Feel like the looming changes to federal estate tax have created more than their share of confusion? Keep an eye on the headlines, and, in the meantime, here are seven ideas to help your clients prepare for the potential last-minute legislative manipulations in store in 2010.
Some aspirin, antacids, access to C-SPAN and a little yoga could be just what the doctor orders for estate planners and tax specialists for the remainder of 2010 and into 2011, given all the issues they must grapple with as a result of the ongoing uncertainty surrounding federal estate tax policy.
Aside from needing remedies for the angst that accompanies trying to plan in a volatile tax environment, advisors must also have a means to keep abreast of what’s happening in Washington, D.C. Will lawmakers opt to keep the estate tax scheme currently set to take hold in 2011, or will they continue the scheme that’s in place this year, revert to the one that was in place in 2009 or find another alternative?
It’s all guesswork. Which means that — and here’s where yoga can help — estate planners must account for a range of possible policy outcomes.
“It’s really important to build as much flexibility into your [estate] plan as possible,” says Brian J. DesRosiers, Esq., LLM, a partner and estate planning attorney at Cody & Cody, LLC, Quincy, Mass.
“Right now, I’m advising clients to plan for the worst,” says David Schlossberg, CEP, president of Assured Concepts Group, an estate and financial planning practice, East Dundee, Ill.
The worst case, in his estimation, is lawmakers let the federal estate tax exclusion return to $1 million in 2011, as it is scheduled to do, after the unlimited exclusion in place in 2010 expires Dec. 31.
Few observers expected Congress to let the unlimited exclusion stand through 2010. Now, however, it appears destined to remain intact, leaving the public to wonder what happens next. Yet the show must go on. Accountants and attorneys still need to find ways of preserving and transferring wealth as tax-efficiently as possible.
Instead of doing nothing, estate planning experts recommend considering the following tactics to move forward amid the uncertainty. As always, it’s best to consult an accountant or attorney specializing in estate planning or wealth transfer for help determining which strategies are suitable for specific client circumstances.
1. Use ‘if … then’ planning tactics. The estate planning community is keeping close tabs on the estate tax policy debate on Capitol Hill. The consensus is lawmakers will likely try to tackle the issue early in 2011. Beyond that, “no one really has a clear idea how it’s going to shake out,” Schlossberg says.
The outcome will go a long way in determining the types of strategies estate planners put in place for
their clients. Will it involve a Qualified Terminable Interest Property trust, an AB marital trust or another alternative? An irrevocable trust, such as an ILIT, or a revocable trust?
That depends largely on the amount of the exclusion, whether it ends up at $1 million, as the law currently provides, $3.5 million, where it was in 2009, or some other threshold. The maximum estate tax rate is another X-factor. Will Congress leave it at 55 percent for 2011 or decide to lower it to the maximum 2009 level, 45 percent?
The upshot for estate planners, DesRosiers says, is a plan enacted today must have the flexibility to be revised if the outcome of the policy debate in Washington so dictates.
2. Buy convertible term life insurance. Estate tax policy may change, but the value of life insurance as a planning tool will not. Where the uncertainty comes into play is in the type of life insurance to buy.
Again, Schlossberg says, it’s all about flexibility. While in most circumstances purchasing a permanent life insurance policy to underpin a plan would be the right thing to do in a stable estate tax policy environment, the prudent move today in many cases is to buy a term life policy that can straightforwardly be converted to a permanent policy once it’s clear what tax parameters will be.