Posts Tagged estate tax
Trust Firm Launches “Why Pay More for Trust Services” Marketing Campaign
Posted by Scott Martin in News on September 10, 2011
Alaska Trust says frugal fees are better for both clients and advisors alike. New low fixed fees and advisor controlled directed trust program makes Alaska Trust a top choice for trust services.
Best known as a provider of full-service managed trusts at made-to-measure prices, Alaska Trust has started turning heads for offering its directed trusts at a flat fee.
As part of the company’s push into the advisory market, it has eliminated basis point pricing and is simply charging a fixed, flat fee, typically $3,500 a year, for all directed trusts — large or small. Read the rest of this entry »
Advisors Predict Obama Tax Deal Will Hurt Trust Business
Posted by Jerry Cooper in News on December 12, 2010
With a new 35% estate tax, $5 million individual exemption and portability, experts say tax savings will no longer motivate clients to hire estate planners. Advisors and planners alike are going to need to change marketing messages to stay ahead.
In a stunning turn of events, on December 6 President Obama announced that he reached a deal with Republicans on estate tax and to extend the Bush tax cuts.
Under the deal, the 2010 repeal of the estate tax will not be extended, ending the long uncertainty about the future of federal estate taxes that allowed billionaires to die tax-free this year.
If Congress had not reached an agreement, the estate tax was scheduled to come back next year at a top rate of 55% and in some cases 60% with an exemption of only $1 million for individuals.
Under those circumstances, estate planning attorneys and trust firms insisted that their thriving practices would continue to help wealthy Americans avoid estate taxes and plan for generations to come.
However, as a complete surprise to the trust community, the defeat that Obama suffered in the November 5 election forced him to accept a Republican proposal that will give Americans a tax rate of 35% — the lowest rate since the 1920s — with a $5 million exemption for individuals and $10 million for couples.
On the surface, you would think that that would be great news for wealthy Americans. However this week I have spent hours on the phone listening to financial planners crying the blues about what is going to happen to their practice since the main reason people came to them was to avoid paying estate taxes.
Martin Shenkman, author and estate tax attorney, told me, “Estate planners have had the wind knocked out of their sails.” He added, “They are going to need to work harder to offer new products to get the wealthy clients into their office.”
He added, “What’s going to happen in many cases is that clients are not going to appreciate the benefit of what the planners are doing if a tax motive is not there. They are going to be less inclined to spend the money to do it right, and more inclined to do something on the cheap with a general practice attorney — or on their own because they will argue, ‘How can I screw this up if no taxes are involved?’”
“Dead as a doornail”
To make matters worse, Howard Zaritsky, a Virginia-based estate planning expert, told me that if the current bill passes, “estate planning as we know it may be dead as a doornail.”
“Most clients under $10 million will need very little in the way of tax planning,” he added. “That will as a practical matter almost eviscerate the rank-and-file financial planning business, because that’s the bulk of clients.”
Portability of exemptions is the key here. Historically, while married couples were always allowed full estate tax exemptions for both spouses, they often needed good legal advice to get the value of both exemptions.
The Senate bill has a “portable” exemption that makes this planning much easier. After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go to the surviving spouse’s future estate.
Up until now, a couple would be required to establish a complex QTIP trust that permits the surviving spouse to receive the credit — but under the proposed portability rule, the credit becomes automatic.
Tony Barnard, a trust marketing expert with Financial Marketing Associates, told me, “Estate planners and trust firms are going to now have to rethink their strategies in order to sustain their current practices.”
“Two reasons that a wealthy client will walk into a planner’s office are to maximize profits or to protect assets from litigation or taxes. Now taxes will become more obscure. Planners are going to have to do a better job at profit and asset protection benefits in order to continue to have conversations with clients.”
New products for the new world
Richard Nenno, an estate planning strategist with Wilmington Trust, told me that without an apparent estate tax hurdle, the equation will have to be more along the lines of directed trust and asset protection trust as opposed to dynasty trusts and other vehicles that deliver tax protection from estate taxes.
Darlynn Morgan of the Morgan Law Group said she agrees that the $5 million exemption will likely chill estate planning for a while, but most of her clients do estate planning for other reasons — including incapacity planning, family dynamics or planning for blended or nontraditional families. She sees no shortage of clients coming in the door to have these critical conversations.
