Future of the Federal Estate Tax

Insight into Obama-Republican deal and the estate tax

On December 6, 2010, President Obama announced that he reached a tentative deal with republicans to extend the Bush Tax Cuts and reform the federal estate tax.

The writers and bloggers at Forbes.com have been covering the issue from many angles.  Featured on the Forbes.com webpage are two of my recent blog posts:

There are a number of other blog posts to mention, including:

• Brian Wingfield, How The Tax Compromise Might Affect Estate Planning, Business in the Beltway.
• Hani Sarji, Obama-Republican Estate Tax Deal Draws Criticism: “The Deal Is Unacceptable”, Estate of Confusion.
• Janet Novack, Washington's New M.A.D. Doctrine: Mutually Assured Deficits, Taxing Matters.
• Hani Sarji, Obama Announces Estate Tax Deal With Republicans: 35% Tax Rate And $5 Million Exemption, For Two Years, Estate of Confusion.
• Brian Wingfield, Taxes? Hold 'Em!, Business in the Beltway.
• Brian Wingfield, Statement By The President On Tax Cuts and Unemployment Benefits, Business in the Beltway.

For other coverage of the Obama deal, see Paul Caron, More on the Obama-Republican Tax Cut Deal, TaxProf Blog, Dec. 8, 2010.

Also, Forbes.com writers and bloggers have covered the recently introduced and defeated Baucus proposal:

• Hani Sarji, With Baucus Bill Blocked In Senate, What Now For Estate Tax?, Estate of Confusion.
• Ashlea Ebeling, Estate And Gift Tax Bombshell, The Best Revenge.

(Also note that like other Forbes.com bloggers, I am grabbing the headlines for many of the articles that I am reading.  One of the readers of Estate of Confusion told me that he finds My Headlines Grabs very helpful.  Let me know what you think: http://blogs.forbes.com/hanisarji/headline-grabs/)

Deborah L. Jacobs explains why 2010 is a good year to leave the children the house

On October 20, 2010, the New York Times published, Leave the Children the House, Without a Hefty Tax Bill, by Deborah L. Jacobs.

Jacobs explains that 2010 is a good year to give the house to children because the gift tax rate is at 35% in 2010 and it is scheduled to be at 55% in 2011.

Jacobs provides the following strategies:

• Give partial interests.
• Use a grantor trust.
• Create a QPRT.
• Create a legal entity.

Jacobs explains that there are drawbacks:

Perhaps the biggest hurdle, though, is the awkwardness of having business relationships with family members . . .    

If you want to keep living in the house, you must pay fair-market rent to the family members or an entity (like a trust) that becomes the owner. Awkward though this might be, it's a smart estate tax move, because the rent then is a way of giving money to your family without having to pay gift tax. 

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  Jacobs keeps readers current between editions of her book by issuing updates that can be downloaded from her book's website http://www.estateplanningsmarts.com/ and by tweeting at http://twitter.com/djworking.

Mark Maremont and Leslie Scism (WSJ): "Shift to Wealthier Clientele Puts Life Insurers in a Bind"

On October 3, 2010, the Wall Street Journal published Shift to Wealthier Clientele Puts Life Insurers in a Bind, by Mark Maremont and Leslie Scism.  This article is interesting because it shows that “a growing proportion of the tax benefits of life insurance goes to the well-off, not to the middle class that once was the industry's backbone.”  Among other things, the article highlights the role of life insurance in estate planning for wealthy individuals:

in a development all but unnoticed outside the industry, life-insurance companies gradually have shifted away from their broad historical base of middle-class households. Instead, statistics show, an increasing portion of insurers' business consists of selling large policies to wealthier Americans, often as part of complex estate-tax plans. . . .

Many large policies are part of estate planning. In one method, the insured sets up an irrevocable trust to buy a life-insurance policy and pays the premiums by giving sums of money to the trust annually.

This can lower estate taxes, because the trust isn't considered part of the estate, and the payment of premiums reduces the estate's size. Then, to the extent estate taxes are due, the insurance proceeds can help cover them.

