Using the 2010 Tax Relief Act to attract and help affluent clientsArticle added by Roccy DeFrancesco on February 14, 2011
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

The affluent benefit most from the new tax law
It’s ironic that the biggest winners from the new tax law are the affluent. This is the very thing Democrats in power wanted to avoid.

The estate, gift and generation skipping tax exemptions have been increased to $5 million per person. The Bush tax law was set to expire at the end of 2010, and the exemptions would have reverted back to $1 million per person ($1.1 million for the GST exemption).

Temporary tax law
As you know, the new tax law is only good until the end of 2012 at the latest. That means in an election year, Congress is going to have to pass and the president is going to have to sign new legislation setting the estate, gift and GST exemption rates. If nothing is done, they will go back to the $1 million level.

Now is the time to plan
For several years now, I’ve heard advisers complain their affluent clients didn’t want to engage in a discussion about estate planning because no one knew what the exemptions were going to be in 2011.

What do we know now? We know the new temporary law is a windfall to affluent clients who can take advantage of the $5 million temporary exemption. What we think we know is that the chances of a $5 million per head exemption being re-voted on and passed are very low.

The Democrats will still control the Senate in 2012, and Obama will not be in the pickle he was in at the end of 2010 when he was forced to strike a deal with Republicans that led to this temporary estate-planning windfall.

Let’s look at a simple example of how affluent clients can take advantage of the new temporary tax law.

Assume you have a client who has $10 million worth of assets that he/she doesn’t need to live on and would like to pass these assets to the next or future generations with the least amount of taxes.
Under the old law — the one that will come back in 2012 if Congress doesn't act — the client and his spouse would have a $1 million per head exemption and a tax of 55 percent on all assets passed to the heirs above the exemption. If the exemptions were used properly, the estate would have to pay estate taxes of $4,400,000 ($8 million x .55 percent) at his/her death in 2013 and beyond (assuming no appreciation on the assets prior to death). Keep in mind that I'm only discussing what can be done with $10 million the client doesn't need and would like to pass to his/her heirs.

They couldn’t gift more than $1 million per spouse while living; and if they did, they’d pay a large gift tax on any gifts above the exempted amount.

In 2011-2012, these same clients whose heirs would be looking at a huge estate tax bill upon the client’s death now can do some amazing planning with no tax ramifications.

Each spouse can gift up to $5 million, not only to an irrevocable trust for the benefit of the next generation (their children), but they can also set up a dynasty trust to give assets to the following generation (their grandchildren). Using a dynasty trust will save an entire layer of estate taxes on wealth passed from the second generation to the third generation.

This is huge for affluent clients.

It’s a broad statement, but any client who has an estate over $4 million and certainly anyone with an estate over $7 million (many think the laws in 2013 and beyond will have a $3.5 million exemption) should run to their advanced-planning adviser to receive advice and to make sure they take advantage of this estate planning windfall.

If you ever wanted to work with affluent clients, now is the time. Most CPAs and attorneys are not proactive. They wait for clients to ask questions and then react. That means that most affluent clients who can take advantage of this estate planning windfall will not. That means there are a lot of opportunities waiting for advisers out there who are proactive.

Don’t wait to contact clients and potential clients to help them understand the estate planning windfall that is at hand. You never know when Congress will pass some other law and throw in the estate tax exemption as a bone to get the other legislation passed. That’s what happened at the end of 2010, which gave us this windfall. While it’s possible this windfall will be around until the end of 2012, it might not and time is wasting. Get out there now, and use the current tax law to pick up and help new affluent clients.
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