tax free to beneficiaries. Even for those clients whose estates are smaller than $5 million but who have substantial IRA assets, income tax planning must be considered. Clients interested in charitable giving continue to need guidance regarding their large IRAs, as do clients whose IRA beneficiaries vary considerably in age. Establishing separate IRA trusts for separate classes of beneficiaries requires thoughtful analysis.
Your well-off clients
For well-to-do clients with estates worth less than $5 million, there may still be a need to do tax planning to maintain flexibility. Are the clients young or do they expect their assets to grow substantially over time? Perhaps bypass trust planning should be included for these clients, after all. At a minimum, disclaimer planning will be necessary for many clients who don’t currently have a taxable situation but want to provide for post-mortem planning to take advantage of favorable tax provisions if their circumstances change over time. Planning for estate taxes is also still an important consideration when helping clients in this asset range.
All your clients
For all clients, regardless of the size of their estates, estate planning is necessary to name guardians for children and to make sure that minor children do not directly receive inheritances, thus subjecting the inheritance to court supervision and court fees. Clients continue to need insurance products for income replacement in the event of death. Planning for second marriages and for disabled beneficiaries is as important as ever. Powers of attorney, whether financial or medical, are crucial for all clients and should be updated regularly so as not to become stale. Naming someone to make financial and medical decisions for when a client becomes incapacitated remains as important in the next few years as ever, regardless of how Congress proceeds in the federal estate tax arena. The same can be said for nearly all aspects of estate planning.
Even in these uncertain times, estate planning is necessary and beneficial for our clients. We can draft flexibility into our plans, helping our clients deal with their current financial and family situations, as well as prepare for future uncertainties, including future estate taxes. Thoughtful analysis and careful attention to our clients’ needs remain constant necessities.
Gary Altman is the president of the estate planning law firm of Altman & Associates and chairman of the National Capital Area Financial Planning Association. He can be reached at gary@altmanassociates.net. Brenda H. Bosch is an attorney with Altman & Associates. She can be reached at brenda@altmanassociates.net. 