October 2008

Estate Planning Monograph 102308

Now is a good time to transfer appreciable assets to wealth preservation trusts.

Asset values have crashed.  Home values have dropped  in the last eighteen months and the investment markets have taken a bungee jump off the Golden Gate. On October 23, 2008 Alan Greenspan told the House Committee of Government Oversight and Reform; “We are in the midst of a once-in-a century credit tsunami.” Mr. Greenspan went on to predict that it will be the stabilization of home prices in the U.S. that ends the current crisis.  He finished his prepared remarks with the clear statement “This crisis will pass, and America will reemerge with a far sounder financial system.”

 In agreement with Mr. Greenspan, most financial experts and economists agree that we are in the largest financial crisis since the Great Depression.  With the recent market weakness, many Americans have seen a significant decrease in the value of their estate assets. This, in turn, has created a number of interesting estate tax planning opportunities that need to be considered.  Strategic planners will seize these down market values and take action that may greatly reduce future estate tax liability. 

Estate Planning is probably not foremost in your client’s thinking today, however, this DOWN MARKET  IS a GOOD time to transfer appreciable estate assets to a Trust that protects the asset and accumulates appreciation OUTSIDE of the Estate. There are many Estate Planning strategies that may accomplish the goal of preserving individual wealth and growing appreciation outside of the Estate, i.e. tax free to the heirs.

A full discussion of the Estate Planning techniques that will pass asset appreciation outside of the taxable estate, tax free to heirs, is beyond the scope of a single monograph.  However, the complex array of estate and gift tax rules can be distilled down to the following basic tax tools of the estate planner: 1) the ability to make significant tax free transfers by gift, 2) the large unified credit, and 3) the ability to provide financial security to an individual while keeping assets out of the estate for tax purposes.

Is there a need for Estate tax planning?  Under the Economic Growth and Tax Relief Reconciliation Act of 2001 the estate tax is supposed to disappear completely in 2010, but most tax advisors think Congress won’t allow that to happen.  Starting in 2011 the tax is supposed to spring back to life with an exemption of 1 million dollars and the top rate of 45%.  Many observers believe the bi-partisan governmental need for revenue strongly suggests that there will always be some level of tax on estates.  Therefore, it appears that the prudent planner should take advantage of the current low asset valuations.

CAUTION, there are many downsides to aggressive estate tax planning, A tax advantage on one hand can be a significant detriment on the other.  All aspects of estate tax planning must be integrated into the whole plan.  For example, there is a full step-up in basis for property held at death; therefore taking advantage of the favorable tax treatment by gifting could be offset by the loss of basis step-up if the gifted property significantly appreciates.  However, gifting property years before death could eliminate all estate taxes and the capital gains tax could be much less than the Estate Tax.  Clearly, careful situational analysis by a team of the individual’s financial advisors, tax accountant and estate planning attorney is the mandatory prerequisite to aggressive estate planning.  The cost of Estate Planning analysis is not insignificant, however, the potential estate tax savings can be substantial.