Estate planning

I received a marketing piece from a major CPA firm this morning. Let me tell you what I think about its key points.

Due to the expiration of certain tax provisions, 2012 may be the last year that taxpayers will be able to utilize the gift and estate tax exemption under the Temporary Tax Relief Act of 2010 – an exemption that generally allows taxpayers to exempt up to $5,120,000 from estate and gift taxes.

This is good to know…

Let’s examine the piece further.

The numerous strategies that can be implemented to incorporate the $5,120,000 estate and gift tax exemption include:

• Qualified Personal Resident Trusts (QPRTs)
• Loans to Family Trusts
• Sale to an Intentionally Defective Grantor Trust in exchange for a self-canceling installment note or a private annuity
• Grantor Retained Annuity Trust (GRAT)
• Life insurance planning
• Partnership freezes with large negative capital accounts

I am very skeptical. I would avoid anything that is too complicated.

Furthermore, many of the estate tax planning strategies currently used may be severely curtailed due to the current economic and political environment. With real estate values depressed and interest rates at record lows, now is an opportune time to implement tax planning strategies such as Dynasty Trusts and/or family limited partnerships because there is anticipation that these tax laws will be removed as the political environment tightens around tax spending.

Oh, so the current strategies are no good anymore and we need new ones. How long will the new ones be good for? Two months?

Currently, however, certain estate and gift tax laws can be beneficial to taxpayers. For instance, assets can be transferred between taxpayers at discounted values for gift tax purposes. Thus, in addition to the benefit of lower tax assessments on low asset values due to a stagnant economy, additional discounts of 20–40% often apply for gift tax purposes. Nonetheless, there has been some discussion from the Joint Select Committee on Deficit Reduction about lowering the reduction on intra-family discounts.

This is good information.

If Congress does not extend the current estate and gift tax provisions, effective January 1, 2013, the following estate tax consequences will take effect:

• The estate tax exemption will decrease from $5.12 million to $1 million;
• The gift tax exemption will decrease from $5.12 million to $1 million;
• The GST tax exemption will decrease from $5.12 million to $1.35 million; and
• The top transfer rate will soar to 55% (from a current 35% rate).

Because the estate and gift tax planning process is complicated, requires a team of advisors, and is at looming risk of expiring in 2012, it is recommended that the tax planning process commence immediately – otherwise, it may be impossible to implement such strategies prior to year-end. Accordingly, valuations need to be implemented and attorneys require time to draft documents.

That’s good to know, but what about if Congress does extend the current tax provisions, what about if Congress simply modifies the current provisions? Will the CPA or law firm reimburse the fees?

I personally don’t think Congress will let the estate tax exemption go back to $1 million. Democrats, as well as Republicans, have money they want to pass on to their heirs.

The bottom line: many of these marketing pieces are to scare you into spending a lot of money and buying expensive financial products.  Most likely you will end up with documents you don’t understand that will be defunct in a few years.

If you are mass affluent who have less than $5 million in net worth, you probably won’t gain much. If you have over $10 million in net worth, do talk to your advisors, but be skeptical. It may come as a surprise to you: bankers, advisors, attorneys and CPAs are all self-interested. If something is too “complicated” for you to understand, it will likely benefit those folks more than it benefits you.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.