With the 2008 presidential election fast approaching, the state of the estate tax remains unresolved. Current law, the Economic Growth and Tax Relief Reconciliation Act of 2001, provides for an increase of the estate tax exemption from our current level of $2 million to $3.5 million in 2009 with a temporary repeal in 2010. Come 2011, however, EGTRRA sunsets and the estate tax exemption amount drops to $1 million, with a tax rate of 55%.
Congress previously focused on a total repeal of the estate tax after 2009. With the 2007 change in Congressional leadership, complete repeal may be out of the equation as the focus shifts to reform. With no crystal ball, it is impossible to predict what reform will take place. What is clear, however, is that the estate tax uncertainty continues and it is important that advisors be equipped to deal with this uncertainty.
Is an estate plan necessary?
For most clients, estate planning is necessary to delineate family relationships, distribute property and to minimize taxation at death. Clients, however, cannot know exactly when they will die and what the tax system will look like at their death. The most prudent thing to do is to plan one’s estate with flexibility under the current tax regime, to allow one’s estate plan to adapt to any future tax law changes.
By waiting, clients may lose out on the opportunity to make years of annual exclusion gifts and to use techniques that may reduce or freeze the size of their estates. During a “wait-and-see” period, their health may also decline, foreclosing the opportunity to purchase life insurance at affordable premiums. Consequently, if death occurs in a year when there is an estate tax, their estate may be faced with a large estate tax bill without the sufficient liquidity to pay those taxes.
Many clients are concerned about being “stuck” in an estate plan if there is a possibility that their estate may not owe estate taxes. It is therefore important that clients continue to plan. This is especially true for ultra wealthy clients for whom any tax reform (short of complete estate tax repeal) would not relieve their estate of estate taxes.
The adaptable ILIT
Making an estate plan as flexible as possible can ease client concerns about planning during this uncertain time. By creating a properly structured irrevocable life insurance trust to be the owner and beneficiary of a life insurance policy, clients can remove the asset from their taxable estate.
Because the ILIT is irrevocable–meaning it cannot be changed or accessed–it is important to build flexibility into the vehicle so as to allow for new options and alternatives should estate tax laws change. Here are 4 techniques that can help an ILIT adapt to possible changes in the tax laws: