WEALTH - The Passing of Wealth

With estate tax laws in flux, high net worth individuals find planning a challenge


When New York Yankee’s owner George Steinbrenner died in 2010, his family had no obligation to pay federal estate taxes, even though his estate was worth more than a billion dollars. That’s because of temporary provisions in legislation signed by President Obama in January of that year eliminating the federal estate tax.

Almost as cumbersome as its title, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 raises questions about what to expect when it expires on Dec. 31. In 2011, federal estate taxes returned at 35 percent, with an exemption of $5 million per individual and $10 million for married couples.

While estate planning professionals don’t expect new legislation until after the November election, many experts have speculated that estate taxes may revert back to 2001-2002 levels, with a $1 million exemption per individual and $2 million per married couple taxed at 55 percent.

“What’s surprising to me is I’ll meet with new clients who are very successful and find out they don’t have the basics of estate planning necessary for their net worth,” notes Rob Schein, managing director and partner of HighTower Advisors. “Today you need a will, a trust, advanced medical directive, and power of attorney.”

To stay ahead of Washington, Brandt Kuhn, a wealth strategist and financial advisor specializing in estate planning at Integrated Wealth Management, thinks that having an exit strategy for assets like real estate is important. “We see expensive properties the children sell cheaply, especially in this market, so they can quickly walk away.” Indian Wells lawyer Lance Eldred advises clients not to lose sight of the goal of intelligent estate planning. “Regardless of where the tax laws go, you have to make sure your assets are handled as you wish during your lifetime and ultimately pass to your family in the best way they can,” he says.

For those facing estate tax obligations, Kuhn points to universal life insurance policies as a vehicle to help pay those taxes. Whole life insurance was once the darling of estate planning. When an insured died, the beneficiary received the proceeds tax free, then paid estate taxes. Life insurance fell out of favor for estate planning purposes as shady insurance salesmen peddling bad products littered the landscape.

“For high net worth individuals, life insurance isn’t used as much as it should be. Today there are a variety of good, safe, universal life products that pay the death benefit as they are intended to,” Kuhn says.

“The new normal is not good, because the estate law is in flux and Congress has made it very difficult to plan,” says Michael Eisenberg, a member of The American Institute of Certified Public Accountants’ Financial Literacy Commission. He educates clients on the option of taking advantage of the $5 million lifetime exemption while it lasts. This allows people to take assets from their estate while alive and gift them. “It’s important to understand that you are giving up those assets, realizing they are no longer yours to control once they are out of your estate,” Eisenberg says. His advice for the coming year: “Meet with estate planning professionals to understand your current circumstances, and keep your eyes and ears open to what is happening in Washington.” For updates, check www.irs.gov and enter “estate tax” in the search box.

Elaine Hill of Hill & Walker in Palm Springs tells clients to sit tight and not change their formulas. “If you have a $3 million estate and a survivor trust, then leave it as is,” she says. Hill saw people do too much in 2010, anticipating what would happen in 2011. “They changed existing trusts, which turned out to be a waste of money.”

David Humphrey, a partner at Cosgrove, Cosgrove & Humphrey, agrees. “I say hold on till after 2012 and Congress does something. Then we can do what we need to do.” Given Congress’ recent history on making decisions, it’s a good bet “they will continue to tap dance on this as long as possible,” notes David Suss, partner at Maryanov Madsen Gordon Campbell.

Congress could be self-serving on this issue, since many members have a net worth exceeding $1 million.

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