Shapeshifter Estate Tax

Summary: Shapeshifter for Star Trek fans
(aren’t we all?) are creatures that can change shape and form in contrast to
those of the Federation and its allies who are referred to as “solids.” The
estate tax no doubt has morphed into a shapeshifter and has not been solid for
a while, and may never again be a solid. Most tax practitioners have discarded
their Tarot Cards which were not particularly effective predicting the outcome
of the 2010 estate tax guessing game.  But in the aftermath of The Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 we all
continue “…to boldly go where no taxman has gone before.” …

 Quickie Summary

By the time
you receive this newsletter you’ll have undoubtedly been bombarded by summaries
of the 2010 Tax Act and its impact on estate planning. So here’s the Cliff
Notes: ◙  In the waning days of 2010 Congress made the
estate tax retroactive to January 1, 2010 with a $5 million estate and GST
exclusion, a 0% GST rate in 2010, and a 35% rate for gift, estate and GST. ◙Executors
have the option of electing the carryover basis regime for those dying in 2010
(in English that means the kids of the fact cats who died in 2010 pay no estate
tax).  ◙ In 2011 and
2012 the gift, estate and GST exemption is $5M. It’s indexed in 2012 for
inflation, but that’s a peanut for now. ◙ Portability – if your spouse dies before you, on your
death your estate may be able to use his/her unused exemption. ◙ In 2013 the exclusion is back to $1M
with a 55% rate, well, at least that’s what’s on the books. ◙ Sounds simple. For almost everyone you
can just ignore the estate tax and do an Alfred E. Neuman: “What! Me
Worry?” Sorry folks ya’ still got lots of worrying (and work) to do.

Portability

Prior to the 2010 Tax Act you had to do a bypass trust
and carefully divide the ownership of your assets to safeguard your spouse’s
estate tax exemption. The 2010 Tax Act created a new concept called portability
so theoretically you can use your spouse’s exemption with no effort. Well,
theoretically I can still eat lots of cheesecake but look like the ripped guy on
the TV infomercials if I only buy that ab machine for 12 easy payments of
$9.95! So much for theory and so much for portability. The rule only exists for
2011-12. GST benefits aren’t portable. Out right bequests provide no protection
from post-death inflation of the first of you and your spouse to die. Outright
bequests could end up with the new spouse and not your kids. Need we go on?

2013

No one coulda described it better than Yogi Berra: “This
is like deja vu all over again.”  $1M/55%.
In 2012 your estate planner and CPA will be calling mumbling incoherently about
the next changes in the estate tax rules. Didn’t you have enough of that
confusion in 2009 and 2010? Here’s some of the 2013 possibilities (they’re
making odds on each possibility in Vegas): ◙ $1M/55%. While most tax experts believe this is
unlikely not planning for could be the costliest mistake you’ve ever made. But
depending on your situation, there may be less costly and more flexible ways to
address this possibility. ◙  Continue the $5M/35%. ◙ Continue the $5M/35% but eliminate our
favorite tax toys: discounts, GRATs, Crummey powers, etc. That would goose up
revenue but not superficially take back what was given. ◙
$3.5M/45% which is what most thought would happen. This could be with,
or without GRATs, discounts, etc. ◙ Repeal the estate tax (looking more likely than
before according to some).

What Repeal Could Bring

But if they repeal the estate tax what will they do?
Here’s a possibility. Repeal estate tax and instead charge a capital gains tax
on all assets on your final income tax return. No issue there with taxing what
was already taxed, it wasn’t. This solves the step up in basis issue at death,
you appraise everything and pay your capital gains tax. The really ultra-wealth
folks that complained about the estate tax rate shouldn’t gripe because the
rate would be the low capital gains rate. But if this is done the gift tax will
have to remain because it would be essential to back stop the estate tax. That
could mean a $1M lifetime gift exclusion. Yet another reason certain groups of
taxpayers need to plan now and plan fast.

What to do
Now

Everyone
(yes you too!) has to revise their planning first, their documents second.
Everything has changed. Formula clauses from old documents probably won’t work
(that could undermine your entire dispositive scheme). Some of you should be
planning like “all get out.” Others might actually creatively scale back and
simplify planning. Portability won’t fix a will with a formula clause created
when the estate tax world was different. State estate tax remains a thorn (not
big enough to justify significant planning, but too painful for many to
ignore).

The Dirty
Little Secret

For folks
with $2M to $5M estates in the past planning might have been accomplished with
a bypass trust, dividing assets and an insurance trust owning some life
insurance. Most of your planners could do that on autopilot. Most of the time
and gray matter they devoted to you was spend on a myriad of other planning
issues. Even if you’re so far under the estate tax radar that estate tax is not
a concern (but read Yogi Berra’s quote above), you still need all the other
“stuff” your planners addressed before. “Estate Planning” was too often viewed
as “Federal Estate Tax Minimization Planning”. The latter was never more than a
component of the broader planning picture. So even if the federal estate tax
has disappeared (and it hasn’t), the rest of the “plan” is still vital.

Estate
Planning for Real People

Estate
planning should have always addressed a myriad of personal issues. Do you have
sufficient assets for retirement? Do you equalize gifts or bequests to your
children? Do you equally or equitably divide your estate? Religious issues.
Planning for illness or disability. And more.

How to Plan

◙  If your wealth could subject you to estate
tax under the $5M exemption you should use these beneficial tax  breaks and aggressively plan. ◙ If you’re under the tax radar today,
but might not be in 2013, plan, but creatively and flexibly so that what you do
is protective of a bad 2013 tax outcome, but not so costly or immutable that
you’re unduly hampered by the result if the estate tax is repealed. ◙ If you’re confident you’ll always be
below the estate tax radar, revise your plan and documents so that they work
under the new paradigm and the 2013 scenarios listed above. ◙ If asset or malpractice protection is a
concern for you, jump all over these tax breaks and exploit this historic
opportunity to shift wealth into protective structures. If the gift exemption
drops to $1M in 2013 you will have lost a unique chance to protect your wealth.
◙ Non-married
partners should use the new exemption to equalize wealth between partners the
low gift tax exclusion and lack of gift tax marital deduction had prevented this
in the past. But the $5M exclusion may afford the first great opportunity to
shift wealth without a tax. Portability is not available to non-married
partners (the bias in the law was continued).

More Info

We provided email subscribers with a wealth of
information on the law as it developed from mid-December onward, as well as
notices of seminars, webinars and two books. Much of this has been posted on www.shenkmaneducation.com. If you missed these and
want to be included in future mailings of white papers and other materials go
to www.shenkmaneducation.com and sign up for the
email version of this newsletter which will include all mailings. For
laypersons an e-book “Estate Planning after the 2010 Tax Act” is available for
$10 on Amazon. For professionals a comprehensive book analyzing the 2010 Tax
Act, power points, webcasts and more is available from the American Institute
of CPAs. The product is called Estate Planning after the Tax Relief and Job
Creation Act of 2010: Tools, Tips, and Tactics, and is co-authored by
Martin Shenkman and Steve Akers (Product No. 091056HS). A more comprehensive
product that will include additional analysis, consumer power points that can
be used by professionals to educate their clients and prospects about the new
law, and more, will be available from the American Bar Association shortly.