A Sea Change for Gift and Estate Planning: PFP Practitioner, Writer and Lecturer Martin Shenkman Outlines Opportunities and Caveats
Bonner, Paul, Journal of Accountancy
Martin Shenkman, Esq., CPA/PFS, is the author of numerous books and articles on tax and financial planning, including the AICPA-published Estate and Related Planning During Economic Turmoil, and with Steve R. Akers, Estate Planning After the Tax Relief and Job Creation Act of 2010: Tools, Tips, and Tactics. His firm, Martin M. Shenkman PC of Paramus, N.J., and New York City, specializes in serving tax and estate and business planning needs of high-net-worth individuals, professionals, owners of closely held businesses, and real estate developers. Shenkman is also a frequent lecturer on financial planning, on which he is regularly quoted in a wide range of media. Recently, he spoke with the JofA on gift and estate tax and how CPAs can advise their clients to help them make sense of the recent changes in gift and estate tax, deal with uncertainty ahead, and make the most of current opportunities.
JofA: How should CPAs and their clients prepare for uncertainty after 2012 for the estate and gift tax?
Shenkman: The single most important point is not to dismiss planning as something that now only pertains to the ultrawealthy. Planning remains vital for most clients. Practitioners are well aware that in 2013, what's on the books now is that we're going to have a $1 million gift and estate tax exemption (the GST [generation-skipping transfer] exemption will be $1 million, too, but inflation-indexed), and we're going to have a 55% tax rate. Very few practitioners really believe that's going to happen, but it cannot be dismissed when consulting with clients. What will happen, I don't think anybody truly knows. So a lot of people are believing we can "wait and see," until maybe mid-2012 or late 2012, what to do before we act. And that could prove to be a very big mistake. Wait and see may become "wait and pay." The safer and smarter approach is to proactively plan flexibly, so that whatever changes occur, the client will be in a better position than if no planning had been undertaken.
Meanwhile, the situation now offers a golden planning opportunity. The gift exemption is $5 million, the highest it's ever been in history, which permits huge wealth shifts. Besides the scheduled reduction of that exemption, there have been proposals to restrict GRATs (grantor retained annuity trusts) to a 10-year term. And the current practice of discounting values of private partnership interests or other forms of equity for lack of marketability or control may face restrictions as well. The Obama administration has already proposed reducing the gift exemption to $1 million.
There's also an economic imperative to planning. Interest rates have started to rise, and as that happens, the leverage from note sale transactions, GRATs and other techniques diminishes. The economy is still very soft, so that you may still get some historically favorable valuations.
Let me point out several opportune client scenarios for which practitioners should try to help plan for current gifts. If you have a client who lives in one of the almost 20 states, give or take, that have decoupled from the federal estate tax system, that client may face a substantial estate tax at the state level even though he or she might have no federal tax. Because of the $5 million federal gift exemption, if you have a client in his or her late 80s, or who is ill, for example, who lives in New York, which has a $1 million exemption, that client may be able to simply gift away assets today, with no federal gift tax, reducing them to, say, $995,000. When that client passes away, there's no New York estate tax. They have almost a half-million-dollar savings. It can be that simple (but watch for changes in state estate or gift tax laws). Many clients who are candidates for this type of planning won't be willing to part with such a large portion of their wealth. There are several options. First, gift something substantial but less than the maximum necessary. …