Higher estate-tax exemption level could mean less work for advisers

With fewer taxpayers affected by the federal estate tax, the demand for estate planning is diminished

Mar 22, 2018 @ 4:00 pm

By Jeff Benjamin

For most financial advisers, the tax-reform package has at least temporarily taken estate planning off the table by raising the estate exemption to a level that only affects one-tenth of 1% of taxpayers, or about 1,000 taxpayers per year.

"This is a game-changer for estate planning attorneys," said Richard Behrendt, director of estate planning at Annex Wealth Management.

"At more than $11 million [exemption] for an individual [and $22 million for a married couple], you could make the case that the federal estate tax is all but repealed, and it makes people like me dinosaurs," Mr. Behrendt said. "It's still meaningful because it still picks up a check from the concentration of wealth of a very small number of families, but for the moderately wealthy, they don't have to worry about this anymore."

According to the most recent data from the Tax Foundation, just 1,452 filers were hit by the estate tax in 2012 when the exemption level was at $5.1 million for a single taxpayer and $10.2 million for a married couple.

The estate tax, which was introduced in 1916 to help finance the pending war effort, was originally set to exempt the first $50,000 of an estate, with the remainder taxed at 10%. Over the years, the exemption level has steadily climbed, reaching $1 million in 2002. But the tax on assets exceeding the exemption level has fluctuated, peaking at 77% from 1941 to 1976.

Federal estate tax rates
Source: Tax Foundation

The current tax rate beyond the exemption is 40%, which was not changed as part of tax reform.

For Seth Corkin, personal chief financial officer at Single Point Partners, the elevated estate tax exemption means shifting the focus away from estate planning and toward more tax planning for wealthier clients at his $100 million firm.

"Estate planning immediately became less of a priority, and I think it is making firms like ours think of ways we can add value on the income tax side now," he said. "We'll just have to wait and see if the tax-law changes are temporary."

Some advisers are already finding ways to make the most of the new tax laws, especially when it comes to catering to wealthy clients.

"The market for estate planning has not shrunk, it has just changed," said Martin Shenkman, an estate planner and founder of an eponymous law firm.

For starters, Mr. Shenkman is in the camp that believes that the doubling of the estate tax exemption will be allowed to expire on schedule in 2026.

He also believes if Democrats regain power in Washington, the exemption could be lowered as early 2020.

In the meantime, Mr. Shenkman has scrambled his resources for a straightforward strategy to convert estate planning into tax planning for wealthy clients.

"The first step is to use the exemption by setting up a trust because by 2020 it may be going away," he said.

For a married couple, Mr. Shenkman recommends both spouses create separate trusts for the other spouse, the kids and grandkids. This moves assets out of the estate, while not restricting access to the assets.

"The critical step is access, because this is not about giving money to our kids," he said.

To work around the new $10,000 limit on state and local tax deductions, which is particularly burdensome to residents of high-tax states, Mr. Shenkman said each spouse should set up a non-grantor trust to hold all non-retirement savings, which avoids state income taxes on all the gains from that portfolio.

The final step is to place the primary residence in a limited liability corporation, and give equal parts of that LLC to each spouse's non-grantor trust, which gives each trust access to the $10,000 property tax deduction without impacting the $24,000 standard deduction.

Key to setting up the non-grantor trust, he added, is that it must be set up in a state that does not tax trusts, such as Alaska or Nevada, regardless of where the taxpayer lives.

"The folks in Washington have completely changed the tax system, so you have to think of tax planning in a different way," Mr. Shenkman said.

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