The article provides quotes from those who are sympathetic to having tax-advantaged life insurance for the wealthy.  These supporters use similar arguments to those used to support a reduced (or eliminated) estate tax:

• the tax breaks “encourage wealth accumulation that helps feed capital formation and job creation”
• the tax breaks help those who save and accumulate their wealth

Significantly, the article points out that “[t]here is no proposal in Congress this year to curb the tax breaks for life insurance.”  Two reasons are (1) there would be “heavy opposition from insurers and agents,” and (2) higher taxes are not popular when the economy weak.

Informative audio: Randy M. Spiro talks about estate tax uncertainty

On June 22, 2010, LexisNexis® Estate Practice & Elder Law Community posted the following podcast: Randy Spiro on practical considerations in estate planning's most uncertain year. Randy M. Spiro is an estate planning attorney who practices in California, and is a Certified Specialist in Taxation and in Probate, Estate Planning and Trust Law.  He has been practicing law since 1978. 

In this interview, Spiro reviews the following:

• reviews the current state of the estate tax, GST tax, and gift tax
• problems with formula clauses A/B trusts
• benefits and downsides of disclaimer trusts
• constitutionality of a retroactive estate tax
• the importance of reviewing clients' estate plans – motivating clients and educating advisors
• putting instructions regarding the estate tax in health care proxy and power of attorney
• who to name as contingent beneficiary in an IRA; "stretching" an IRA
• thoughts about the estate tax in 2011

Spiro also shares his expertise in a number of informative articles on JDSupra. For example, in one article – Would Retroactive Reinstatement of the Federal Estate Tax be Constitutional? (1/11/10) – Spiro summarizes U.S. v Carlton, 512 U.S. 26 (1994), and Nationsbank of Texas, N.A. v. U.S, 269 F3d 1332 (Fed.Cir.2001). He concludes by writing,

It would be foolish to conclude that the Carlton and Nationsbank cases are controlling on the issue of constitutionality, but it would be equally foolish to believe that the Supreme Court will treat these cases as irrelevant. Rather, this situation presents an excellent law school exam question where there is merit on both sides. If the estate tax is retroactively reinstated, affected taxpayers will not find it amusing that Congress has created a great law school exam question.

In a U.S. News & World Report article, Kimberly Palmer writes about dangers of DIY estate planning

On June 29, 2010, U.S. News & World Report published The Dangers of DIY Estate Planning, by Kimberly Palmer. 

Palmer points out that people disagree on whether estate planning should be done without a practitioner's help: 

Almost everyone agrees that for people with complicated family or legal situations involving children from multiple spouses or great wealth, professional help is the way to go. But for people with relatively straightforward needs—a will for a single person without much money, for example—there's more room for disagreement.

Palmer quotes the general counsel for LegalZoom, who states that people “can be empowered to handle common legal matters on their own.” 

Palmer also quoted me for the opposite perspective.  I think that it very dangerous for people to attempt their own estate planning.  There are many factors that people might overlook, and people might not know the legal effects of a question that a DIY estate planning software presents them. 

Palmer refers to a cautionary tale that Leanna Hamill writes about on her blog: The Dangers of Do It Yourself, A Cautionary Tale (1/13/09).  My previous blog entry, LegalZoom and the dangers of DIY estate planning (5/25/10), shows that many practitioners have written about the dangers of DIY estate planning. 

Palmer also quotes Deborah L. Jacobs.  Palmer writes, Jacobs “suggests reading up on estate planning before scheduling an appointment with a lawyer, so you go into the meeting prepared and can skip much of the introductory conversation on estate law.” 

I second Jacobs’s advice.  Her book, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide, is a very good guide on the subject.

Deborah L. Jacobs's "travails" with the "mad cool" iPad might lead to an e-book version of Estate Planning Smarts

Deborah L. Jacobs (lawyer, award winning) has written two very engaging reviews of the iPad.  These articles are especially interesting because Jacobs is attempting to be productive with a first-generation machine.   

[1] The promise of productivity.

A Financial Advice Wonk Falls For The iPad (Forbes.com, 6/23/10) conveys Jacobs’s excitement for the iPad.  She envisioned it “as a portable workhorse”:

I had very different ideas about how to fill up my iPad's 64 gigabytes of memory. I envisioned it not as a plaything, but as a portable workhorse. Having never owned a smartphone, I figured the iPad would answer a pressing need to retrieve e-mail on the go and might be a capable reading device. And near term I saw enormous potential for the 1.6-pound iPad to lighten my load on a vacation to Tibet this summer.

