Tax changes that President Barack Obama and Congress hammered out in the final days of 2010 discouraged clients from seeking estate-planning advice last year, even though estate lawyers argue there are many planning opportunities that shouldn't be missed.
The legislation that set a $5 million estate tax exemption for 2011 and 2012 has all but eliminated “estate tax avoidance” as a motivating factor for clients, according to 32% of estate-planning lawyers and financial advisers surveyed recently by WealthCounsel LLC.
In fact, tax avoidance dropped from being the No. 1 reason in 2010 that clients sought estate planning to fourth last year, according to the survey of 1,085 professionals.
“The Republican-led Congress has done an effective job of vilifying the estate or "death tax' as unfair,” said Matt McClintock, executive director of WealthCounsel. “So with the $5 million exemption, a lot of people breathed a sigh of relief because they said, "I don't have that much,' and it diminished concern for estate planning as motivated by the estate tax.”
Even advisers and insurance professionals were “shellshocked” by the tax changes at the end of 2010, Mr. McClintock said.
It took until September for advisers to begin working actively with estate-planning attorneys on planning opportunities for high-net-worth families, he said.
“There is so much uncertainty at this time, it's difficult to give suggestions without saying that the benefits will vary based upon where estate and income tax rates wind up in 2013 — and estate and gift exemptions levels in 2013,” said estate-planning attorney Barry Nelson of Nelson & Nelson PA.
Estate tax lawyers said that 2011 became a year for figuring out how to take advantage of the $5 million exemption before it disappears.
“A number of very wealthy people are planning very aggressively and taking significant advantage of what may be a small window of opportunity,” said Martin Shenkman, an estate-planning attorney. “We don't know what tomorrow will bring.”
After a temporary suspension in 2010, the estate tax had been poised to jump to 55% with a $1 million exemption, or $2 million for couples. Instead, the rate was set at 35% for two years and applies only to estates worth more than $5 million, or $10 million for couples.
The estate tax exemption is tied to the lifetime gift tax exemption, meaning that amounts given away as gifts will be subtracted from the estate tax exemption after death.
This year, the president and Congress again will have to address the estate tax issue, as these parameters expire at the end of the year.
Advisers said that there generally was no reason for clients with plans that accounted for, say, a $1 million estate tax exemption to re-plan under the rules for 2012 and 2013. But most advisers said that they are still encouraging any clients without a plan to get one.
“When we have clients without an estate plan, we always urge them to do appropriate planning,” said Keith Newcomb, a financial adviser with Full Life Financial LLC. “There's no app for planning the day you're going to die.”
Mr. Newcomb said that he works with clients and attorneys to develop flexible estate plans that work with formulas instead of numbers to retain the integrity of the plan even when there are law changes.
“The word "temporary' occurs 43 times in the 2010 tax act's 30 pages,” he said. “That is a fact we have taken into consideration in our financial plans since then.”
THREE REASONS
In the end, the top three reasons that clients sought estate planning last year was to avoid chaos and discord among beneficiaries, to avoid probate and to protect children from mismanaging their inheritance, the survey showed.
An area that drove clients to Mr. Nelson's office last year was asset protection for their children, including protecting their inheritances. He suggests a safety net trust for part of the inheritance in which a fiduciary can distribute the funds only “as a last resort” to prevent the child from becoming penniless.
Mr. Nelson's firm has been structuring trusts so if a client's child is later divorced, the child will retain assets that they inherited rather than having any of the funds pass to the former spouse, Mr. Nelson said.
In addition, nearly half the states impose a separate estate or inheritance tax that should be considered when planning how much people living in those states should keep in the estate, Mr. Shenkman said.
The fact that interest rates are low makes it an especially good time for clients to set up a charitable-lead annuity trust to transfer wealth to children in a tax-efficient way and benefit a charity, said Allan Zachariah, co-founder of Pathstone Family Office.
With a CLAT, the trust provides a charity with an annuity stream for a certain period, and at the end of the period, the trust is returned to the client or passed on to family. If the trust's investment performance over the period beats an interest rate that is published each month by the Internal Revenue Service, the excess earnings that pass to the beneficiaries are tax-free, Mr. Zachariah said.
“It's a great strategy for the client who is charitably inclined,” he said.
lskinner@investmentnews.com
