Stephen C. Rhudy, Partner at Walker Lambe Rhudy Costley & Gill, PLLC
Since the introduction of an unlimited marital deduction in 1981, coupled with higher estate tax exemption amounts, which later got even higher, probably every competent estate planner could and would offer prospective clients potentially dramatic tax savings from “Bypass” (or “Credit Shelter,” or “A-B”) Trust planning – planning designed to facilitate maximum use of two exemptions (and thus get the clients to “first base”). These potential savings could be pretty easily quantified, making the estate planning project a pretty easy “sell” for many, many families. The so-called Bush tax cuts of 2001, which phased in dramatic new increases in the exemption amounts, from $675,000 in 2000 to $3.5 Million (pre-repeal) in 2009, clearly reduced the number of families with interests in more “advanced” planning measures (measures to minimize or avoid exposure to estate taxes – getting to “second base” and beyond), but “first base” was still an easy (and for many even more valuable) planning goal.
Things are a bit different now. After the year of repeal in 2010, and another two years of political dancing, we have since early 2013 had a “permanent” (i.e., until Congress acts affirmatively to change it) $5 Million estate tax exemption (adjusted for inflation), including a $5 million lifetime gift tax exemption, and a $5 Million generation-skipping tax exemption. We also have a new rule that makes a deceased spouse’s unused exemption “portable” – and therefore usable by the surviving spouse – this means that getting to “first base” is no longer an obvious goal for every client whose family’s assets might ever reach $5 Million.
So, we are now in our second year of estate planning where very few of our potential new clients are much affected and thus motivated in their planning, by estate taxes. Viewed from the household level, it might seem that the higher exemptions and portability features are good for everybody.
Still, my colleagues and I harbor some concerns that, without the motivation of dramatic tax savings to prompt the visit to the estate planning lawyer, too many families will assume their needs are simple, such that they might be handled with a simple Will. These families may never know what opportunities they may have missed, or even worse, find out only when it is too late. Tax planning may be the least of what they miss.
Our years of experience witnessing firsthand the nontax benefits available from trust plans (e.g., divorce and/or remarriage and creditor protection) inevitably inform our discussions with clients, and we still find that many Walker Lambe clients are highly interested in trust-based planning; they also readily find the use of revocable trusts to achieve probate avoidance quite attractive. We are thus proving with our own experience in practice that “estate tax planning” is but a small piece of “estate planning.”
Indeed, tax planning may no longer be the high profile or even glamorous tail that wags the dog, but tax competence will still be, at least as long as we have an income tax, an important element of estate planning. Even in 2014, your estate planning lawyer can add tremendous potential value to your estate plan by managing the optimal “stretch-out” of inherited IRAs, or by using those tax-deferred accounts to make charitable gifts. You should be informed that appropriate use of tax-wise bypass trusts may be very much superior to reliance on portability, particularly when assets might be expected to appreciate in value, or when a family might have sufficient wealth to benefit from generation-skipping gifts. Competent estate planning will also remain sensitive to the potential value in managing the opportunities for a step-up in basis, at the death of the first and/or second spouse to die; and even to the potential impacts – on the design of trust distribution provisions, and also on the design of trust investment portfolios – of 2014’s “new” 3.8% “Medicare tax” on net investment income. This tax is imposed only when income levels reach the highest tax brackets but are significant to many trusts, especially those originally designed to accumulate income since trusts in 2014 reach their highest tax brackets at the relatively low net income level of $12,150. Thus a trust might very well be subjected to this tax even when the trust beneficiaries would not.
Working with competent estate planning attorneys is still worth your while.