The icing on the cake was that the entire Internal Revenue Code was available in a choice of three different iPad apps, one of which cost just 99 cents. Yes, I'm serious. As a financial writer, I need the IRC (as tax geeks call it) for my work. In book form it's heavy and expensive and the free online versions are cumbersome to use. So once Congress passes various tax bills now pending, I'll put the IRC app on my buy list. Because, to put it in teenspeak, "That app is mad cool."

The idea of a portable IRC, and for only 99 cents, makes the hearts of some skip a beat.  It made at least one reader consider buying an Pad.

Despite potential drawbacks that the iPad might have, Jacobs was “totally sold on the iPad as the preferred reading device”:

For someone accustomed to working on a high-performance computer, trying to be productive with an iPad is like cooking haute cuisine over a campfire. Perhaps it can be done, but unless you're out in the wilderness, why go through the hassle? . . .

All this said, I am totally sold on the iPad as the preferred reading device wherever I am, to retrieve e-mail on the go and as a stopgap work tool when traveling light is a priority. . . .

The biggest surprise may be how many baby boomers like me will use an iPad, among other things, to wean themselves from the printed page and reading glasses.

[2] The reality of “an enormously time-consuming process.” 

On June 28, 2010, Forbes.com published a follow-up article: A Financial Advice Wonk's Further iPad Adventures.  This review is more critical of the iPad’s shortcomings:

Being a lifelong New York City dweller, I preferred to take the subway, even in what turned out to be 90-degree heat, rather than lose the choice parking spot my husband had snagged right in front of our house.

Although my earphones problem was readily solved during my visit to the Apple Store--the earphones must be pushed in with some force until they click--it took me many hours to restore all the personal material and settings that were wiped out by the telephone diagnostic process. This included information that there was no way to back up, like a slew of settings necessary to send and receive from each of my four e-mail accounts, and all the documents I had loaded under various apps (I had copies of these on my desktop computer). The three e-books that I had purchased from Amazon, readable only with the Kindle app for iPad, were also wiped out, though they had been automatically archived on my Amazon account and could be quickly downloaded again.

Depending on what functions you try to perform with the iPad, harnessing its power and coping with its idiosyncrasies can be an enormously time-consuming process. Part of the problem stems from working with a first generation machine. But a more profound issue is the proliferation of apps--the mini programs required to perform every function with the iPad. Some are offered by Apple, but most are produced by third parties; few, no matter who the purveyor, have been perfected.

[3] Looking forward to an e-book version Estate Planning Smarts.

In her June 23 article, Jacobs informs readers that she has been thinking about an e-book version of her book on estate planning:

A new application called Blio will make it possible by next year to put my own recent book, Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide, into e-book format without losing its reader-friendly charts and two-color graphics.

I think an e-book version of Estate Planning Smarts would be . . . “mad cool.” 

Deborah L. Jacobs: "Six Estate Planning Questions for Women"

On June 22, 2010, Forbes published Six Estate Planning Questions For Women, by Deborah L. Jacobs.

Jacobs explains that “estate planning is a crucial part of retirement planning for women”:

Among Americans 65 and older, 42% of women but just 14% of men are widowed. Women's longer life expectancy, combined with their tendency to marry older mates and their lower lifetime earnings means they are far more likely to see their living standards compromised in retirement if proper estate planning isn't done.

Making planning all the more crucial right now is the matter of taxes.

Jacobs writes, “while estate planning concerns and involves everyone, in many cases it affects women more profoundly.”  She provides six questions that everyone, especially women, should ask:

1. Whom can you trust?  Jacobs discusses powers of attorney.
2. Who would raise your children?  Here, Jacobs discusses choosing a guardian.
3. Do you need life insurance?
4. Do you have assets of your own? "This is an issue for spouses or others in relationships with commingled funds."
5. Is there money in the bank?
6. Should you shed assets to save taxes?

These questions are important and they are practical, not theoretical.  They are questions that should be asked. 

