I must confess that all this talk about estate tax repeal and farmers losing their corn fields has resulted in our clients being confused and my mother being worried. No son wants to worry his mother and no mother would want her child without a job.
Recently, my mom inquired how our business would fair if there were no estate tax planning required. Implicit in that question was her belief that no one would need our services if the Republicans were successful in repealing the estate tax and thus her poor son would end up starving and her grandchildren destitute! As patiently as I could, I explained to her that for a number of well planned reasons our business will continue to blossom regardless of what Congress does.
A DIRTY LITTLE SECRET
Mother dearest, you shouldn’t believe what Congress is telling you. They say they are repealing the dreaded “Death Tax.” Not so! They are replacing it with a new “Carry Over Basis Tax.” You see, under current law, heirs get to adjust the cost basis (for computing subsequent capital gains and loses) to estate taxed values. We call this a “stepped up cost basis” which effectively eliminates capital gains and losses as of date of death and gives the heirs a clean slate. When the “Death Tax” disappears, the new “Carry Over Basis Tax” will make the heirs determine and pay taxes on what the deceased clients paid without a fresh start. Yes, there are some exemptions, but the complexities of this new tax will keep us busy planning for our clients for years to come.
If the government abandons the estate tax business, it will surely leave states (like New York, Connecticut and New Jersey among others) searching for additional tax revenue. Increasing federal estate tax exemptions ($1.5 million today and projected to increase to $3,500,000 in 2009) will be partially offset by higher state estate taxes. We believe that the major long term repercussion for these states is to eventually increase the flight of business owners and wealthy families to states, like Florida, that have abandoned the state estate tax. Domicile planning will be an important planning tool in the years to come. And mom, don’t worry because we are not solely relying on the government’s ineptitude to structure our business plan. We provide a broad array of other critical services that families will continue to need.
WHY PAY TAXES IF YOU DON’T HAVE TO?
We believe that forum shopping to reduce the income tax effects on irrevocable lifetime Trusts will continue to grow quickly. Income tax effects on parents as Grantors, beneficiaries and Trusts vary widely from state to state. For instance, income tax rates on estates and Trusts generally range from 4% to 9 % in New York, New Jersey and Connecticut. For those considering establishing Trusts that are aimed at accumulating dollars, they should consider establishing Trusts in those jurisdictions where there is minimal or no taxes. By way of example, Florida has no tax and Delaware does not impose an income tax on Trusts that accumulate income for non-resident beneficiaries.
ESTATE & FIDUCIARY LITIGATION
And mom, lets not forget those Trustees who continue to use terribly bad judgment in administering the affairs of their Trusts. We continue to see a rise in estate and Trust litigation concerning fiduciaries that have not treated beneficiaries equally and/or Trustees who have either wasted the assets of the Trust or invested the Trust corpus without consideration to the ultimate needs of the beneficiaries. We continue to have a vibrant and growing base of work in this area.
For those silly enough to believe that the government will really permanently repeal the estate tax, they better not forget the topic of gift taxes. We have heard no talk about repealing this equally confiscatory tax. Remember, if you give property during your life worth more than $1 million, you are going to pay approximately 40-45% in gift taxes. Our job, which we have been successfully doing for over 20 years, is to educate clients about the antibiotic to these taxes.
A GOLDEN SECRET
So mom, not to worry. My hunch is that we will be busier with total repeal or higher exemption rates. It really does not matter. We have listened carefully to what our clients need and have continued to expand our core practices to meet these requirements. What we have learned in the wealth transfer business, is that our clients will continue to place a high premium on sagacious legal advice combined with exemplary tax services.