Martin Shenkman added that under the current rules, he still sees a market for GRATs (grantor retained annuity trusts) and other vehicles that permit the protection of taxes for the long haul.
Trafficking in portability credits?
Estate planners in the American Bar Association’s email discussion group for probate and trust law (ABA-PTL) are going back and forth with “what if” scenarios over the proposal and alternative planning opportunities that it could spawn.
According to Arlington, Virginia estate planner Douglas Blair, the wave of the future may end up as something like a “Nevada Domestic Portability Partnership” or “Alaska Domestic Portability Partnership,” neither of which exists as yet but could theoretically be created by filing documents (or perhaps filling out forms online) from anywhere in the country.
“Mail ‘em in or enter your signature keys, pay your filing fee, and poof! You’re Nevada Domestic Portability Partners, entitled to take full advantage of your partner’s unused portable exemption if he should, sadly, predecease you,” he notes. “And who’s to say you could have only one Nevada Domestic Portability Partner at a time, if you have real need for those unused exemptions? Or, a clever programmer could set up a system of cascading Nevada Domestic Portability Partner online applications, so that when one died, the new partner would be ‘online’ with his exemption waiting, milliseconds later, until the full $10 million was filled up.”
Napa Valley estate planner David Diamond — tongue in cheek — wonders if this could spin out into an entire new business for today’s estate planners:
“Maybe I should retire from the practice of law, get ordained so I can perform marriages, and start a match-making service where I pair up and marry destitute seniors in nursing homes to wealthy unmarried individuals. What’s a $5 million exemption worth? At least $1,750,000 in today’s dollars. Even taking life expectancy into account and discounting to present value, a fee of $50,000 to $100,000 doesn’t seem unreasonable for this service. Putting a few marriages together per year would sure beat sweating out 1,500 billable hours.”
Jerry Cooper, senior editor, The Trust Advisor Blog.
Permalink: http://thetrustadvisor.com/news/estatedeal
Estate Tax Predictions for 2011
Posted by Scott Martin in News on November 20, 2010
With only six weeks left in the crazy year of no estate tax, it looks like the Steinbrenner and Duncan heirs can keep their billions. But a split Congress means everything next year is up for grabs.
Last December, we had clarity on the federal estate tax. The Democratic majority in the House was moving fast to extend the 2009 exemption and rates, and it looked like the Senate would soon follow.
Now, almost a year later, there’s no fix in sight. As a result, there was no estate tax this year and visibility on what estates will end up paying in 2011 has eroded to zero.
Even on Capitol Hill, nobody knows what kind of tax liability people who die two months from now will owe the IRS.
When asked to give a forecast, Michael Briggs, an aide to Senator Bernie Sanders of Vermont, simply says the future of the estate tax is now “totally unpredictable.”
Sanders is one of the members of Congress who’s both most keyed into developments on the estate tax front and — until the November election — most keyed up about making sure no more billionaires die without leaving the federal government a piece of their fortunes.
If his office now acknowledges that there’s no way to tell what’s going to happen next year, ground-level practitioners have even less guidance as they try to prepare their clients for literally anything.
“There’s too much out there, and that makes it so difficult to advise clients,” says Barbara Kogen, a partner at Beverly Hills CPA firm NSBN.
The mood on the street ranges from wry amusement to outright frustration.
“I have given up,” says Andrew Tignanelli, a Baltimore CPA and planner. “This is a perfect example of the totally dysfunctional nature of Washington. Sadly, they are not even ashamed.”
Tired of “all or nothing” outlook
Part of the problem is that even if advisors take the most likely scenarios into account and ignore everything else, there’s still too much ground to cover.
If Congress does nothing, this section of the tax code will automatically reset to 2000 levels on January 1. That means estates will owe the government up to 50% of their taxable value over $1 million.
And since this expands the number of families who have to worry about the tax from zero to about 2 million, advisors who had hoped for a fix before the end of the year are now having to scramble to make sure that even their mass market clients have their estate plans in order.
On the other hand, the most likely alternative would be to either reinstate the 2009 rules or set up a bipartisan compromise between Republicans who want the tax abolished outright and Democratic-leaning types like Sanders who wouldn’t mind charging really big estates even more.
