Estate Tax Repeal Presents Opportunity for Customized Maintenance Programs

By Vincent Bonazzoli
Family Estate Planning Law Group
vinnieb@vbestateplanning.com
Member of WealthCounsel

The 2010 estate tax repeal and “sunset” of EGTRRA in 2011 presents many challenges for the practicing attorney. The “sunset” of EGTRRA was unthinkable and the actual repeal (or suspension) of the estate tax and “carry over basis” rules in 2010 may require many attorneys to review, alter and amend plans. Two unique opportunities will present themselves over the second half of 2010 and first half of 2011 that will open a third opportunity that can transform the manner in which estate planning is done and dramatically increase the value of an estate planning practice.

The first opportunity results from the new basis rules for 2010. The attorney will have to amend plans in order to take advantage of the new “basis allocation” rules. Many of the “optimum marital deduction”estate tax minimization formula clauses used will result in a loss of the $3M step-up in basis allocation for assets transferred from the decedent to spouse or a “QTIP” trust since assets funding the “traditional” clauses will not pass to the spouse or to a QTIP trust. The knee jerk reaction for the attorney will be to amend the trust, collect a one-time fee for time or work done and send the client on his way. The next “reactive” amendment or change to the plan will either be initiated by the attorney or when some dramatic change in personal circumstances motivates the client to return to the attorney to address the “crisis” or issue. Although the unusual circumstances will result in many estate plans being amended in 2010, the “reactive” character of the attorney client relationship will remain.

Attorneys who are more “entrepreneurial” will see a second opportunity. If Congress does not act in the second half of 2010 and change the current law, EGTRRA 2001 will sunset and the estate tax law starting January 1, 2011 will be the estate tax law “as though EGTRRA was never enacted”. On a very base level, this means that the estate tax will return, the exemption will be $1M and the highest tax rate will be 55% (60% for estates $10M to $17,184,000). With the current political climate, increasing deficits, economic downturn, world economic turmoil and the looming mid-term congressional elections, many feel that Congress is likely NOT to act and the $1M exemption will return. If EGTRRA sunsets then the 2009 “base” estate tax plans, which assumed a $3.5M exemption, will actually cause a significant estate tax. Estate plans for clients who have assets between $2M to $7M must be reviewed. For example, a client having $7M in assets that did base planning in 2009 assumed that the base plan would eliminate the federal estate taxes. Under the 2011 law this same plan will result in an estate tax of over $3.1M on the death of the surviving spouse. Clearly, the second opportunity is for the attorney to do additional planning to solve the federal estate tax problem for estates of over $1M ($2M for a married couple). Some of the advanced techniques may include planning with ILITS, planning using discounting techniques (GRATS, FLPS and sale of LP interests to IDTS), and charitable planning using Charitable Lead Trusts (CLTS) (or “Frozen” T-CLATS)) to avoid and reduce the “new” estate tax liability in 2011. The entrepreneurial attorney will seize this opportunity, make an “advanced planning proposal” and charge the client for this “one time” additional planning.

Clearly this second opportunity will generate revenue for the year. Please note however, that this one time additional work will not add value to the estate planning practice and is still based on a “reactive” attorney-client relationship.

It is clear that we as estate planners must expect the unexpected. The next law change, political crisis, or economic down-turn (or up-turn) will occur and will require current estate plans to change AGAIN. The unusual law changes in 2010 and 2011 presents the perfect opportunity (the third opportunity) for the attorney to introduce, create, communicate and implement a formal updating or client maintenance/membership program. We have the opportunity to use the dramatic changes that have taken place with EGTRRA 2001 and in particular the estate tax repeal in 2010 and sunset in 2011 as a real life example of recent and dramatic changes which calls for a more proactive formalized process to address sudden and dramatic change that will certainly occur.

Our experience in representing clients and training attorneys has disclosed that clients are seeking guidance on ways to make sure their plans are kept up to date. Most clients understand that a “formal client updating” program is essential for making the estate plan work. The formal updating program will assist the client in keeping the estate plan current on a proactive basis based on an ongoing relationship with the estate planning attorney. The firm can choose to charge an annual fee for services (possibly an annual flat price) so that the client knows upfront the cost for keeping the plan current. In addition the firm will receive reoccurring revenue and open other sources of revenue such as fees generated from client referrals, fees for trust administration and fees for additional work that will be systematically uncovered upon annual estate planning reviews.

The law changes of 2010 and 2011 provide a unique opportunity for the estate planning firm to transform the way estate planning is done. The firm can turn the traditional “re-active” transactional based estate planning model into pro-active relationship “relationship based” model by implementing a formal estate planning updating program. The firm may chose to charge a flat price, collected annually, which will create reoccurring revenue for the firm and controlled costs for the client. Once the firm has reoccurring revenue the firm becomes a “true business” with a “saleable value”. Now is the time for the firm to seize the opportunity to create a formal maintenance program and secure long term financial viability.

For more information about this topic, I encourage you to participate in several WealthCounsel events.

Participate in a complimentary webinar on Practical Solutions for Estate Tax Planning in 2010 and Beyond and return to your practice with the peace of mind you are seeking and the answers your clients expect.

Don't miss the opportunity to sharpen your knowledge, brainstorm with colleagues, and collaborate on the best strategies to leverage the confusion surrounding the estate tax during the Planning for Generations Symposium. 

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