Advisers rethink estate planning

With no permanent repeal of the estate tax in sight, advisers are appeasing worried clients by putting new twists on old estate-planning tools. "Increasingly, advisers are pulling out all of the tools from the arsenals," said Patrick Smith, vice president of estate and business planning for The Hartford (Conn.) Financial Services Group Inc. Those tools include disclaimer provisions, estate freezes and short-term trusts known as grantor-retained annuity trusts, or GRATs. A GRAT is an irrevocable trust that is popular among families with assets that are expected to increase, because such appreciation can be passed on to heirs tax free. Concerns about the estate tax are mounting — largely because more Americans are joining the ranks of the wealthy. In fact, a new Hartford study of families with household incomes of $150,000 or more showed that 53.5% were concerned over whether heirs would have to pay the tax.
In tax years 2007 and 2008, estates valued at more than $2 million can be taxed as much as 45%. In tax year 2009, the threshold will rise to $3.5 million. The year after that, the tax will be repealed for a year, but it is to be restored in 2011 at up to 55% on estates over $1 million. While most industry observers expect Congress to alter the law in the next couple of years, few are predicting that the estate tax will be repealed altogether. In the face of such uncertainty, advisers are scrambling to offer clients' more flexibility with a number of tax-saving strategies, Mr. Smith said. One popular strategy is to set up a so-called spousal-access trust. Such a vehicle allows a married couple to establish an irrevocable life insurance trust and to keep the life insurance proceeds needed for estate liquidity out of their taxable estate. At the same time, it permits one of the spouses to have indirect access to the cash value of the policy. "The word 'irrevocable' is a daunting word," Mr. Smith said. Another tactic that may soon enjoy renewed interest is the so-called estate freeze. The strategy, used to reduce estate taxes when passing on a family business, was once extremely popular, but changes in the Internal Revenue Code significantly diminished its appeal. Here is how it works: A business's senior owners freeze the value of their estate by taking preferred stock and transferring ownership of common stock to their heirs. Since preferred stock remains valued on the books at par no matter how the business grows, the transaction holds down estate taxes. The heirs, meanwhile, enjoy any growth in value of the business via their common stock. New York-based JPMorgan Chase & Co. intends to unveil an estate freeze program by the end of the year. "We're using the essential concept but executing the arrangement using a new type of entity," said Beth Rodriguez, the company's head of U.S. wealth advisory services. She declined to discuss specifics of the strategy but said that it will rely on an entity that hasn't been used before. While such estate-planning tools as estate freezes and GRATS are quite complex, there are less complicated ways to reduce estate taxes, said David T. Phillips, founder and chief executive of Estate Planning Specialists LLC in Chandler, Ariz. For example, he encourages wealthy clients to purchase life insurance policies that come with a premium-refund guarantee in the event that the estate tax is abolished. Even though most people think that the estate tax won't be abolished, this provision gives clients peace of mind, Mr. Phillips said. Meanwhile, advisers are also recommending that clients incorporate disclaimer provisions into their wills. Such provisions give heirs flexibility to divide an estate according to their wishes and financial condition. For example, a wife can inherit $5 million but elect to accept only $3 million. The remainder can be divided up among her children. Used properly, a disclaimer provision can reduce estate taxes by hundreds of thousands of dollars, said James Lange, a Pittsburgh-based tax attorney. Still, not all attorneys and advisers say that this is the best strategy. "The major problem with it is, you're telling someone who just lost a partner of 30 or 40 years to disclaim," said Martin Shenkman, an attorney in an eponymous Teaneck, N.J., law firm. "Why would a person give up control over financial assets when they're feeling the loss of a spouse?" Mr. Shenkman has seen a "sea change" in the way people are drafting trusts in hopes of reducing taxes. "It's tweaking the old stuff," he said. Unfortunately, as these strategies are more complex, mistakes can occur, said Holly Isdale, managing director and head of strategic wealth services at Lehman Brothers Inc. in New York. "I've seen supersophisticated estate plans fall apart for very simple reasons," she said. Lisa Shidler can be reached at lshidler@crain.com.