But the 2009 rules would roll the exemption back up to $3.5 million, ensuring that only the biggest fish in any advisor’s book — the 280,000 richest families — would need to worry about their heirs owing the federal government a single dime.
Furthermore, since we would only be rolling back the status quo a year, those clients probably got their trusts and other arrangements in place back before 2009.
Uncertainty leaves too many clients at risk
While probably about 60% of most RIA firms’ bread-and-butter clients have their trusts together as well, that could still leave hundreds of thousands of families rushing to shield their assets ahead of the January 1 reset.
Throw in the post-election uncertainty surrounding the Bush income tax cuts, capital gains tax rates and dividend taxes, and you’ve got plenty of planners who blame Congress for stalling until it’s too late to do much real tax planning of any kind.
“It is inexcusable,” says Todd Ganos, a principal in Monterey firm Doolittle & Ganos.
“When the majority party had 60 seats in the Senate, it could have made permanent whatever solution they proposed,” he adds. “But they did nothing.”
Ganos believes that ultimately the 2009 rules will be put back in place for the estate tax and that President Obama will end up allowing the incoming House Republican majority to extend the Bush income tax brackets as well.
In theory, whatever solution Congress comes up with can be made retroactive. Over the course of this year, tax gurus repeatedly raised this point as a possible hitch for the estates of the several billionaires — including George Steinbrenner, pipeline mogul Dan Duncan and others — which would otherwise pass on without owing the IRS anything.
Some estate planners currently hold out the possibility that a fix will end up covering everyone who dies after January 1, effectively preventing any family from being subject to the almost universally unpopular $1 million exemption.
Rick Shapiro, a Connecticut planner, has dug into the issue with several tax lawyers and CPAs and has tentatively concluded that a retroactive change to the tax code is theoretically possible.
He bemoans the “lack of clear direction” and notes that previous generations of estate planners would have found the freak temporary abolition of the estate tax for a single year vanishingly improbable at best.
In any event, nobody we talked to was inclined to think that a retroactive tax fix would be extended all the way back to this year.
Barbara Kogen sums it up best: There will be no retroactive reinstatement of the estate tax for 2010 because, at this point, too many billionaires have died.
“Steinbrenner, Duncan in Texas, all those people dying, their heirs have the deep pockets and a lot to lose,” she explains. “They’re willing to pay the legal fees. It’s clearly way too late to fix this retroactively.”
Maybe after a year of forgoing billions of dollars in potential estate tax revenue, fielding a few complaints from mere millionaires bristling at their heirs owing a few thousand dollars will get the new Congress to do something next year.
“Chances are we won’t get anything in 2010,” Kogen says. “I think people hope something could happen early in 2011. I hope we get some clarity soon either way.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and reporting.
Permalink: http://thetrustadvisor.com/news/estate2011
Steinbrenner Heirs Face Uphill Battle to Win $600 Million Estate Tax Loophole
Posted by Jerry Cooper in News on July 17, 2010
Public outrage and political theater over billionaires dying tax-free this year have prompted lawmakers to put a lid on this issue quickly while Democrats are still in charge.
Billionaire George Steinbrenner, owner of the New York Yankees, died this week at the age of 80. He was a man with the Midas touch and possessed a perfect instinct for impeccable timing.
Timing again was on his side for dying in a year with no federal estate taxes on the books. News reports from NBC, the Washington Post and the New York Times brought this to the public’s attention.
The Trust Advisor Blog ran a story in January on this topic. At the time, many of our readers and our contributors said this was too good to be true. And as often is the case, when something is too good to be true, it seldom is.
Now that the genie of public outrage is out of the bottle, there will certainly be an argument over whether Steinbrenner’s heirs will avoid up to $600 million in estate tax. Lawmakers in Washington are already using his good name to prevent billion-dollar estates from passing tax-free.
Senator Bernard Sanders (I-VT) and four co-sponsors have introduced a bill that would retroactively return the estate tax to the 2009 exemption level of $3.5 million with a progressive tax rate structure starting at 45% with a 10% surcharge on billionaires.
The debate started last March following the death of Texas pipeline mogul Dan Duncan, who died at 77 with an estimated net worth of $9 billion, ranking him as the 74th wealthiest person in the world. Under the Sanders proposal, that $9 billion would generate billions of dollars in government revenue.
