AICPA experts find exceptional opportunities for estate plans in 2009

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Accountants need to reach out to their clients as soon as possible to alert them to the opportunities presented by the 2009 federal exemption, the highest in estate tax history, and for estate-related tax benefits for themselves and their heirs from declining asset values, say specialists speaking at a Web seminar sponsored jointly by the AICPA PFP Division and the National Association of Estate Planners and Councils (NAEPC) on September 22nd. Panelists identified critical areas in will and trust documents that must be reviewed /revised in light of potential estate tax and other relevant legal changes and discussed the potential impact of the economic downturn on the design of an existing estate plan.

The Web seminar is archived on the AICPA’s site and will be repeated in lay terms (designed for clients) on October 19 from 2 to 4 PM ET. An appendix, which includes a sample client letter, is included in the detailed Web seminar materials.

Why 2009 Is so Important for Financial and Estate Planning: Reviews Everyone Should Do Now takes a look at the many ways that clients and their advisers can take advantage of the federal estate tax exemption ($3.5 million in 2009), and at the same time review the effects of declining asset values on Section 529 plans and other retirement strategies.  Strategies that take advantage of lower interest rates are examined. Speakers bring the consequences of normal stages in a client’s life (new additions to family, death, divorce, remarriage, inheritance) into their analysis and discussion of why clients should review estate plans in 2009.

Current Federal Estate Tax Law and Likely Changes

Estate tax law is currently in a state of flux. On January 1, 2009, the federal estate tax exemption was increased from $2.0 million to $3.5 million per decedent -- $3.5 million for an individual and $7 million for a couple. The provisions of current law -- no federal estate tax for decedents dying in 2010, but after 2010, the federal exemption amount reverts to $1 million -- are not likely to remain as they now stand. Changes will be made to the law, but clients should expect that with both federal and state governments badly in need of revenue, estate tax law will not be passed that is costly to either the states or to the federal government. 

The Congressional Budget Office has published a comparison of some of the prominent proposals for estate tax changes currently circulating in Congress. A combination of proposals, a likely outcome, speakers said, could include keeping the exemption at $3.5 million indexed for inflation, the reunification of the estate and gift taxes, and eliminating discounts on passive assets like family limited partnerships.

A panelist also pointed out some of the changes taking place in state estate tax law since the elimination of the federal estate tax credit in 2005, which had given states an easy basis for their own charges and a reason to be coupled with the federal law. Since 2005, however, some states (including New York) have decoupled from the federal government and now have lower exemptions.

Asset Distribution by Formulas and Trust Documents Needing Review

Federal and state tax law changes in exemptions make it imperative that clients who set up estates over the last decade with formulas tied to exemption levels review their wills. Formula clauses in spousal estate plans provide for the change in value of the assets between the time the estate plan was executed and the time the formula clause takes effect at the first death, but the clause should be reviewed if the spouse and someone else, the children, for example, are included in the formula. 

Clients should also review Credit Shelter Trusts. In their accompanying documents the presenters note that in a depreciating market, all the depreciation goes to the credit trust and results in an underfunded credit trust (which is going the wrong way). 

Another area that needs review, according to panelists, relates to the growing participation of clients in international employment and ownership of foreign assets. Clients should be questioned in greater depth and detail about any international issues that could affect their estates. These could include changes in the law affecting non-citizen spouses and rules governing foreign trusts.

Consequences of Asset Value Changes to Charitable Bequests and Division of Assets

The Web seminar presenters say that most people want to set up an estate that treats their children equitably, but given the changes in asset values and potential tax consequences to individuals, the desired equality may not longer be there. Where a client is making a bequest to a charity as well as leaving a percentage of the estate to children, it might be preferable from a tax standpoint to make a make a gift now and take the deduction. 

Again, from a tax standpoint it may be preferable to structure a will so that the children benefit from lower values and the nonprofit benefits from higher values. Clients can consider alternatives like giving a fixed dollar amount to charity or a gift over time in the form of life insurance rather than a percentage of the assets.

Life Insurance

The proceeds of life insurance are intended to provide liquidity when the estate is in probate. Proceeds may be used to pay taxes but also to purchase a family business and keep the business operating. 

It is critical that clients review their life insurance policies so that individuals in a group policy may relinquish the incidents of ownership before their death. Clients should also ask whether they are well served by their agent and look at the ratings of the carrier.

Retirement Plans – Beneficiary Review

Clients should review beneficiaries for retirement accounts. They should not name the estate on their form, which will mean probate, but should instead name a beneficiary. There is no required minimum distribution from a traditional IRA in 2009, although there are administrative requirements for individuals who have inherited an IRA.

Other Matters for Review


Changes may have occurred in the lives of executors and trustees and the soundness of corporate fiduciaries because of the economic downturn. These need to be reviewed.  The accompanying Web seminar materials list a number of changes in family status that can affect an estate.

Planning Opportunities for a Downturn

One reason to write to or call all your clients, is that beginning in 2010, the $100,000 limit on conversions of traditional IRAs to Roth IRAs is eliminated completely. In 2010 individuals will have the choice of recognizing their conversion income in 2010 or averaging it over 2011 and 2012 at the rates in effect for those years. The Roth IRA conversion is a good choice for an individual who wants to minimize the potential tax burden to his beneficiaries.

The value of assets in 529 plans is down, and clients should think about other ways to cover college costs. They could consider the impact of the “kiddie tax” on their income and possibly consider removing their assets from a 529 plan and putting them in a more traditional trust, panelists said.

Some of the planning opportunities for a downturn discussed included establishing a domicile in a low tax state. Clients should also check their property casualty insurance because with the values down they might be able to reduce their coverage.

Other tax options worth discussing with clients based on the very special circumstances of 2009 – low asset values and high exemption amounts -- relate to gifting strategies or transfer of assets to children. These include:

  1. An opportunity for wealthy individuals to transfer assets at no current gift tax cost by using the annual exclusion amount and lifetime gift tax exemption.
  1. Business owners who want to transfer an interest in their companies to children or other family members can maximize the use of the annual exclusion and lifetime exemption by taking valuation discounts into effect.
  1. Simple gifting strategies may replace more complex ones that were necessary with larger value gifts because of low asset values. The more complicated strategies often involve a significant degree of administration that is a burden to some clients.

A Grantor Retained Annuity Trust (GRAT) was discussed as a good option when interest rates are low because it enables a person to effectively “freeze” current values of assets held in trust for estate tax purposes and collect an annuity for a fixed number of years. Changes are expected in GRAT law but at least for 2009 and 2010 it is possible to transfer the assets of an S Corporation or a vacation house, for example into a GRAT.

The message of the Web seminar to the client and their advisors was clear: “Plan now while there are opportunities out there.”

Horror Stories

Horror stories about what happened to individuals who did not review their estate plans punctuated the Web seminar. And the sponsors have provided a form so that participants can send in their own horror stories.



The moderator and all the speakers clearly enjoyed their subject. They were:


Sidney Kess, CPA, J.D., LL.M.


Steven Siegel, J.D., LL.M.

Martin M. Shenkman, CPA, PFS, MBA, J.D.

Jacqueline Patterson, CPA, J.D., MBT

Daniel L. Daniels, J.D.

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