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Patricia Annino
Estate planning trends you need to know about

Advisers are turning their attention to state estate taxes, investment choices for dynasty trusts, and other issues.

April 22, 2013
By Patricia M. Annino, J.D

Now that the $5 million federal exemption is permanent, estate planners need to refocus their energies—and their clients—on creating estate plans that are less concerned with avoiding federal taxes and more concerned with managing and maintaining wealth for current and future generations.

With that in mind, here is a look at the latest estate planning trends that are here to stay.

Simplify, simplify, simplify (and get back to the basics)

The federal gift, estate, and generation-skipping tax exemptions will remain at $5 million ($5.25 million in 2013, adjusted for inflation), with a top rate of 40% (up from 35%) beginning in 2013. Further, the estate tax portability election, which allows a surviving spouse to use a deceased spouse’s unused exemption amount, was also made permanent. The trend, therefore, will be to simplify and unwind complicated structures, including trusts, which no longer have any estate tax benefit.

Although the sentiment that “the law may change” will encourage some clients to cling to the old structures, there still will be a move toward simplicity. Clients want transparent, understandable planning tools and no longer believe they need anything complex to accomplish their overall goals. Post-mortem techniques will allow advisers and families to have a “second look” nine months after the date of the decedent’s death (i.e., before the estate tax return is due) to correct any factual mistakes or account for changes in the law that occurred since the documents were established.

Increased emphasis on state estate tax planning

For many families, federal estate tax planning will no longer be the main driver—state estate and inheritance taxes will now be in the spotlight. In some states, the exemption is as low as $1 million and the state estate tax rates reach 16%. A $10 million estate that may not pay any federal estate taxes could pay as much as $1.44 million in state estate taxes.

Although the state in which a decedent is domiciled controls the bulk of the tax, it becomes complicated to calculate the state estate and inheritance taxes when families own property in several states. Imagine a scenario in which a husband and wife are domiciled in Florida (which does not currently have a separate state death tax), own a vacation home on Cape Cod in Massachusetts, and have commercial real estate in Greenwich, Conn. They would have to pay state estate taxes to Massachusetts and Connecticut because they owned real property in both states.

The state that claims estate tax domicile will prevail in assessing the estate tax on more than the real property and tangible personal property physically located in that state—it will reap the tax on the decedent’s intangible assets, too, including investments and stock in the family business no matter where it is located. The determination of domicile for state estate tax purposes is fact-driven and differs from the determination of domicile for state income tax purposes. Estate planning professionals need to pay particular attention to these points.  

Increased focus on intergenerational planning

As greater wealth passes down unhampered by federal estate taxes, it will become easier to hold broad discussions on family wealth that cut across generational lines. Insurance professionals must shift gears from the old goal—preserving wealth by making sure that the government interferes as little as possible—to emphasizing the capture, preservation, and management of the assets for the good of a family system for generations to come. This requires a candid and thoughtful conversation with the family to discuss common goals, visions for the future, and how a family business will be managed in subsequent generations.

Investment choices for dynasty trusts

At the end of 2012, many high-net-worth families took advantage of their ability to gift $5.12 million (adjusted for inflation) and transferred assets to trusts. In the year-end rush, many of those trusts now have investments but no investment strategy. Now that this increased exemption has become permanent, many families will continue to implement and fund these trusts.

From a leverage point of view, current law dictates that those assets, no matter how much they appreciate, will bypass estate tax for subsequent generations and will do so until the trust terminates. From an estate planning point of view, advisers should consider investment leverage and, with their fiduciary duty in mind, contemplate investing those assets for future growth. Many families are also purchasing life insurance as part of this investment strategy, as it provides additional leverage, and the funds used to purchase the insurance have already been moved out of the federal transfer tax system.

Understanding the impact of double inheritors

Many Baby Boomer women in this country will be double inheritors—they will inherit wealth from their parents and from their spouse. As a result, a staggering amount of wealth will be controlled by women in this age group over the next 20 years. Advisers need to appreciate the enormous size of this market and understand the differences between female and male Baby Boomer clients. To tap into this burgeoning market, advisers should determine what internal resources exist to educate the double-inheritor client and host or sponsor workshops that teach them the basics of estate planning.

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Patricia M. Annino, J.D., LL.M., a nationally recognized authority on estate planning and taxation, received the Boston Estate Planning Council’s “Estate Planner of the Year” Award in 2007, and chairs the Estate Planning practice at Prince Lobel Tye LLP. She has been voted by her peers as one of the Best Lawyers in America (trust and estates), a Super Lawyer, and a Top 50 Massachusetts Super Lawyer. She is a Fellow of the American College of Trust and Estates Counsel (ACTEC).