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.