One of the interesting aspects of the recent election season was the efforts of pundits and talking heads to sound authoritative while they were making wild guesses about the presidential election, or merely expressing their own hopes about the outcome. As we saw, all of these purported experts were rendered obsolete by a few people with calculators who combined and analyzed the polls that were available to anyone who wanted to review them. We are now faced with another period of uncertainty, due to the imminent expiration of what are still called the Bush tax cuts (even though the former president has asked that they not be referred to by that name), together with the now-ubiquitous fiscal cliff, which political leaders are now scrambling to avoid.
Unfortunately, there are no experts to analyze in a scientific way the many opinions as to what will happen on January 1, 2013, and we are left with emails and newsletters in which predictions are made about next year’s tax law: Will the $5 million estate tax exemption remain, or will it be reduced to $3.5 million? Or will it by default be reduced to the $1 million level? Similarly, will the gift tax exemption, which is now equivalent to the estate tax exemption, remain tied to it, or will it be reduced to a lower level, as it was in prior years? Any such predictions, whether based on “inside” information or years of experience, are probably no better than a coin flip. Given that circumstance, what kind of planning will be available for clients in the next month and years beyond that?
I wrote in a previous article that there was still time to do planning in 2012 under the rules of certainty that extend to the end of the year: $5 million gift tax exemption, and the ability to discount transfers of closely held assets, plus grantor retained annuity trusts that are not limited as to (shortness of) duration. Based on discussions with a number of trusts and estates practitioners in the area, clients still think there is plenty of time to begin planning, and if past history is a guide, will be thinking that on Christmas Eve (“I’m leaving on a trip this afternoon. Can I revise my will?”). Whatever planning can be done in the next 40 or so days will be carried out.
But then 2013 arrives. It is possible that leaders in Congress and the president will reach an agreement on tax law changes before the end of the year, but it’s not certain and past history would suggest that, as they say, the can will be kicked further down the road. If that kicked can consists of extending the 2012 estate and gift tax rules into 2013, then planning will continue as it is. If legislation is enacted later in the year, it may change some or all of the following rules:
• The federal estate tax exemption: $1 million, $3.5 million or $5 million.
• The federal gift tax exemption: in line with the estate tax exemption or, as in past years, kept at a lower level.
• Portability of the estate tax exemption between spouses, so that unused exemption can be used by the surviving spouse. This change in the law has resulted in considerable simplification in planning, although some practitioners have been reluctant to rely on it because it is subject to the 2012 sunset provision.
• Federal estate and gift tax rates: a flat rate of 35 percent or 45 percent, or the graduated rates from 2001.
• Grantor retained annuity trusts: 10-year minimum term or no limits on length or the lack thereof.
• Discounts for closely held interests: This technique has been widely used, and is successful when backed up by credible valuation reports. Attempts to curtail or abolish such discounts have been made since the Clinton administration.
These changes, if they occur, might occur at different times during the year or into the following year. And if temporary provisions are extended again, their expiration will have to be taken into account. How will this be done? By writing wills and trusts that are sufficiently flexible to take advantage of whatever favorable provisions are in the law from time to time. Since few people can predict the date of their own demise, planning documents will have to be written in a way that benefits are not lost by language that is too restrictive and too broad. In that regard, we might be entering into a period when estate and gift planning will be more complicated because of the shifting target of tax law provisions. Practitioners in the trusts and estates field might have to “retool” their planning documents and techniques to fit within the new uncertainty. But even with that uncertainty, planning for the enjoyment and transmission of wealth will be necessary and rewarding.
In doing that type of wealth enjoyment and transmission planning, it is important to keep in mind the broad nature of such planning. It does not involve merely who gets one’s assets at the end of life, but how other forms of wealth are used and passed on, and how wealth is handled by succeeding generations. This includes planning for Social Security benefits and the Byzantine rules of Medicare and other health insurance programs. It also includes planning for what is the most important asset for many people — which retirement benefits, in their many forms: pensions, IRAs, 401(k), 403(b), etc. And planning for medical issues, which touches on financial issues but also the wealth that consists of personal health. Finally, it requires consideration of the planning done for and by the next generation: What do we tell children about wealth and when, in ways that help them to get the benefit of wealth with less of its negative aspects, such as loss of ambition; and how have children planned for their own families?
Estate, gift, wealth, lifetime planning, whatever you call it, is entering a new phase of complexity and challenge, but also a new period of opportunity, for lawyers to help clients navigate the uncertainty that is becoming the norm and create some level of probability that the accumulation, enjoyment and transmission of wealth will achieve a positive result for the current and succeeding generations. •
Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. Louis can be reached at firstname.lastname@example.org and 215-972-7155.