Drafting Tips for Estate Planners After the 2010 Tax Act
By by Martin M. Shenkman, CPA, MBA, JD
Drafting estate planning documents post-TRA will require estate planners to develop new drafting and planning techniques. This chapter is a first rough attempt, in the wake of the new law, to identify some of the changes in drafting different estate planning documents, that taxpayers and their advisers should consider. Some of the issues that might warrant consideration in drafting new estate planning documents include the following:
Uncertainty as to the law remains. But, unlike the 2010 debacle when advisers and taxpayers alike were caught off guard by the unexpected implications of estate tax repeal on the provisions in wills and other documents used to allocate assets to intended heirs (formula clauses), practitioners don’t want to be caught off guard again. So, the formula clauses to allocate assets and bequests will likely be drafted in a more comprehensive manner, consider possible changes in the estate tax exclusion, include in some instances floors and caps (minimum and maximum amounts to be bequeathed under certain provisions), and other safeguards. What will happen to the estate tax law in 2013? How can documents be drafted today to account for the wide range of possibilities that the law in 2013 might reflect? The estate tax could be eliminated entirely. The $1 million exclusion and 55% rate may return as they were scheduled to do in 2011. The rules from 2009 may be enacted, a $3.5 million exclusion and 45% rate. Or perhaps the $5 million exclusion may remain with a 35% rate. Portability may remain or be repealed. And so on. Not a small feat to contemplate in a document.
Tax allocation clauses must be reviewed carefully. If a client makes a $5 million gift that is covered by the $5 million gift exemption, and if the estate tax exclusion is later reduced, the estate tax is assessed on the value of the estate augmented by the gifts, and only the estate tax exemption in effect at the date of death is allowed. This means that estate taxes may be due with respect to the gifted assets. (In effect, there is no way to “lock in” the benefit of the $5 million exemption by making gifts.) If the assets were given to persons different than the residuary beneficiaries of the estate, merely using a typical tax allocation clause to allocate estate taxes against the residuary estate may result in a rude surprise to the residuary beneficiaries. It is even conceivable that the residuary estate would be totally consumed by such estate taxes.
State estate tax remains an uncertainty. How will the states react, if at all, to the significant changes in the federal law? What can be incorporated into documents to address this?
Portability is a new concept and undoubtedly over time estate planning practitioners will develop standard clauses to deal with portability. A key objective of portability is that no actions should have to be taken by taxpayers, but, at minimum, including a reminder in a will for the executor to consider making the portability election is important.
Taxpayers at lower wealth levels will resist all of this and view it, to their detriment in many instances, as unnecessary, since they will never be subject to an estate tax (they hope!).
Direct estate tax issues are not the only points to consider. For example, it is common in some clauses (e.g., a charitable lead trust) to refer to values “as finally determined for federal estate tax purposes.” If the estate will never be subject to an estate tax and no estate tax return will be filed, what do these clauses mean?
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