Estate Tax Planning After the 2010 Tax Act: Checklist

Checklist -2010 Estate Planning Changes

The TRA has fundamentally changed estate planning. A key issue is how long its changes will last? If 2013 witnesses a sunset of the generous TRA changes, estate tax planning will again fundamentally change and apply to many clients.

√  Every client plan and all client documents must be reviewed and most will require revisions. Many, perhaps most, clients never bit the bullet to update their documents in early 2010 to deal with repeal. As a result, many plans were made, and documents drafted, when the estate tax exclusion was much lower.

√  Ignoring taxes, what does the client really want to accomplish with their estate? Then, factor in federal, and if applicable, state estate taxes. How must the real plan be modified? Factor in the possibility of a $1 million exclusion and 55% rate in 2013. How must the plan again be modified? Finally, factor in a repeal of all estate taxes. How must the plan be modified yet again. Build flexibility and use options that can withstand the stress test of each of these scenarios.

√  Buy sell agreements must be reviewed. How are they affected by the modifications in the tax law? Do they include estate tax definitions that distort the intended results after the 2010 TRA? How do the generous Code Sec. 179 deductions and other income tax considerations affect the formula used?

√  Re-evaluate Roth conversions in light of the lower income tax rates and inapplicability of the estate tax to so many more clients. Communicate to all clients who you assisted with Roth conversion analysis about the new rules and how they may impact tax payment decisions and recharacterization.

√  Communicate to clients the possible impact of the massive estate tax changes. Importantly, the message must be conveyed that they must still address estate planning. Emphasize that, for most clients, estate taxes were only one of many components to any comprehensive estate plan.

√  Communicate to any clients, whom you helped with prenuptial agreements, that they may wish to revisit those agreements. The changes in the exclusion, estate tax rates, income tax rates, and so on, may all affect the impact of such agreements.

√  Be certain to address the required estate tax filings on the death of the first spouse, so decedent's estates don't undermine their ability to pass on their unused exclusion by not filing the appropriate estate tax return.

√  Some elderly or ill clients may have funded Section 529 college savings plans for descendants to reduce their estate in fear of the estate tax exclusion declining to $1 million. With the estate tax exclusion now at $5 million, review whether some of these clients as "account holders" of the 529 plans may wish to retract those gifts, and now have control over the cash that had been given.

√  Re-evaluate gift strategies with all clients. Some will wish to cancel future gifts and even prohibit gifts under their durable powers of attorney. On the opposite extreme, very wealthy clients, may benefit from aggressively leveraging the new $5 million gift exclusion to shift substantial wealth before the law again changes.

√  Be alert for the possibility that a client may have rescinded a 2010 transaction in light of the 2010 TRA changes. For tax purposes, the taxable year is the measuring unit, so that gains and losses are determined on an annual basis using the facts as they exist at the end of the year in question.  In determining income during a particular year, the legal concept of rescission provides that if the transaction was cancelled during the same tax year in which it occurred, then no gain would exist at the end of the annual measuring period to tax.