Jacobs’s article also provides pictures that reinforce the points made in the article.  Click on the image below to go an interactive feature of this article:

 
If you find Jacobs’s article useful, then you will also find her book on estate planning useful: Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. Jacobs keeps readers current between editions of her book by issuing updates that can be downloaded from her book's website http://www.estateplanningsmarts.com/ and tweeting at http://twitter.com/djworking.

Interesting and informative blog post by Jim Gust: "Extenders blocked--what does it mean for estate tax reform?"

On June 18, 2010, Jim Gust posted Extenders blocked--what does it mean for estate tax reform? on Trust and Wealth Management Marketing.  It is a short post, but it is packed with insight:

• Deficit reduction argument.  If one accepts the premise that the tax extenders bill, H.R. 4213, is being blocked because it is not fully paid for, then it is probable that the estate tax rate will be raised.  Gust explains, "Any increase in the exemption amount above $1 million, even a restoration to 2009's $3.5 million, will be scored as a serious addition to the deficit.  One that benefits only 'the rich.'  I don't think it will happen."
• Reasons why H.R. 4213 is being blocked.  (1) Deficit reduction argument.  (2) Possible reason: “hedge fund managers are successfully heading off a change in the taxation of carried interests, currently treated as capital gains.”
• Looking back: EGTRRA’s changes.  Gust writes, “Like nearly all observers of transfer tax policy, I never expected to have a year without federal estate taxes. I thought it was a clever ploy for manipulating the scoring system.”
• Looking ahead: estate tax reform.  Gust states that a retroactive fix for 2010 is increasingly unlikely, and explains why $1M exemption and a 55% tax rate in 2011 is increasingly likely. 
• Marketing a trusts & estates practice.  Gust is already starting to prepare marketing materials for the scheduled tax increase in 2011: “We are preparing marketing materials based on a $1 million exemption in 2011 and later years.”
• Gift tax planning and gift tax return preparation could increase.  Gust writes, “[O]nce it becomes crystal clear that there will be no retroactive changes to gift tax rates, I expect a flood of taxable gifts this year to take advantage of the temporary 35% tax rate.”

Forbes article by Deborah L. Jacobs: "Prepare for the Return of the Estate Tax"

Forbes has published Prepare for the Return of the Estate Tax, by Deborah L. Jacobs (lawyer, awarding winning journalist, author of Estate Planning Smarts).  The synopsis of the article provides, “The federal estate tax is coming back, while some state levies never went away. Act now to protect your family's assets.”

There are three parts to the synopsis:

[1] “The federal estate tax is coming back.”  Consensus among observes is that Congress will probably fail to reform the estate tax in 2010.  For example, in What's the Skinny on the Estate Tax?(LawEasy.com, May 2010), Martin M. Shenkman writes that “[a]t this stage, nothing may happen until several months into 2011 and then we may just get an exclusion of $1-$3 million with no inflation indexing and a rate of 45-55%.”

[2] “[S]ome state levies never went away.”  A June 9, 2010 Forbes article, by Ashlea Ebeling -- The State Estate Grab, 2010 Edition -- explains that “[l]ike the federal estate tax, state levies are in flux. As of mid-2010, 19 states imposed taxes on estates not left to a spouse or charity.”  Ebeling’s article provides a very useful, color-coded and interactive map of the United States that tells (a) whether a state has an estate, inheritance, estate and inheritance tax, or no state death taxes at all; and (b) where applicable, the exemption amount and top tax rate. 

[3] “Act now to protect your family's assets.”  If the estate tax “will rise from the ashes on Jan. 1, 2011,” as it is scheduled to do; then the time “to protect your family’s assets” is indeed “now.”  Jacobs explains why "[t]he prospect of a $1 million exemption means many more families need to plan for the federal tax:" "Tally up the value of a house, life insurance (if you are foolish enough to die owning it yourself), retirement and other accounts, and you may be surprised to find yours is one of them." 

Jacobs’s article discusses the actions people can take now to protect their estates:

• Review life insurance policy ownership.
• Put some assets in your own name.
• Maximize annual gifts.
• Fund college savings plans.
• Pay tuition and medical expenses.
• Convert to a Roth IRA.

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  This book would be profitably read by anyone who is curious about estate planning.  Estate Planning Smarts will empower you because it explains difficult concepts in accessible language and because it provides useful checklists at the end of chapters.

