After a month of death tax confusion, The Trust Advisor checked in with key providers to see if business slacked off. 

Between the threat that Congress will retroactively de-repeal the currently repealed federal estate tax and the ongoing questions about what happens to the tax in 2011 and beyond, the wealthy and their advisors are busier than ever. 

We thought that most death tax consultants and trust officers would have taken a long vacation in Hawaii without an estate tax this year to worry about. But it’s shaping up to be just another year in the trust planning business. “The whole estate tax repeal is much ado about nothing,” said Phil Kavesh, a Southern California estate attorney and founder of UltimateEstatePlanner.com. 

In an interview with The Trust Advisor Kavesh suggested, “Let’s not kid ourselves, there’s going to be an estate tax moving forward. We’re telling our clients to keep planning, full speed ahead.” 

That’s the reality.  After years of speculation, lobbying and not a little daydreaming to the contrary, nobody seriously believes the estate tax is going away for good, and the rich will have to go on planning around it. 

The question is how we’ll be defining “rich” when the tax makes its comeback. If Congress does nothing, estates valued at more than $1 million will be taxable at a rate of up to 60% next year. But as University of California-Davis estate law professor Joel Dobris explained it, that low exemption level would alienate a lot of potential campaign contributors for Republicans and Democrats alike. “It makes for more unhappy upper-middle-class voters.” 

An exemption of $3.5 million (as proposed in President Obama’s 2010 budget and passed in a narrow partisan House vote December 4) or $5 million (as the equivalent Senate bill mandates) is far more likely to win bipartisan support. Given the recent adjustment of power on Capitol Hill, there’s a chance Republicans could fight for the higher number.  But gridlock would work against them—if they fail to make a deal in the next 11 months, they expose tens of thousands of America’s wealthiest households a year to a new tax liability.

Never the Main Market

In any event, while those households wield a lot of economic heft, there really aren’t that many of them — whether the exemption is fixed at $5 million, $3.5 million or even $1 million. 

According to numbers from the Urban Institute and Brookings Institution’s Tax Policy Center, about 1.7% of all Americans who die each year (44,000 estates) would accrue an estate tax liability in 2011 if the $1 million exemption remains in place.  Raising the tax bar to $3.5 million shrinks the pool 85% to 6,400 estates; a $5 million exemption would cut that population in half again, leaving only the 3,500 richest estates owing anything to the IRS. 

Needless to say, if those were the only people estate planners worked with estate planners would have been unemployed long ago.  Actually, planners do a lot more than just death tax avoidance. And this year in particular has been brisk in spite of the tax hiatus. They also create special needs trusts, asset protection trusts and even delve into conventional tax minimization planning. 

A survey released this week by Trusts and Estates Magazine reported considerable growth among estate planners inspite of the higher estate tax exemption. The survey showed that 40% of the firms polled “business has increased.”

 Trusts are now used by less wealthier clients.  According to Robert Ellis, the author of a research report published by Celent, Inc. the average trust size has moved from $5 million to $1 million per family even though the estate tax exemption has gone up. 

Tax or No Tax, Trust the Trust 

Meanwhile, trusts have exploded as a wealth planning tool among the 5.9 million households worth $1 million to $5 million, not to mention the 30 million “mass affluent” families who make up the backbone of many financial advisors’ books of business. According to Fidelity’s RIA group, more than half (60%) of all families with $500,000 to $1 million in investable assets are using trusts today. 

For them, the immediate benefits of setting up a trust are more subtle: asset protection for professionals in particular, business succession, funding specific goals, and circumventing probate and, where applicable, state estate tax. 

Whether the federal death tax will ever apply to your clients or not, they’ll all appreciate being kept in the loop, especially in an environment where other advisors may be burying their heads in the sand, says Kavesh. “This is a major marketing opportunity for advisors,” he explained. “People are scared and they’re anxious. Even though there are obviously no crystal-cut solutions, simply reaching out to explain where they stand can generate work in other areas.” 

No Estate Tax – Business a Usual 

Although the estate tax remains a major motivation for the richest families to create and fund trusts, most of that trust activity took place well before the 2001 tax cuts started changing the way the tax worked on a year-to-year basis. Since then, the trust market has evolved independently of the estate tax. 

Instead of twiddling their thumbs on the way to extinction, established trust departments and independent trust companies were doing big enough business to tempt broker-dealers, RIAs, and the wire houses to horn in on the action—even though at the time gurus like Tiburon Advisors thought the then-distant 2010 repeal would be permanent.

Now, nobody really knows how the IRS will treat inherited property in the short term.  But estate planning has always been about finding ways to manage the vagaries of the tax code. 

New companies like Bryn Mawr Trust gathered healthy assets last year right up to the estate tax’s unexpected disappearance.  And while Northern Trust Company of Delaware—a leader in the perpetual trust market—sees “much uncertainty around the status of the federal estate tax,” in the words of President Dan Lindley, the main upshot this year has been reluctance to fund new trusts with taxable gifts or generation-skipping transfers until the situation clarifies. Otherwise, Lindley says, “it has been business as usual.”

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research.

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