The internet provides a rich source of discussions and suggestions relative to future of the estate planning. It particularly makes available a number of constructive discussions as to the direction of estate planning practices after the enactment of The American Taxpayer Relief Act of 2012 (ATRA).
As stated by Marty Shenkman in “Heckerling ... It's a Wrap” (Wealth Management.com, Jan. 24, 2013) planners need “…to service moderate wealth clients in light of the new reality of estate planning (that is, estate planning sans the tax “driver”), while still being able to serve the wealthier clients in need of more traditional planning to minimize the estate tax they continue to face.”
Tax planning areas still needing attention
In moderate sized estates, the domination of estate planning by instinctive reaction to the federal estate tax should give way after 2012 to a renewed emphasis on the intra-family disposition of property and its effect on family relationships and needs. The fundamental core issues of estate planning remain those of assuring solid family relationships and business continuity.
From the estate tax standpoint, value freezing arrangements designed to avoid estate values increasing into the taxable area and conventional marital deduction/credit trust arrangements to assure availability of the applicable exclusions of both spouses should be prudently applied. The deceased spouse’s unused exemption amount was extended by ATRA for years after 2012, but clients should not merely rely on portability and neglect appropriate estate planning.
Given the reduction of impact of the federal estate tax after 2012 on many previously taxable estates, the planner may need to shift focus to other tax issues. Planning for achieving the maximum step-up in basis of family assets at death will become an area of importance. Business entities that were designed to result in value adjustments that mitigate the impact of the federal estate tax may no longer be necessary and, in some family circumstances, should be eliminated. Such entities reduce the step-up in basis at death because of discounted values of the decedent’s interests in them and provide only a step-up in the basis of the entity interests, rather than a step-up in the basis of individual assets. In the case of depreciable property, such individual asset step-ups in basis result in immediate income tax benefits.
Other income tax issues, such as the effect of the higher income tax rates set by ATRA, will need to be addressed by the planner. For suggestions as to income tax planning opportunities, see Keebler’s “Tax Planning for 2013 Under the New Laws” (The Ultimate Estate Planner 2013). As stated by Bob Keebler in the introduction to his Teleconference of April 24, 2013(Ultimate Estate Planning):
Clients (and prospects) just aren't as motivated to do estate tax planning these days. But with income tax rates up, deductions being phased out and, on top of all this, now a 3.8 percent surtax, people are very motivated to reduce their income taxes!
And, as an estate planning professional, you've got lots of overlooked income tax reduction weapons in your arsenal (that you previously used to reduce client's estate taxes)—like trusts, partnerships, LLCs and other entities.
Another planning change will be that life insurance purchased with the purpose of funding estate tax may require reassessment from an income tax planning standpoint. “Five Insurance Planning Insights from Heckerling,” AALU Washington Report, Bull. No. 13-06 (Feb. 6, 2013) discusses life insurance planning in the higher estate tax applicable exclusion environment after ATRA, the utility of life insurance in higher value estates and likely future federal tax legislation targeting life insurance planning techniques. See Charles Ratner & Lawrence Brody’s “Life Insurance After ATRA,”in the April 2013 issue of Trusts & Estates, which addresses the opportunities and increased flexibility resulting from ATRA. Also see Shenkman’s “Insurance as the Key Ingredient in the ‘New’ Estate Planning” (The Ultimate Estate Planner 2013) for a discussion of life insurance techniques as planning opportunities after ATRA.
The estate tax isn’t everything–“real” planning for property and business succession
“Jeff Scroggin & the Future of Estate Planning” (NAEPC, Leimberg Information Services July 2010), although written before the passage of ATRA, provides interesting insights on sustaining an estate planning practice in spite of increasing exemptions. The author stresses that estate planning is not fundamentally about taxes, but about the people involved in the clients’ estates and sorting out their relationships as successors. Scroggin points out that on the plus side of the estate planning practice are the explosion of wealth, the elder boom and client mobility. As he says: “Clients need the practical, insightful advice of seasoned professionals who understand not only the legal and tax complexities of estate planning – but perhaps even more, the personal (and often subliminal) undertones that underlay so much of what we do for our clients.”
As it happens, most of the commonly applied estate tax control techniques and devices have been consistent with these goals, which will help transitional planning. Families should be conscious of the need for continued planning, even though they don’t perceive a threat from the federal estate tax.
Jacobs’ “Morphing Into the New Age of Estate Planning” (Forbes 1/15/2013) discusses the effect of ATRA on the estate planning practice, including elder law issues and “real” estate planning for non-taxable estates.