Jacobs keeps readers current between editions of her book by issuing updates that can be downloaded from her book's website http://www.estateplanningsmarts.com/ and tweeting at http://twitter.com/djworking.

Two CNBC articles on the estate tax by Jessica Rao and the importance of discerning between similar sounding advice

[1] Two CNBC articles.

On May 24, 2010, CNBC published two articles that discuss the federal estate tax.  Both articles were written by Jessica Rao:

[1.1] How To Manage Your Death Portfolio -- discusses

• Having a “Family Love Letter,” which is a document that “includes an inventory of advisors, assets and other information.  It even contains details like account passwords, what frequent flyer miles you have, and if a neighbor owes you money.”
• Creating trusts for minors, for life insurance, for flexibility, to avoid probate.
• Having advance medical directives.
• Keeping beneficiary designation forms up-to-date.
• Having contingent beneficiaries.

[1.2] How To Play The Changing Tax Picture in 2010 

• Calls the estate tax repeal “a one-year wonder.”
• Discusses the benefits of gifting assets in 2010. 
• Also discusses investing in municipal bonds and contributing to 529 college saving plans.

[2] Advice may sound similar but have a different tenor.

Both articles conclude with similar sounding advice:

1. “People should do what they want, regardless of the tax consequence"
2. “Never do anything just for taxes”

The two points may sound similar, but as the discussion below shows, they have very different tenors.

[2.1] Consequences (especially tax consequences) should never be ignored.

It is surprising to read the first point as the conclusion to an article that also states that “[i]f you don’t make appropriate financial plans, loved ones could pay unnecessary taxes.”  People should never ignore the consequences of their actions, especially the tax consequences. 

The folly of the first point becomes apparent when considering insight from Matt Brady, head of Wealth Advisory, Americas, at Barclays Wealth:

If you can save on taxes, that almost means more than any amount of investment performance because the difference between capital gains, for instance, and ordinary income, is 20 percentage points . . .

If you can be efficient in having most of your returns in capital gains, then there is no amount of outperformance that you can realistically achieve that makes up for that.

Quoted in John McCrank, Barclays Wealth sees scramble on U.S. tax burden, Reuters, May 26, 2010. 

If a 20 percentage point spread is important, think about how avoiding a 45 percentage point liability can enhance the wealth of your family. 

[2.2] Tax planning is one aspect of estate planning.

The second point is valid and is sound advice.  Tax planning is just one aspect of effective estate planning.

If you are interested in learning about some of the other aspects of estate planning, you might consider attending the following CLE:

Estate Planners Risk Assessment and Checklist: The Big Picture is Often Overlooked But Critical for All Estate Planners and Plans

Tuesday, June 8, 2010
Format: Teleconference and Live Audio Webcast
Duration: 90 minutes

Sponsor: The American Bar Association Section of Real Property, Trust & Estate Law

Program Information

Do you create impressive estate plans that negatively impact your clients' control, cash flow and financial statements? Are you trained to understand the dynamics of basic family psychology?

A client and their family are likely to judge the ultimate success of an estate plan based on personal concerns, not the legal and tax merits. A technically flawless plan may fail to achieve a client's goals if the planner does not consider family dynamics, client tendencies, and other non-tax, non-legal factors. Deciding on the techniques to recommend and provisions to draft requires considering more than the technical aspects of a plan, which estate planners may tend to overlook. Proper consideration of these non-legal, non-tax factors can help planners reduce serious potential problems, including future estate disputes, IRS audits, client complaints, and disputes with the client's other advisors.

Join us as our panel discusses 25 factors to consider and how being aware of the unique personal, family and business issues each client presents can lead to a better result for everyone involved.

Program Faculty

OUR EXPERTS

• Avi Z. Kestenbaum, Esq., Meltzer, Lippe, Goldstein & Breitstone, LLP, Adjunct Tax Professor at Hofstra University School of Law and the Baruch College MBA Program, Mineola, NY
• Marvin Blum, Esq., The Blum Firm, P.C., Fort Worth, TX
• Al W. King III, JD, LLM, South Dakota Trust Company LLC, New York, NY

(Note: law students can register for the Webcast for free.)