The Future of Estate Planning

Half of 2010 is behind us and January 1, 2011, is around the corner. Although several proposals for estate tax exemptions from $1,000,000 to $5,000,000, and estate tax brackets from 35% to 55%, are in the Congressional pipeline, a Congressional stalemate seems just as likely as action. As a result, the unthinkable and unexpected now seem to be possible – the return of a federal estate tax system with a low $1,000,000 estate tax “exemption” and estate tax brackets that kick in at 41%. Whatever becomes the new estate planning reality, we expect there will be renewed interest in the following estate planning techniques.

(1) Credit Shelter Trusts (a/k/a “B Trusts,” “Family Trusts,” and “Bypass Trusts”). Many more clients will regard credit shelter trusts, which are established when one spouse dies for the benefit of the surviving spouse, as a real necessity instead of just possibly advantageous. For background details, see our article entitled “All Estate Plans with Marital Deduction Formula Documents Should Be Reviewed.”

(2) Gift Planning. If the “exemption” returns to $1,000,000, an estate that exceeds the “exemption,” after taking into account marital, charitable and other deductions, will be taxed at no less than 41%. Clients will be looking for gift techniques to reduce the tax exposure by reducing their estates. Simple gift techniques include small gifts ($13,000 per year per donee) which are excluded from taxable gifts and gifts to certain qualified education accounts. More complicated gift techniques include irrevocable life insurance trusts, qualified personal residence trusts, grantor retained annuity trusts, sales to certain irrevocable grantor trusts, and charitable trusts. In addition, in a high estate tax environment, many clients may wish to take advantage of depressed real estate values to make gifts of interests in real estate. Related gift planning will make the use of family limited liability companies and partnerships even more popular. The use of grantor retained annuity trusts (especially when interest rates are so low) and sales to specially designed trusts (the “intentionally defective grantor trust” or “IDGT”) will be more attractive even if proposals to limit valuation discounts are adopted.

(3) Life Insurance. Life insurance has always been a popular way to make certain that cash is available to pay estate taxes. The need for life insurance is especially compelling when large illiquid estates (for example, consisting of primarily real property, retirement plan accounts, such as IRAs and 401(k) plans, and closely held business interests) have substantial estate tax obligations. If the estate tax “exemption” is reduced and if estate tax brackets are increased, more clients will choose to acquire life insurance owned by an irrevocable life insurance trust and financed by gifts to the trust. Because estate tax obligations of U.S. citizen married couples can be deferred until the death of the surviving spouse, we expect that more married couples will be acquiring joint life (or “second to die”) life insurance policies (owned by an irrevocable trust) to finance estate tax obligations which will be due when the surviving spouse dies. Life insurance, and irrevocable life insurance trusts, can also be a useful way to deal with the mortality risk associated with grantor retained annuity trusts and similar trusts designed for gifts of a residence (the qualified personal residence trust).

There has always been a natural tendency to postpone estate planning especially when youth and good health make the risks seem remote. The uncertainty of the last ten years relating to estate tax repeal added an additional rationale for postponing the estate planning exercise. Although many of us are in denial and feel that we have preserved our youthful vigor and good health over the last ten years, the coming of January 1, 2011, and a new estate planning reality, cannot be denied.

In addition, as Congress continues to pile on new debt that will encumber the future efforts of our children and grandchildren, we face another new reality: that, for the first time in our country’s history, the next generation’s quality of life will not be better than our own. The planning steps mentioned above may minimize the estate tax burdens and maximize what is left for our children and grandchildren at a time when they may need it like no other generation before us.

Let us know what you think. Feel free to leave a comment.

Posted by Richard S. Land (

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