Lawmakers had a chance to fix the estate tax several months ago, saving Duncan and Steinbrenner’s heirs millions, in a proposal that would have given Republicans just about everything they asked for, including a $5 million exemption rising with inflation and a maximum of 35% maximum rates. But because of party bickering, lawmakers couldn’t agree—and here we are.
Public outcry over billionaire dying tax-free makes great political theater, matching the fuss created in 1995 when President Bill Clinton and Congress plugged the expatriation loophole that let billionaires like Ken Dart escape U.S. estate taxes by renouncing their citizenship and moving to Belize.
Some of the strongest outrage has come from Congress itself. When asked to summarize Senator Sanders’ position, aide Michael Briggs pointed me to a speech he made the day Steinbrenner died.
“We have a situation now where the very wealthiest people in this country are seeing that when someone in their family dies, the estate tax is zero,” the senator said, concluding with “In my view, it is immoral it is unfair that while the middle class struggles to survive, millionaires and billionaire’s get tax breaks.”
Where the rhetoric meets the road
Given that sentiment, it’s not surprising that Sanders and his allies are pushing a bill that would retroactively tax Steinbrenner and others who have died in the last seven months. Meanwhile, Blanche Lincoln of Arkansas and John Kyl have revived their bipartisan proposal, and more would-be fixes and compromises will probably emerge over the next few months.
Right now, it’s all still political theater, says estate planner Phil Kavesh.
“I think this is definitely not going to get resolved until the November election, and at this point will probably be pushed back to January when the new Congress takes office,” he says.
The logic is a little cynical, Kavesh admits, but everyone I talked to agrees.
On one hand, every billionaire who dies is an embarrassment for lawmakers who were supposed to close the loophole last year.
But on the other, the longer the Senate keeps us all in suspense, the more time both Democrats and Republicans have to collect contributions from the upper-middle-class families that will be exposed to the estate tax next year if nothing happens.
“If the estate tax came back next year with only a $1 million exemption, that would be devastating for a lot of relatively middle-class people,” Kavesh notes.
More complicated than it looks
While some members of Congress may think it will be easy to bang out an amendment that raises the exemption back to $3.5 million, by the time November rolls around the budget could tie their hands.
Thanks to “pay as you go” rules, in order to exempt more estates from the tax means finding about $60 billion in additional revenue, or cutting that much from federal spending. Neither is an especially attractive option, but Sanders, Lincoln, Kyl and others are working on solutions.
The Sanders bill, for example, would create a special “billionaire’s tax” designed to spare 99.7% of all families from paying any estate tax at all, while skimming off 65% of what high rollers like Steinbrenner leave behind.
Retroactive headaches
“If I were the executor for the estate of Art Linkletter, George Steinbrenner, Dennis Hopper or any of the other wealthy people who’ve passed away in the past six months, I would be stalling any distributions until I got some clarity,” says Bill Ahern, policy director of the non-profit Tax Foundation.
That’s because Sanders wants to make his tax retroactive to the beginning of 2010 to bring in revenue from the billionaire deaths we’ve seen so far this year—assuming, of course, that they left any taxable assets behind and not in trusts or other tax-shielded vehicles.
“Sad but true, when people mention these billionaires dying in a year of no estate tax, I wonder in the back of my mind how much they would have paid last year,” Phil Kavesh says. “These people can afford very sophisticated legal counsel to avoid estate tax, but this topic has such political cachet that it may trap people in the upper middle class as well.”
Although Max Baucus and the Senate Finance Committee have backpedaled away from retroactivity as the year drags on, it’s anything but a dead issue, Bill Ahern says. As long as it gets the votes, it has a good shot at fending off any constitutional concerns.
“The Supreme Court has been very kind to retroactive taxation, especially within one year,” says Ahern.
Phil Kavesh isn’t so sure. “Quite frankly, retroactivity might not be a workable solution at this point in the year,” he says. “Enough big estates have been affected so far that there is a lot of money at stake, and that means a lot of money to fund fights in the court system that could go on for years.”
The silver lining for estate planners
As a result, Kavesh suspects we could end up with the $1 million exemption after all, at least for as long as it takes to work out a budget-neutral compromise.
