Many planners are telling clients not to expect the tax to go away.
Back when the Economic Growth and Tax Relief Reconciliation Act of 2001 was signed into law, it looked like estate planners had a lot of work to do.
Among the provisions of the mammoth tax package was the repeal of the
estate tax over a period of ten years-in an odd countdown that changed
a number of estate tax law provisions on an annual basis.
Many predicted a sticky situation in which wills would need to be
updated and estate plans put on hold until at least 2010, when the law
called for the complete removal of the estate tax, or 2011, when the
law switches everything back to the way it was in 2001.
So how much have things changed for estate planners since President
Bush signed the repeal into law four years ago? Apparently, according
to planners, not much.
Many estate planners say that, aside from occasional changes in
strategies, there have not been dramatic changes in the way they've
dealt with clients. This is partly because, for most clients, tax
savings play second-fiddle to smooth wealth transference when it comes
to the nitty-gritty of drawing up a will and estate plan, advisors say.
The repeal's impact on the estate planning process has been more subtle
than earth-shaking, advisors say. There's more emphasis on making plans
flexible enough to deal with future changes in the law, they say. Some
clients, they say, may be more reluctant to lock themselves into a life
insurance trust that, in the end, may not be needed to foot an estate
tax bill. That's why some advisors say they are more frequently turning
to gifting to relieve the tax burden.
With exemptions changing on a yearly basis, assessing clients' tax
burdens has become more complicated, they say. The law calls for the
exemption to gradually increase from $675,000 in 2001 to $3.5 million
in 2009. In 2010, the estate tax is repealed (making the exemption
unlimited), but then in 2011 the tax is reinstated with an exemption of
$1 million. Few, however, expect it to play out that way.
"It certainly has made planning more complicated for estate planners
who are talking to clients and saying, 'OK, if the law goes in this
direction we should do this, and if it goes in that direction we should
do that," says David Ness, president of Raymond James Trust Company in
St. Petersburg, Fla.
Perhaps the most vexing issue estate planners have had to face is
trying to predict what will happen in the 2010-2011 timeframe. Will
estate taxes be repealed or won't they? Will Congress act beforehand to
bring clarity to the mess?
There are a lot of unanswered questions. So many, in fact, that advisors have given up on trying to predict the answers.
In interview after interview, advisors say their advice for many
clients is to take the safe route and proceed with the expectation that
estate taxes will never go away.
As for the guessing game, it has become something of an inside joke in the profession.
Estate Attorney Stephen Long, of Ballon Stoll Bader & Nadler P.C.
in New York, recalls a conference earlier this year where participants
got a hearty laugh over how, each year over the past three years,
they've predicted that the 2010-2011 double-reverse will never
happen-that something will change beforehand.
"Every year we're saying we can't believe that the estate tax will go
away and spring back to life a year later," Long says. "Yet here we are
four years later, and no one has changed anything. So I don't know what
to say."
Yet estate planners seem to be using speculation as a basis for
planning, to a limited extent. Many of them, for example, are assuming
that an outright repeal of the estate tax will not happen.
Their reasoning is that there are too many factors weighing in against
a permanent repeal, including a growing federal deficit, the continuing
cost of U.S. military operations in the Middle East and uncertainty
about the funding of Social Security.
"I believe the best course of action is for individuals to do nothing
that banks on the repeal," says Chuck Hodges, a partner and estate
planner at Chamberlain Hrdlicka law firm in Atlanta.
He notes that there are multiple Congressional elections and one more presidential election to go before the repeal is scheduled to go into effect in 2010. Hodges also points out that the estate tax has been repealed before in the nation's history.
"You can't be so naïve to believe that if something happens and it does
go away, that it's never coming back," he says. "It has gone and come
back multiple times."
Louise Cole, whose firm, The Cole Group, in Dover Township, N.J., uses
family retreats as part of their estate planning process, says dealing
with uncertainty is integral to a planner's job.
"You're always planning for the worst," she says. "So you plan like estate taxes are going to be there always."
Many planners are counting on Congress to settle on a middle ground, and are using this as a basis for making rough determinations on their clients' estate tax liability.
Long, for example feels that $2 million is the most likely exemption
and is telling clients not to expect an increase beyond that amount.
"If we do go higher, terrific," he says.
Ness has settled on the current $1.5 million exemption as a
conservative line to draw for clients. He feels clients between the
$1.5 million and $3.5 million asset level face the most uncertainty,
and clients with $3.5 million or more in assets should assume there
will always be an estate tax.
The maximum estate tax rate, he predicts, will fall somewhere between
35% and 40%. "It will be somewhere that the Democrats can go to their
constituents and say, 'Donald Trump still pays,' and the Republicans
can go back and say to 95% of their constituents, 'We solved your
problem,'" he says.
The uncertainty has made things complicated, but it's also made both
advisors and clients think more carefully about their plans, says Neal
R. Anderson, vice president of financial plan development at Waddell
& Reed in Shawnee Mission, Kan.