Gage’s “Estate Planning as a Family: A Collaborative Approach”(BMC Associates, from Passages, a publication of the National Center for Family Philanthropy, 2005) as summarized and discussed in “Collaborative Estate Planning”(BMC Associates 2013) stresses the need for family collaboration in addressing intergenerational succession of family property and the importance of whole family planning for property transition. As the estate planning emphasis moves from death tax planning to the nuances of succession planning, such an approach may become more necessary than ever. See, “Collaborative estate planning”–Havens Technology-Probate 27 Probate & Property 56 (March/April 2013 – for ABA members)
PDI Global 2013 estate planning guides, from ThomsonReuters, as updated for ATRA, are available in a choice of electronic and print formats. These guides for client education stress the non-tax issues of estate and succession planning and the need for families to address them.
Observations on estate planning after 2012
Martin Shenkman’s “2013 Tax Act Impact on Estate Planning -- Taxpayer Relief Act of 2013, Fiscal Cliff and Estate Planning, Steps to Take to Secure your 2012 Gift Planning”(LawEasy.com) stresses the things that still need to be done, even though the client’s initial reaction to ATRA may be that it eliminates further planning. The author stresses that all taxpayers still need to undertake planning for business succession, income tax and asset protection. The author also includes suggestions for both moderate wealth and high-net-worth taxpayers and stresses the continuing need for follow-up and the implementation of previous planning.
Post-2012 planning has been and will further be addressed (including letters to clients) in Marty Shenkman’s newsletter available firstname.lastname@example.org. A model update letter to clients is the 2013 Tax Update Letter from Hopkins & Carley.
Steve Akers’ “Musings on Heckerling 2013” from ACTEC include “The Estate Planner’s ‘Playbook’ for 2013 and Going Forward Under the Post-ATRA ‘New Normal’ of Permanent Large Exemptions and Portability.” Akers touches upon basis adjustment strategies, gift planning issues and strategies, GRAT strategies, installment sales to trusts, partnerships and LLCs, high-net-worth estates and many other topics for the planner in the post-ATRA world.
CPA Practice Advisor, “Estate Planning After the Fiscal Cliff: Top 10 Steps”(McManus & Associates, Jan. 31, 2013) discusses the remaining planning issues under federal estate tax law and the possibility of increasing state death and gift taxes.
Megan Leonhardt’s “Taking the Reins from ‘Big Law’” (Wealthmanagement.com, Feb. 28, 2013) looks at the effect on law firms of the continuing need for estate planning and the resistance of clients to the large hourly rates generated by other fields of practice, especially when there’s no imminent estate tax impact. The author suggests that smaller firms and boutique shops will have an advantage in the future.
The potential for future estate tax changes
It’s axiomatic that, as long as Congress meets, the “permanent” applicable exclusion and estate tax rate fixed by ATRA are subject to revision, as discussed in Ron Aucutt’s, Capital Letter No. 33, “The Administration’s Fiscal Budget Proposals.” The Budget Proposals as reflected in the Treasury Department’s “Greenbook,” formally known as the General Explanation of the Administration’s Fiscal Year 2014 Revenue Proposals, which calls for the applicable exclusion to be returned to the 2009 levels of $3,500,000 for estate and generation-skipping-transfer taxes and $1,000,000 for gift taxes beginning in the year 2018, with no indexing for inflation and a tax rate of 40 percent. Clients should always be cautioned that the world of politics is uncertain, action of this type by a future Congress is possible and basic estate tax planning should continue to be part of the clients’ estate plans. Specific continuing administration proposals for fine- tuning the federal estate tax are reviewed in Clarfield’s“Estate Planning Moves BEFORE Sequestration is Resolved”(Forbes 3/08/2013), which discusses proposals relating to grantor trusts, grantor retained annuity trusts and entity discounts. See the ThomsonReuters Checkpoint Special Report on the President’s Fiscal Year 2014 Budget individual and business tax provisions.
Trusts & Estates magazine is pleased to present the monthly Technology Review by Donald H. Kelley—a respected connoisseur of the software and Internet resources wealth management advisors use to further their practices.
Kelley is a lawyer living in Highlands Ranch, Colo., and is of counsel to the law firm of Kelley, Scritsmier & Byrne, P.C. of North Platte, Neb. He is the co-author of the Intuitive Estate Planner Software, (Thomson – West 2004). He has served on the governing boards of the American Bar Association Real Property Probate and Trust Section and the American College of Tax Counsel. He is a past regent, and past chair of the Committee on Technology in the Practice, of the American College of Trust and Estate Counsel.
Trusts & Estates has asked Kelley to provide his unvarnished opinions on the tech resources available in the practice today. His columns are edited for readability only. Send feedback and suggestions for articles directly to him at email@example.com.