Either way, he says it’s the best of times and the worst of times for estate planners. Those who can cope with all the moving parts in play can book a lot of business.
“What with the tax environment shifting as it is, a lot of my clients are seriously looking at taking measures before the end of the year,” he says.
“There’s a lot of rumbling about additional restrictions on certain types of trusts going forward, so whatever happens to the exemption, the time for them to act is now.”
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes and Scott Martin contributed to the research and reporting.
Permalink: http://thetrustadvisor.com/news/steinbrenner
Bickering Senators Delay Estate Tax Fix
Posted by Scott Martin in News on May 22, 2010
More chest-pounding tactics between lawmakers imperil speedy resolution for long-term estate tax repair. Senator Baucus’ office told us deal is far from complete.
With Democratic leadership and Republicans blaming each other, it looks like negotiations to roll back the currently repealed federal estate tax to 2009 levels when it kicks back in next year have been wrecked.
A staffer in Finance Committee chairman Max Baucus’ office told me that “Republican objections” had stalemated recent progress toward estate tax clarity.
Since the deal would have given Republicans just about everything they’ve asked for, including a $5 million exemption (rising with inflation) and a 35% maximum rate, those objections were more about Senate procedure than the tax code.
From the Republican camp, John Kyl of Arizona, Senate minority whip, threw the blame back across the aisle.
“We no longer have an agreement,” he told reporters, “because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they’re not going to allow it on the floor.”
Reading between the lines
What Kyl means is that while Baucus and other leading Democrats been ready to deal, many rank-and-file party members would probably balk any serious estate tax overhaul until after the November elections.
If the Senate does nothing, the tax resets on January 1 with an exemption of $1 million and a maximum rate of 60%. Senator Bob Casey of Pennsylvania estimates that maybe 80% of his fellow Democrats are willing to let this happen because, in his words, tax relief for wealthy families looks “offensive” given massive federal revenue deficits.
As the Baucus aide told me, it boils down to not enough votes even if all Republicans are on board. “He understands the political realities of what can pass the Senate,” she says.
Estate planners are disappointed, but not surprised.
“It can be almost impossible to cut through the Washington chatter, but it’s basically shenanigans as usual,” says New York attorney Martin Shenkman. “The underlying mood is that tax rates across the board are rising, and estate tax is part of that conversation,” he added.
Shenkman wouldn’t be stunned to see the Senate run out the clock and let the exemption reset at $1 million, even though that would expose about seven times as many families to estate tax liabilities.
Of course, that would keep Shenkman and his peers busy. Wider estate tax concerns naturally feed interest in trusts and other estate planning vehicles designed to reduce the size of a taxable estate, minimizing the eventual IRS bill or eliminating it altogether.
Paying the death tax in advance
Early gossip around the now-stalled deal focused on whether it would give people the option of paying estate tax while they’re still alive.
On the surface, the idea of transferring property into what Kyl calls a “prepayment trust” is interesting, not to mention a potential growth business for trust companies.
But in practice, there doesn’t seem to be a compelling argument for wealthy families to assign their assets to one of these vehicles and pay their estate tax in installments when they can simply go with an old-fashioned irrevocable trust instead.
While Kyl will probably keep pushing the idea in future negotiations, it’s probably not going to go anywhere.
Likewise, talk of restoring the estate tax in 2010 and making it retroactive to the beginning of the year seems to have fizzled out. Every day the Senate drags out the process makes any retroactive tax a bigger headache for executors. If we don’t get any action before November, the odds drop to near zero.
Nobody expected things to drag on as far as they have. “It’s incredible that Congress had nine years to fix this and not only waited until the deadline, but went past the deadline,” says Jonathan Siegel, a law professor at George Washington University.
“They’re like college students who waited until something was due and then pulled an all-nighter,” he added. “That’s too crazy, even for Congress.”
Scott Martin, contributing editor, The Trust Advisor Blog.
Permalink: http://thetrustadvisor.com/news/estatefix
Billionaire’s Heirs First to Win 2010 Estate Tax Jackpot
Posted by Scott Martin in News on April 10, 2010
Washington lawmakers’ estate tax hiatus has now potentially cost the IRS billions in lost tax collections. Experts say death of Texas billionaire Dan Duncan makes retroactive reinstatement of the death tax less likely because the stakes are now a lot higher.
Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28. If he’d passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there’s no federal estate tax this year, the government gets nothing.
As the first billionaire to die in this year without an estate tax, Duncan presents a tempting opportunity for a revenue-strapped Congress to follow through on threats to reinstate the tax for 2010 and possibly even make it retroactive to the beginning of the year.
However, probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years.
“I never imagined it would get this far,” Joel Dobris, an estate planning professor at University of California-Davis, told me.
“The longer they wait, the stronger the ‘no retroactivity’ argument sounds,” he added. “Maybe they waited too long.”
The lack of clarity has already weighed on less monumental estates for months, says Don Ford, founder of Houston law firm Ford & Mathiason.
“We’ve had two clients fall into this already,” he told me. “They’ve died this year and would have had taxable estates under either last year’s rule or next year’s rule. But now we’ve just got to hang on and see what happens.”
Ticking Clock, High Stakes
Ford has heard that all the movers and shakers in Washington agree that the hole in the estate tax has got to be fixed, but nobody can agree on how to do it.
If nothing happens, the tax will reset in 2011 with an exemption of $1 million and a maximum rate of 50%. That would make a lot of upper-middle-class voters unhappy, Joel Dobris says, so the prospect of doing nothing isn’t popular in Congress.
Late last year, the House approved an eleventh-hour plan to keep the tax alive in 2010 under the 2009 rules, which impose a maximum 45% tax rate on estates worth over $3.5 million. But the bill went nowhere in the Senate, feeding speculation that when and if Congress reinstates the tax for this year, it would be on a retroactive basis to cover those who died after January 1.
Back in January, estate planner Phil Kavesh told me that whatever happens, making the tax retroactive would be a bit like Russian roulette: the longer the game goes on, the more dangerous it gets.
“Sooner or later, some billionaire will die this year, and then there’s a real incentive to argue that any kind of retroactive law is invalid,” he said.
Not a Big Revenue Source
Nobody in Congress really expected a billionaire of Dan Duncan’s caliber to die this year without significant estate protection already in place.
In fact, the Congressional Joint Committee on Taxation estimated last year that restoring the estate tax at 2009 levels would have only added about $468 million to the federal government’s 2010 revenue.
That kind of cash really wouldn’t have made much more than a symbolic difference in a $3.5 trillion operating budget. But symbolism matters a lot in Washington these days, UC-Davis professor Joel Dobris told me.
Duncan gave away hundreds of millions of dollars over his lifetime to local hospitals, schools, community groups, and other charitable organizations. Details of his estate plan aren’t available, but it’s likely he made huge additional bequests to be paid after his death.
If his advisors were up to the job, the bulk of his remaining wealth was probably held in trust, so it probably wouldn’t be subject to estate tax either way. (There’s no Texas estate tax, so that’s not an issue in this case.)
However, a significant slice—about $362 million, according to my math—of his fortune was locked up in a controlling stake of the energy partnerships he’d built or bought over the years.
The absence of federal estate tax this year frees his heirs from the need to liquidate that equity in order to pay the IRS. As a result, the Duncan family has already announced that it won’t be selling out soon.
Looking Ahead
For the rest of us, the clock is ticking and the spring and summer Congressional recesses are ahead. It’s theoretically possible that gridlock and inertia will leave the door open for more billionaires to leave tax-free estates this year, in which case Houston lawyer Don Ford worries that the retroactivity issue could come back in 2011.
“Does this get pushed back to next year when it becomes a real issue, and then they try to make the new exemption and rates retroactive?” he wonders. “That’s when it becomes a little unsettling.”
No matter what happens to the estate tax, Ford told me that his clients take comfort in the trusts and other estate planning instruments he’s put in place for them. “Uncertainty like this only demonstrates the value of what we do,” he told me
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
Permalink: http://thetrustadvisor.com/news/billionaire
With No Estate Tax This Year, Do Estate Planners Still Have a Job?
Posted by Scott Martin in News on January 29, 2010
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.
Permalink: http://thetrustadvisor.com/news/with-no-estate-tax-this-year-do-estate-planners-still-have-a-job
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