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Estate Planning for the 99 Percent

Estate planningThe CPA financial planner has a new challenge: the majority of our clients’ estates will not be subject to the federal estate tax when death occurs. If this is true, then how do we help them plan for the future, as well as convince them that planning is still important and necessary?

I call this the “new reality” in financial and estate planning. In 2015, the applicable exclusion from the federal gift and estate tax was $5.43 million, indexed annually for inflation, and the 2015 applicable exclusion from the generation-skipping transfer tax (GST) was also $5.43 million. These numbers are now adjusted to $5.45 million for 2016. Clients whose estates fall below this threshold make up 99 percent of the clients we work with in our practices.

However, we can no longer say, “I will plan your estate and save you taxes.” With estate tax savings almost a non-issue, we must adjust, motivating the client to focus on non-transfer tax and income tax aspects of planning that have a large impact on their lives.

Appreciated Assets and a New Look at Discounts

A very significant part of the value of the moderate wealth client’s estate presently consists of appreciated assets. Since these assets will not be subject to transfer taxes, avoiding capital gain taxes and net investment income taxes, and passing assets with a stepped-up basis, becomes a primary concern. Traditional estate planning techniques used to reduce the value of assets on death, such as family limited partnerships and limited liability companies formed to create valuation discounts for estate tax savings; now, they may be counter-productive to planning since the American Taxpayer Relief Act of 2012 (ATRA) was enacted.

In a sense, estate planning is upside down from what has been traditionally favored. For persons of moderate wealth below the federal estate tax exclusion, the goal of planning now is to include everything possible in an estate at maximum value. This is quite a change from the traditional notion of excluding as much as possible, and minimizing the value of whatever must be included!

This change in thinking must be embraced not only by the client, but also by the planner who must guide the client. It is an essential consideration in much of what must be done to plan estates effectively in the post-ATRA world. Practitioners have fought for many years to maximize valuation discounts for lifetime gift transfers and for the value of interests in any assets included in a client’s estate. A key component of the documentation of many gift plans and estate tax returns has been the formal appraisal of the discount applicable to the non-controlling interest in an asset or entity involved. The IRS has resisted these discounts and often challenged them as excessive. With the majority of clients no longer facing a federal estate tax, claiming valuation discounts will provide no estate tax benefit whatsoever, but will reduce the value of the basis step up, and thereby increase the future capital gain costs the client’s heirs will face.

Accordingly, creating asset transfers that generate significant discounts may no longer be desirable. Claiming discounts on transfers at death for minority interest or lack of marketability will only serve to reduce the value of property inherited by heirs from a decedent and the basis of property to the heirs. When there won’t be any federal estate tax at the decedent’s death, such discount claims are counterproductive.

Bringing Estate Planning Full Circle

Our job as financial planners is getting tougher and tougher, thanks to a federal estate tax-free world where so many resources are available online.

My advice is to open up the lines of communication and put your knowledge and expertise to use. But, let’s face reality: some clients may be reluctant to do much of anything beyond simply having an IRA or even life insurance; it’s your responsibility, and in your clients’ best interest, to put complex, yet practical planning to work.

More information on estate planning is included in a free excerpt on closely held businesses, taken from Steven Siegel’s The CPA’s Guide to Financial and Estate Planning, Volume 4.  Members of the PFP Section, including CPA/PFS credential holders, have full access to the entire 4-volume series, including audio recordings of webinars presented to complement the Guide, as part of their membership. Additional estate planning resources are available in Forefield Advisor and on the PFP Section’s estate planning resource page.

Steven G. Siegel, JD, LLM, Siegel Group. Steve specializes in tax consulting, estate planning, and advising family business owners and entrepreneurs. He has lectured extensively throughout the United States on tax, business, and estate planning topics. Steve is the author of numerous tax and estate planning publications, including the Grantor Trust Answer Book (CCH 2016). He is an adjunct professor of law in the Graduate Tax Program of the University of Alabama Law School, and has served as an adjunct professor of law at Seton Hall and Rutgers University law schools.

Estate planning courtesy of Shutterstock.


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