Advisers fret over tax plan’s effect on planning

Some financial advisers worry that the tax agreement between congressional Republicans and the White House will discourage some clients from seeking advice on estate planning.

After a temporary suspension in 2010, the estate tax had been poised to jump Jan. 1 to 55% with a $1 million exemption or $2 million for couples. Under the agreement reached last week, the rate would be set at 35% for two years and apply to estates worth more than $5 million, or $10 million for couples. The Senate version of the plan was introduced late last week and a House version is expected this week.

“The $5 million exclusion will drive a large number of people away from the process,” said Martin Shenkman, an estate- planning lawyer in Paramus, N.J..

People who aren’t likely to have $5 million or more to shelter from the estate tax may secure wills online or go to lawyers who don’t specialize in estates, he said. If that happens, many of the ancillary issues that get aired during the course of estate planning — such as insurance matters or interfamily strife — will go unaddressed.

“Many clients are motivated to do the planning they do because of the perception of the complexity of estate taxes,” he said. “Taxes for many are the driver, but it’s never been the only issue, and for most, it’s not even the major issue.”

Financial adviser Kacy Gott of Aspiriant LLC, which has $7 billion in assets under management and advisement, called the agreement a “mixed blessing.”

Having two years of certainty is better than none, but the proposal will encourage procrastination, he said.

“Any type of short-term plan like this is a great excuse for people who postponed until now to continue to do so,” he said.

The variance of the estate tax at the federal level discourages clients from planning overall, said Barry Nelson, an estate-planning attorney.

“Clients don’t want to respond [to changes in the tax laws] because they see the indecision in government and wonder why they should make decisions when Congress is just going to change it again,” he said.

Karen Altfest, president of Altfest Personal Wealth Management, which manages $650 million in assets, said she hopes that the agreement will achieve stability at least for the next two years, and that will encourage clients who have outdated wills or no wills to take action.

“People should check in more often with their attorney, anyway,” she said. “Nothing is forever; at least this is a respite for two years.”

The timing makes it especially regrettable, said Scott Zucker, an estate-planning attorney. The issue will come up again for 2012 — which is a presidential election year.

“Unfortunately, the emphasis then will be on the politics of it rather than the economics of it, he said.

One aspect of the agreement that some advisers support is a provision that would lead to the reinstatement of a stepped-up basis system of valuing an appreciated asset upon inheritance. Under that system, the cost basis used to calculate future taxes would be the value on the date of the original owner’s death.

Legislation passed at the end of 2009 limited the approach for valuing an inherited asset to a carry-over basis, meaning the cost basis is the same as the original owner’s. Under the carry-over-basis system, the step-up is capped at $3 million for a spouse and $1.3 million for other family members.

Under the terms of the tax deal struck last week, the stepped-up-basis system would be reinstated and the estates of anyone who died in 2010 would have the option of using either system, according to Jim Manley, a spokesman for Senate Majority Leader Harry Reid, D-Nev.

“The lack of a step-up this year has really hurt middle-class families,” said Owen Malcolm, senior vice president and chief operating officer of Sanders Financial Management, which has $180 million in assets.

E-mail Liz Skinner at [email protected].