Top Four Concerns Estate Planners Hear From Clients

Aug 20, 2021 10:00:00 AM



Earlier this year, WealthCounsel, in conjunction with Trusts & Estates magazine, surveyed over 500 estate planning professionals to see what opportunities and challenges they and their clients face. The results indicate that, while there is stability within the industry overall, there are growing concerns from clients regarding proposed legislation that could have wide-ranging implications if passed. 

We have compiled the top four concerns estate planners report hearing from their clients and included ways in which attorneys can address these fears.

Fear #1: Income taxes will increase.

According to WealthCounsel’s recent 2021 Estate Planning Trends Survey, over 70 percent of respondent attorneys said that a major concern among their clients is the potential increase in income taxes. These fears likely came about after the Biden administration shared its American Families Plan, which increases the income tax rate for the top 1 percent of earners—from 37 percent to 39.6 percent—affecting taxpayers with incomes over $400,000. 

While the plan still has a lot of hurdles to jump if it is to become law, attorneys can use this time to educate clients about the potential tax rate, what it means for them, and how to plan should they fall within the affected income tax bracket.

What can attorneys do to alleviate this concern?

Counsel clients on the income reduction benefits of contributing to an individual retirement account or 401(k), with which taxes are deferred until the client withdraws funds during retirement. Considering the time value of money and the likelihood that the client will be in a lower tax bracket in retirement, the income tax savings can be substantial. If the client expects a higher tax rate during retirement, the client should consider converting existing retirement accounts into Roth accounts. 

Clients should also consider gifting income-producing assets. By shifting income-producing assets to their heirs, clients reduce not only their taxable income but also the size of their estate for estate tax purposes. In addition to an increase in ordinary income tax rates, there may also be an end to the preferential treatment of long-term capital gains. Business owners or others with appreciated assets may wish to recognize long-term gains now under the preferential rates. Finally, for the charitably inclined client, charitable giving can prove an effective means to reduce income taxes.  

Fear #2: The estate tax exemption amount will decrease.

Another common concern among clients is the potential decrease in the estate tax exemption amount. The current federal estate tax exemption amount is at a historical high, impacting less than 1 percent of the US population ($11.7 million for individuals and $23.4 million for couples). However, this amount is unlikely to last very long. Unless Congress acts, the exemption amount will sunset on January 1, 2026, and revert to $5 million. We could see the amount decrease before that date, as the current administration has indicated that it would support a proposal to reduce the estate and gift tax exemption to $3.5 million (or $7 million per married couple). 

With these two facts in mind, it is no longer if but when the exemption amount will decrease. When it does, the federal estate tax will affect a much larger portion of individuals—meaning attorneys may want to rethink their current estate planning strategies.  

What can attorneys do to alleviate this concern?

The Tax Cuts and Jobs Act of 2017 doubled the estate and gift tax exclusion amounts for 2018 through 2025. Practitioners were concerned about clawback issues until the Treasury Department and the Internal Revenue Service released final regulations in Treasury Decision 9884 on November 26, 2019, which alleviated those concerns. The current school of thought is that high net worth individuals should lock into the higher exclusion amounts by completing gifts before the exclusion amounts are reduced either in 2026 or by earlier action of Congress. Clients should not only consider taking full advantage of the annual gift tax exclusion ($15,000 for 2021) but also complete gifts either outright to beneficiaries or to irrevocable trusts. By utilizing certain irrevocable trusts such as a spousal lifetime access trust, the client potentially could continue to indirectly benefit from the trust if the client needs funds in the future.

For clients who have a comfortable amount of assets and do not wish to increase the size of their taxable estate, they may want to consider a grantor retained annuity trust (GRAT), specifically a zeroed-out GRAT, which would allow the client to transfer the appreciation on investments without having to use gift tax exemptions. 

CAUTION: It is important to advise clients that attorneys cannot predict tax law changes. It is possible that Congress acts and there is no reduction in the estate and gift tax exclusion. To avoid finger-pointing and accusations that the attorney advised the client to make unnecessary gifts, the client should be advised of and acknowledge this possibility.

Fear #3: Stepped-up basis at death will be eliminated.

Another reported concern among clients is—no surprise—the elimination of stepped-up basis at death. An asset's value on the day the owner dies currently determines its basis, effectively eliminating income tax on any appreciation that occurred during the owner’s lifetime and requiring the owner’s beneficiaries to pay income tax on only the appreciation that occurs after the death. 

However, current proposals from the Biden administration would eliminate the step up in basis at death for gains of more than $1 million on inherited assets ($2 million if inheriting from a married couple). This could require beneficiaries to pay additional tax when they sell the inherited asset. Or, the gain could be realized when the asset is inherited, creating an immediate tax liability. With the Millennial and Gen X generations standing to inherit 30 trillion dollars in the coming decades, this change could have far-reaching implications. 

What can attorneys do to alleviate this concern?

The elimination of stepped-up basis at death and the preferential treatment given to long-term capital gains would be a double whammy. Clients should review appreciated assets to determine whether it makes sense to recognize gains now or, upon their death, pass the gains to their beneficiaries who, in turn, will pay the taxes on the gains. Gifting assets before they appreciate can help alleviate the loss of the benefit of stepped-up basis at death.

Congress is not expected to apply tax changes retroactively or to the 2021 calendar year. Before making any hasty moves, clients should review their entire estate plan and analyze how the elimination of the step up in basis may impact their assets.  

Fear #4: Estate tax rates will increase.

According to the Industry Trends survey, 57 percent of attorneys report their clients are concerned with increased estate tax rates. Under the current laws, the top estate tax rate is 40 percent, but the Biden administration has proposed increasing the estate tax rate to historical norms.

Not only would the new tax proposals drop the exemption down to $3.5 million (transfer at death) and $1 million (for lifetime gifts), the proposals would increase the tax rates for gifts, estates, and generation-skipping transfers from the current rate of 40 percent to as high as 65 percent.

What can attorneys do to alleviate this concern?

Clients should consider zeroed-out GRATs to freeze estate values. They should also consider irrevocable grantor trusts. Not only does funding an irrevocable trust reduce the grantor’s estate size, but so does paying income taxes. The best way to avoid increased estate tax rates is by reducing the client’s taxable estate. 

Ultra high net worth clients may wish to take advantage of discount gifting in conjunction with a family limited partnership or a sale to an intentionally defective grantor trust. Discount gifting is a powerful way to reduce the size of a taxable estate, as seen in Nelson v. Commissioner, T.C. Memo 2020-81, where the Tax Court permitted multiple layered discounts totaling approximately 60 percent!

See the latest industry trends in estate planning and how the pandemic is affecting the communication methods, business goals, client demographics, of attorneys and their staff in our 2021 Estate Planning Industry Trends Report. 



Post a Comment

  • There are no suggestions because the search field is empty.