Law Life: Estate planning tools may vanish in 2013

Kimberly Atkins, The Daily Record Newswire

For estate planning attorneys, the unstable nature of federal tax law has become the new normal. But the prospect of skyrocketing estate tax rates and the potential loss of  key estate planning tools with certain federal laws set to expire is spurring them to get their clients to act – and quickly.

“There is a lot of speculation about what the estate tax exemption amount is going to be” after the current law expires on Dec. 31, said Genevieve M. Larson, an associate in the San Francisco office of Farella Braun + Martel. “People who want to move need to move now” because it’s likely that by Jan. 1, the situation won’t be as favorable as it is currently.

For years, the troubled state of federal estate tax law has left lawyers guessing. From the repeal of the estate tax in 2010 to the short-term measure adopted at the end of that year that narrowly prevented the rate from shooting up to 55 percent and the exemption from falling to $1 million, lawyers and their clients have had to plan carefully.

The 2010 measure set the exemption at $5 million (currently $5.12 million when adjusted for inflation) and the rate to 35 percent. Now, lawyers are again wondering if Congress will act before the end of the year to prevent the gift and estate tax exemptions from rolling back to $1 million per person with a tax rate of 55 percent.

They are also singing a familiar tune to their clients.

“This has become the normal course of action,” said Jonathan Samel, who chairs the Business/Tax, Estates & Trusts and Elder Law Departments of Hamburg, Rubin, Mullin, Maxwell & Lupin in Lansdale, Pa. “I have to constantly remind clients that they should be used to it, and that they should be taking advantage of opportunities to revisit their plans.”

Some clients are becoming weary of the song.

“There are many clients I deal with who are very focused and want to keep on top of things,” Samel said. “But there are many more clients that are just tired of it. It’s like crying wolf, knowing that when you get to the end of the year crazy things will happen. People just throw up their hands.”

Planning tools in peril?       
As estate planning lawyers are aware, there are a host of mechanisms that can be used to help minimize tax liability and maximize peace of mind for clients. Though the tools are well-known, this year there is a catch: some of them may not be around much longer. Here is a look at some planning tools that could go away at the end of 2012:
Gifts. The law adopted in 2010 unified the estate and gift taxes, so that gifts of less than $5.12 million per donor are exempt, and amounts above that threshold are taxed at a rate of 35 percent.

But the unification of the gift and estate tax laws came as a surprise when it was passed – and lawmakers could take a different approach when they revisit tax law provisions by setting new lower exemptions for gifts.

Gifts in Trust. Planning gifts in trust may be a good idea for donors who still wish to maintain some control over their assets or in other circumstances, such as clients who want to make gifts to young children. Clients can remain in control of the assets until a designated event, such as the beneficiary reaching a certain age, or pass control to the next generation. But this technique could be affected if the gift tax exemption changes after this year.

Life Insurance Trusts. When a trust is set up to purchase life insurance, the proceeds of the policy will be exempt from the estate tax. Currently, transfers to life insurance policies, like other estate planning tools, are exempt up to the $5.12 million threshold, but next year that limit could drop to $1 million.

So this year “you are able to transfer more policies, or bigger policies, and also get all the tax benefits,” Larson said.

GRATs and Grantor Trusts. With Grantor Retained Annuity Trusts, or GRATs, donors can retain control over the assets and receive annuity payments for a designated period of time, after which the assets pass to the beneficiary. By creating a grantor trust, the donor can transfer income generating assets to the trust and choose to pay income tax on the income, thus sparing the beneficiary from tax liability.

However, both GRATs and grantor trusts may soon become extinct. Their increased popularity in recent years has drawn the attention of the Internal Revenue Service, and now the White House is backing proposed legislation that would limit or eliminate GRATs and grantor trusts.

Get an appraiser while you can  
While federal law changes, if any, won’t take place until the end of the year – making it tempting to take a wait-and-see approach to estate planning – waiting is a bad idea, attorneys say.

“People really should act now in the event they need appraisals for the assets that they are moving,” Larson said. “As the year draws to an end, appraisers are going be inundated.”

Depending on the assets involved in gifts, trusts or other transfers, valuation is a crucial and necessary step in the process and shouldn’t be left to the last minute.
“When you are dealing with business interests and real estate, you must get appropriate appraisals to figure it all out,” Samel said. “I stress that my clients have to get on this.”
Even for clients who are not yet ready to decide what plan of action to take before the year is up, it is better to get appraisals now and decide what to do a few months down the road.

“What I have been saying to clients is, ‘Let’s plan. We don’t have to pull the trigger on completing the gifts [until year’s end]. But we need to have the information ahead of time so that we can do something by the end of the year if we decide to do something,’” Samel said.