As trusted advisors, tax professionals can help their clients navigate the haze
With the Bush tax cuts set to expire at the end of this year, and confusion abounding over the future of estate and gift taxes, estate and financial planning has become a far more complex exercise. As you advise clients and help them prepare their estates for 2011 and beyond, consider these five points:
1. The estate tax isn’t going away for good. If Congress does nothing this year, under the “sunset” provision of the 2001 legislation it will be as if the 2001 law had never been enacted; and as of January 1, 2011, there will be a $1 million exclusion and a 55-percent maximum rate. Even if Congress does act, it is unlikely to permanently repeal the estate tax given the soaring federal deficit. Instead, it may elect simply to restore the 2009 limits or come up with a compromise, says Bruno Graziano, senior analyst for CCH, a Wolters Kluwer business.
2. Review all existing documents. “Language in a will or trust that was not properly drafted to account for a situation where the estate tax is temporarily repealed could have unintended consequences, such as disinheriting a spouse,” says Graziano. Caveat: Nine states so far have passed laws protecting beneficiaries from this possibility.
3. Know your state(s). That means not only where you live, but where you own property. Under the current patchwork system, some states have no estate tax; those that do have varying exclusion amounts, effective dates and other rules.
4. Leverage the lifetime gift exclusion. Since the estate tax will likely be back, encourage clients to consider certain trusts and other techniques to move as much money as they can out of their estates now. For example, clients should consider taking advantage of split-interest trusts, such as grantor retained annuity trusts (GRATs) or charitable lead remainder trusts. “There are proposals on the table that would limit some of these,” says Graziano, noting that one proposal would eliminate short-term GRATs, making the new minimum 10 years— thus limiting the tax-saving benefits.
5. Secure the future. It’s impossible to predict exactly what Congress will do, but even if lawmakers were to permanently repeal the estate tax, estate planning is still critical. Other issues such as asset protection, dysfunctional family situations, disposition of retirement assets, and business-succession issues can be just as important, if not more so, than the traditional transfer-tax issues, says Graziano. “Work with your clients and their other advisors to develop a solid estate plan that will provide security for their families and be flexible enough to remain viable regardless of what happens with the estate tax.”
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This story is from the CCH e-newsletter First Choice, written specifically for tax, accounting and audit professionals. First Choice offers tips, tricks and ideas about how to increase your public accounting firm’s productivity and efficiency. Every issue also features insights with a tax, audit or accounting professional.