Adjusting For Tax Changes Is The Key To A Winning Estate Planning Strategy
Estate owners need offensive, defensive and often preemptive strategies
By John S. Budihas
NBA coach Pat Riley says success depends on how well a team can adapt to and challenge the offensive and defensive strategies of an opponent. The New England Patriots won this years Super Bowl by quickly identifying and then reacting to their opponents running and passing attacks.
How well one prepares for and adjusts to change is critical on the playing field. Its just as important in the world of financial planning, especially when you consider the ever-evolving tax environment.
For instance, estate owners need to adjust to changes in tax law, health and family circumstances, plus business and financial circumstances that could make difficult the transfer of property both at death and during life. They need offensive, defensive and often preemptive strategies.
High-net-worth clients are concerned about the volatility of transfer tax law. They should be. The passage of the Economic Growth Tax Relief and Reconciliation Act in 2001 introduced 300 changes to transfer tax laws that can deplete wealth and make the transfer of assets more difficult.
For example, high marginal estate tax rates take a hiatus in 2010 and then return in 2011. Also, EGTRRA repeals 100% of the state death tax credit in 2005. Only 25% of the available credit can be used as a subsidy in 2004.
Since 1982, many states made their inheritance tax equal to the available federal credit. These were called the “sponge tax” states. The federal credit subsidized estates that filed a 706 federal estate tax return with state inheritance tax obligations. State death taxes offset the federal estate tax the estate was obligated to pay.
Because EGTRRA replaces the federal estate tax credit with a tax deduction, many states face the loss of millions of dollars in revenues from death taxes. Many of these states now hope to preclude those losses by either creating their own marginal death tax schedules or aligning those schedules to whatever the pre-EGTRRA credit had been.
Another expected source of wealth depletion is EGTRRAs lifetime gift cap, which restricts lifetime wealth transfers to $1 million. Lifetime gifts exceeding $1 million now are subject to a tax rate of at least 41%.
Fortunately, your clients can employ life insurance planning techniques to neutralize the potentially devastating effects of EGTRRAs transfer tax changes and other estate shrinkage due to litigation, creditor proceedings or divorce settlements. Life insurance can replace assets lost from these circumstances or it can be used to pay taxes incurred at discounts of 70% or more.