Academic journal article Journal of Accountancy

Going, Going, Gone? Estate Planning Strategies in Uncertain Times

Academic journal article Journal of Accountancy

Going, Going, Gone? Estate Planning Strategies in Uncertain Times

Article excerpt


* WITH UNCERTAINTY ABOUT WHETHER THE ESTATE TAX will actually be repealed in 2010 and the possibility it will return in 2011, CPAs need to help their clients plan carefully to make sure they take maximum advantage of all of the estate tax changes.

* THE ESTATE TAX EXEMPTION INCREASES GRADUALLY from 2002 to 2009. Married couples should make sure they arrange their estate plans to take full advantage of tax relief available in the year they die. This means a periodic review of estate documents and having enough assets titled in separate names to use the full exemption.

* THE GIFT TAX REMAINS. CLIENTS SHOULD CONTINUE making gifts that fall within the $11,000 annual exclusion and consider other gifts as appropriate. Other more sophisticated techniques such as the grantor retained annuity trust and the family limited partnership could also be useful to some clients.

* DESPITE THE APPARENT ESTATE TAX REPEAL, life insurance will remain a critical part of most estate plans. Coverage types however, may change for some clients. Until it's certain the estate tax is gone for good, CPAs should not recommend clients let existing life insurance coverage lapse.

* AMONG THE IMPORTANT TASKS EXECUTORS WILL have is allocating the step-up in basis among beneficiaries in 2010. Executors will have to allocate the general $1.3 million step-up and the special $3 million spousal step-up. Clients should consider naming a corporate executor or trustee instead of a family member.

"Kill the death tax!" Supporters used this political slogan to encourage passage of the Economic Growth and Tax Relief Reconciliation Act of 2001--signed into law on June 7, 2001. But was that really the final result? Although the legislation calls for the estate tax to decline gradually through 2009 and be repealed in 2010, the act sunsets unless Congress extends it. That means the estate tax returns in 2011. However, some clients, hearing the word "repeal," will believe there is no need for any future estate and gift planning. Nothing could be further from the truth.

This situation presents some unique challenges for CPAs providing estate planning advice in the coming years. This article suggests strategies accountants should consider when helping clients understand the implications of the new law and how to minimize the transfer tax bite over the next decade (For more information on the act's estate tax provisions, see "The Uncertainty of Death and Taxes," JofA, Oct.01, page 95.)


To briefly summarize what the 2001 act does or does not do with regard to estate and gift taxes, consider the following provisions:

* The estate tax is scheduled to be repealed for only one year, 2010, unless Congress extends the repeal or makes other changes before that time.

* The exemption amount (the amount of transfers at death free of federal tax) increases gradually from the 2002 and 2003 amount of $1 million as follows:

2004 to 2005   $1.5 million
2006 to 2008   $2 million
        2009   $3.5 million
        2010   No tax
        2011   $1 million

* Even with the estate tax repeal, the tax basis of inherited assets will no longer be stepped up to fair market value on the date of death, except for a limited step-up of $1.3 million on selected assets and an additional $3 million on property passing to a surviving spouse.

* The act did not repeal the gift tax but rather froze it at a $1 million lifetime exclusion.

* Before repeal in 2010, the top estate tax rate on assets above the exemption amount will steadily inch down to 45% in 2009 from 55% today.

Some observers have characterized the new provisions as a "strange new world." The complexity of the situation is magnified when you consider that at the time of this writing, federal budget surpluses are vanishing as the United States moves into a wartime economy, rendering the 2001 act vulnerable to the winds of political change and economic necessity. …

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