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Tax Planning Advice: Leverage the Exemption

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This is the NUMBER in a series of 23 tax tips that AdvisorOne will publish on each business day in March as part of our Tax Planning Special Report (see our Special Report calendar for a more complete list of topics to be covered and experts who will deliver their insights).

The tax tip today comes from Gavin Morrissey, director of advanced planning at Commonwealth Financial Network, in San Diego, Calif. Morrisseyconsults on issues involving insurance, tax, executive benefits, business, and estate and charitable planning. He also consults with advisors on concentrated stock and stock option planning and writes a tax planning blog for AdvisorOne.

The Tip: Leverage the Exemption

Startling, unexpected news can be hard to absorb. Morrissey says surprise is the main reaction he has heard from his clients about the $5 million estate tax exemption and its reunification with the lifetime gift tax that was part of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act) that came into effect on Jan. 1.

“I’m not sure it’s clicked in yet,” Morrissey says. “I think there’s still a level of disbelief that they can leave so much alone and still have it protected from estate taxes. You don’t have to go through high-level planning to protect $10 million [for married couples].”

Indeed, Morrissey finds some clients still paralyzed by the uncertainty of what will happen in two years when the exemption is revisited by Congress—during the presidential campaign, no less. “They’re scared to do anything. For the wealthier clients, I say, we know what the law is right now, that’s what we can plan for.”

Morrissey’s advice for high-net-worth clients:  “Start giving away assets. You can’t get a better deal than the $5 million lifetime exemption.”  He says ultra wealthy clients also may want to couple the exemption with other strategies that can garner discounts, such as family limited partnerships, limited liability companies, installment sales, intentionally defective trusts,irrevocable life insurance trusts or grantor retained annuity trusts (GRATs). “You want to leverage this $5 million exemption to the greatest extent possible.”

Like others, Morrissey points out that GRATs are under siege. The last Congress came close to passing a 10-year term limit on this strategy whose utility is greatest over a two-to-three-year period, and President Obama proposed the longer term in his recent budget message.  “If you’re wealthy and have assets that are likely to appreciate quickly, implement a GRAT while it’s still a good law,” Morrissey says.