An Expert’s Perspective on What’s New in Estate Planning

An Expert’s Perspective on What’s New in Estate Planning

By Laurence Keiser

The sun has set on 2003.

The dawn of the new year brought an increase in the estate and generation-skipping transfer tax exemptions to $1.5 million. The gift tax exemption remains at $1 million. The maximum tax rates have dropped to 48 percent. The federal credit for state death taxes is only 25 percent of the otherwise allowable amount.

But unfortunately, we are no closer to a real solution to perennial estate planning uncertainties: repeal of the estate tax in 2010 or restoration in 2011. Despite the president’s call to Congress, permanent repeal seems unlikely, given mounting federal budget deficits.

Unable to foresee repeal, practitioners should urge their clients to take maximum advantage of available estate planning techniques. Everyone should revisit their estate plans. Since the stock market recovered somewhat in 2003 and real estate values have continued to increase, clients’ taxable estates may be significantly more than they recall it being.

Suggestions

Family limited partnerships, properly structured and properly administered, will continue to be successful. The Internal Revenue Service’s attacks have been sustained where the transferor retained control. If a client is willing to give up control, or is willing to put control in an independent third party, discounts should be available. With IRS victories in cases like J C Shepard v. Comm’r (115 T.C. No. 30) and Estate of Albert Strangi (115 T.C. No. 35), it is very important to observe the formalities.

My firm limits taxable gifts to $1 million to avoid payment of gift tax, and we therefore are looking for techniques that freeze the value of the estate. (Beware of states, like Connecticut, that still have a gift tax.) Grantor retained annuity trusts (GRATs) and sales of property to intentionally defective grantor trusts (IDGTs) work particularly well in the present low-interest-rate environment. After Walton v. Commissioner (115 T.C. 589), the IRS changed its regulations and now agrees that GRATs can be zeroed out. The Service also withdrew its challenge to a sale to an IDGT in a case that was docketed in the tax court, but then settled before trial.

Our clients also favor qualified personal residence trusts (QPRTs) because QPRTs provide an excellent (and Internal Revenue Code-sanctioned) opportunity to reduce the taxable estate without a reduction in present income or a change in lifestyle.

In short, there still are planning opportunities available to minimize transfer taxes. CPAs who do income tax planning for clients also should offer estate tax planning for those clients. Even clients with more-moderate wealth should review their estate plans. Tax-oriented provisions may no longer be necessary. Formula clauses, drafted when the exclusion was $675,000, may cause unintended results. And there is a magnified importance in how property is titled in order to avoid wasting available exclusions.

And while we all clearly love New York, it has once again become a very expensive state in which to die. New York collects the entire federal credit for state death taxes even though, in 2004, only 25 percent of that amount reduces the federal tax. Some states continue to collect only the actual amount of the federal credit. To put this in perspective, a domiciliary of New York with a $10-million-dollar estate is “out of pocket” about $800,000. A domiciliary of Florida with a $10-million-dollar estate is “out of pocket” zero.

The problem is compounded by the fact that New York’s exclusion did not increase to $1.5 million as the federal did. The New York estate tax on the extra $500,000 is about $64,000. Under present rates, getting $500,000 into the credit shelter trust could save $240,000. Is it worthwhile to pay about $64,000 today to maybe save $240,000 sometime in the future?

Our drafting now for New York residents includes a credit shelter trust for the $1 million and qualified terminable interest property (QTIP) marital trust for the excess. This allows the $64,000 question to be deferred until nine months after the date of the first death. (Incidentally, New Jersey “froze” its exemption at $675,000 as of Jan. 1, 2002, and Connecticut has “decoupled” from the federal tax as of July 1, 2004.)

And here’s the tip of the day for New York residents: Make a $500,000 gift. Husbands and wives should each make the gift. Why? The federal taxable estate will be reduced by $500,000. (New York’s gift tax has been repealed.) When the adjusted taxable gift is added back, the federal estate tax will remain the same. But the federal taxable estate (not increased by the adjusted taxable gift) is the measure for the computation of the state death tax credit and, thus, the measure of the New York state tax.

Laurence Keiser is an estate planning expert and partner with Stern Keiser Panken & Wohl, LLP, in White Plains. Keiser will present an eight-CPE-credit advanced estate planning seminar to firms in-house this summer. Practitioners interested in holding this seminar in-house should contact Monte Kaplan, the Foundation for Accounting Education’s manager of in-firm sales CPE development, at 212-719-8431.