With the new estate tax in place, we asked three estate planning pros to talk to us about the solution and what it means for their business as well as their clients. In part one, they tell us what they think about the new tax levels and how they're explaining it to clients.
For part two, see: The prospecting power of the new estate tax
Q. On Jan. 1, we saw this headline on LifeHealthPro.com: “Senate makes estate tax permanent.” The article quoted David Stertzer, AALU president and CEO, as saying, “The Association for Advanced Life Underwriting is very pleased that the agreement brings permanence and certainty to the estate tax regime — which we have been advocating for over the last decade.” Can you share your own personal feelings about this important legislation at the time it was decided? And now, several weeks after you’ve had the chance to digest what it means for your business, what are your thoughts?
Brad Elman, CLU, principal at Nine Dots Benefits in Los Altos, Calif.: My personal feeling initially was pleasant surprise that the government didn’t lower the exemption. Several weeks later, I am glad that the higher exemption will lower the tax burden on those estates that now fall under the taxable limit and appreciate the opportunity to help clients make use of a significantly higher unified credit than we have had historically. For clients not facing an estate tax, we can focus on the more important aspects of estate planning: creating a plan that transfers the right property to the right people in the right way and at the right time. For clients who are facing an estate tax, we can take advantage of the increased gift tax exemption to transfer a lot more wealth during his or her lifetime and potentially use some of the transfer to purchase life insurance, where appropriate.
James J. Tyrpak, M.S.F.S., CLU, ChFC, AEP, registered principal of Cambridge Investment Research in Williamsville, N.Y.: It is always good to have an expectation that an estate tax will likely be in place for an extended period. It was good that the exemption was held at its current level and indexed for inflation in the future so that few estates will be exposed to taxation. While that is good for estates, it will likely reduce the opportunities for future tax-driven estate planning. The higher tax rate, though, does provide some opportunity for additional life insurance.
Rick Watkins, CLU, ChFC, CFP, principal of Rick Watkins Financial Services LLC in Evansville, Ind.: The $5 million estate exemption amount, indexing per individual and making these both portable and permanent, surprised me somewhat. I envisioned the exemption amount to be a bit lower, perhaps around $3 million, and was also unsure how portability would end up. I did not think this would be permanent, as we have had so many laws that sunset in the past. Being permanent is the best part of the regulation, in that it now allows for much better long-term planning for our clients.
Q. Now that there is more permanence and clarity in this area than there has been in a long time, what practical steps are you taking with your clients? Is there a particular approach you are using with them so they’ll re-evaluate their estate planning needs in relation to the new law?
Tyrpak: The approach today provides the opportunity to motivate clients to do their planning now, if they haven’t recently, because we’re in a position to plan with one variable being reduced significantly, namely taxation. Clients need to be reminded that planning should not just be about taxation, but also clients’ desires for transferring assets.
Watkins: With the regulation being permanent, we can plan much easier and, oftentimes, much more simply. In many cases, at the total of the $10 million-plus exemption per couple, a life insurance trust, as well as bypass/A-B/family-marital/credit shelter trust planning — or whatever name you wish to use for it — may not be necessary anymore. Portability allows a surviving individual to have a much larger estate that is not taxable because the maximum amount available to both spouses can be utilized. I talk to clients that I know have previously structured their A-B trusts and/or an ILIT and tell them that they absolutely should revisit their plans for potential revisions
Elman: Some of our existing estate planning clients rushed to get their planning done before year end. I am not a fan of hurrying any type of financial decision, and the pressure of a Dec. 31, 2012, completion date was stressful. The good news is that the clients who didn’t or couldn’t get their planning done before year end now have the opportunity to do it. And the clients who did get it done don’t have to worry about a claw back.
As is often the case, an external motivator — in this case, the threat of losing the $5.12 million gift tax exemption — caused people to think about their estates. This is a very positive thing. Estate planning, when done properly, can be a very productive process. To me, it’s really not about taxes or exemptions, as these things have changed over time. Estate planning in our practice has always been about making sure that your property goes where you want it to go, when you want or need it to go there. Sometimes this involves life insurance, and sometimes it does not.
The majority of our estate planning clients would prioritize their goals as follows:
- Take care of themselves and their loved ones.
- Create change with the money — getting resources to charitable and philanthropic causes they care about.
- Minimize taxes.
- Leave an inheritance.
In situations where a family business is the majority of the estate, then I would make the continuation of the business the primary goal.
While it’s helpful in planning to have legislation that is more permanent than any we’ve had in the recent past, we need to keep in mind that, while this law won’t change without congressional action, Congress certainly has, and probably will at some time in the future, made changes in the transfer tax rules.
For more on estate planning, see: