Benjamin Franklin Was Wrong!

Summary: Benjamin Franklin penned the famous phrase: “In this world nothing can be said to be certain, except death and taxes." But Ben, smart as he was, couldn’t conceive of our current Congress! Nothing is certain about taxes any longer.  (1) Everyone expects tax rates to rise to cover growing deficits, but what form that takes and when it will happen all remain to be seen; (2) President Obama’s proposed budgets has nasty stuff for wealthy folk endeavoring to plan their estates; and (3) The “Now you see it, now you don’t” estate tax remains in flux. Since you’ve no doubt heard about repeal, possible reinstatement, and carryover basis, we’ll provide a broader discussion of the current estate tax environment and pro-active steps you can take.  A recent survey of CPAs said 83% of their clients are taking a “wait and see” approach to the estate tax. Hmmm. Sounds a bit like Nero and the fiddle.


For a detailed 60 page analysis of the impact of estate tax repeal, including sample documentation and more see Subscribers to the electronic version of Practical Planner received this white paper during the first week of January. Sign up and receive future electronic updates and seminar announcements. Just go to and input your email address into the green box on the right side “Free Monthly Newsletter.”


Estate Repeal, Well Maybe: Everyone expected, and still expects, Congress to “patch” the estate tax so that in 2010 we’d have the same $3.5 million exclusion and 45% tax rate as in 2009 until Congress decides what to do for the long term. Senate Finance Committee Chairman Baucus and Treasury Secretary Geithner stated that they both support extending the 2009 estate tax rates for 2010 and making the changes retroactive to January 1, 2010. You might know the result by the time you read this, but then again maybe not. Whatever happens, issues and opportunities should be evaluated. Importantly, there are important lessons that everyone should learn from these events. Planning, it seems, should forever more be more flexible.


Obama Budget - Estate Restrictions: In addition to repeal uncertainty, changes proposed in President Obama’s budget create additional concerns. These include a restriction on Grantor retained annuity trusts (GRATs) commonly used to shift growth in asset values outside your estate. GRATs will have to last a minimum 10 years. This is significant because if you don’t survive the 10 year term the assets will be included in your estate. The addition of this mortality risks will make GRATs, which hare commonly two years under current law, impractical for many seniors. Hug your insurance agent. If you use a 10 year GRAT odds are good that you’ll want to at least consider a 10 year term insurance policy to cover the risk of your dying prematurely. The investment strategies of GRATs will have to change. You can’t immunize a single asset class GRAT with cash and sit on it for a 10 year term, With a 2 year GRAT that was tax-groovy.  Discounts, long the bane of the IRS, and fodder for more cocktail conversations than any other tax topic in history, will be subject to new limitations. The Treasury will issue new regulations specifying restrictions (e.g., in a partnership agreement or state law) that will be ignored in valuing interests in family controlled entities if the ownership interests involved are transferred by bequest or gift to family. These will include interests that can be removed by family members. So if you’re planning a discount move, swing before the window closes. Discount restrictions will take some of the juice out of many tax planning techniques. But don’t despair, grantor trusts are quickly becoming the “new tax normal.” See Practical Planner May 2009. Archives are available on


Carryover basis Rules: For those dying in 2010 there will be a limited basis step up. Congress effectively created an income tax cost to replace the estate tax. If you die owning a stock you paid $1 for and it is worth $1M under 2009 law, you would pay an estate tax (if your estate exceeded $3.5M) but then the “investment” or “tax basis” in that stock would be increased to $1M value at your death. IRC Sec. 1014. If your kids sold it for $1M they would not pay capital gains tax. Under the 2010 law, unless and until Congress changes it, the basis step up is limited under an arcane set of new rules that ever tax geek hopes they don’t have to learn. These rules are called “carry over basis”. Every estate will get to increase the tax basis in assets owned at death by $1.3M (only $60,000 for non-resident aliens, sorry Sigourney). $3M more can be allocated to increase basis of property received from a deceased spouse. These rules will require substantial recordkeeping by everyone, regardless of the size of your estate, because everyone is potentially subject to income and capital gains taxes. The rules are arcane, even for tax laws! Unlike the fiddling Nero -- do something! Re-title accounts to tenants in common with your spouse. The planning paradigm with the estate tax had been to divide assets 50/50 so whoever checked out first could fund a bypass trust. The new carry over basis paradigm is to divide assets by appreciation. But just like Doublemint gum you can get two, two tax plans in one! Tenants in common gets you the right division under either scenario. Revise your documents! Yes, you need to. Build in more flexibility, specific powers and instructions on how an executor should divvy up the basis adjustments if they apply, and other goodies discussed below.


Your Will is Probably Wrong: If your will leaves an amount to a trust or children based on the amount that doesn’t create a federal estate tax (a common way to write will language because of the many changes the law has taken over the years) what happens if there is no estate tax? Your dispositive scheme may just go haywire! You need to revise your will to contemplate a world without an estate tax. No tax advisers ever had this scenario in mind on their radar screen. . Consider appointing an independent fiduciary to address tax decisions while uncertainty reigns. Putting this off won’t help. And even if Congress reinstated the estate tax retroactively yesterday, issues may remain for some time to come. Include statements clarifying your personal objectives independent of tax considerations. That will help interpret and apply your will regardless of how the tax system is jiggered.


He's Back - The Return of Freddy Krueger: Everyone is confident Congress will bring back the estate and GST tax. If Congress reinstates the estate and GST taxes but does not make them retroactive what happens during that interim window when there is no estate or GST tax? You may not be able to set up a dynasty trust and make it GST exempt because you may not be able to allocate GST exemption to protect a trust if there is no GST tax. Does that put the freeze on that type of planning until Congress acts? What if you set up a GST exempt trust and Congress retroactively reinstates the GST tax? Will that result in a retroactive allocation of GST exemption to that trust? Instead of fiddling fund a trust now with a defined value clause to allocate assets among GST exempt and non-exempt trust based on how the law shakes out. ? If you have a trust that is not exempt from the GST tax but for which grandchildren (“skip people in tax jargon) are beneficiaries, consider distributions now while there is no GST tax. You might be able to make distributions subject to an agreement of the beneficiary to refund the distribution if a GST is retroactively reinstated.


Gift Planning: Make taxable gifts! Yes, you read right! If you’re loaded and on in years or not well, if you make large taxable gifts at the 2010 35% maximum gift tax rate, that could be a whopping savings from incurring the 55% marginal estate tax rate that comes into play in 2011 and later  years if Congress does nothing.  Also, if you survive 3 years after making the taxable gift, the gift tax you paid is removed from your estate as well as the asset (in tax jargon that’s a net gift). That’s a winner. Just make conforming updates to your living will since you’ll need to survive 3 years after making the taxable gifts to get the gift tax out of your estate. If you wait for the tax issues to resolve, interest rates might be higher, asset values may be higher and tax planning strategies more limited.


Conclusion: The uncertainty is wild, but so are the roller coasters at Cedar Point. Jump on and have a ride. Waiting will provide certainty, but may also waste valuable planning opportunities.

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