Section Review

Comments from the Chairman-Elect of the Probate Section Council: Is There Life After Repeal? Estate Planning in a Post-Estate Tax World

The estate tax has once again dodged the bullet. In early June, the Senate voted, by a narrow margin, against permanent repeal. Nonetheless, the implications of total repeal continue to loom large in our collective imaginations. As concerted lobbying efforts favoring repeal are inexorably advanced by well-heeled special interests, final victory – if that’s what it is - seems within sight. Of course, the ebb and flow of Republican and Democratic primacy keeps the ultimate outcome uncertain, as anything done today can be undone in the next legislative session. But what if the repeal efforts are actually permanent and successful? Can the estate planning specialist survive in an estate tax-free environment? The truth is, only a very small percentage of the population ever needed estate tax planning. Even before the lifetime exemption began its recent journey skyward, even when the Unified Credit, as we used to call it, was stalled at a mere $600,000, the vast majority of Americans’ estates were not taxable. It has even been suggested that avoidance of the estate tax has been historically overemphasized by the legal community. There are a number of reasons for this (perhaps undue) focus on tax planning: clearly the tax is a motivational tool, which, by utilizing the very real threat of grave economic loss, could encourage reticent clients to get their dispositive houses in order. Another reason, I believe, is simply because planners love to plan – they love the creative challenge of using the arcane and byzantine logic of the estate tax code against itself, in elegant ways never intended by its creators. And soon the tax may be gone, like an old and irascible uncle whose presence was a constant annoyance, but whose sudden absence brings an unexpected pang of nostalgia and loss. But would the repeal of the estate tax spell ruin for estate planning and probate practitioners? Such a grim fate is far from sealed. Historically, the vast majority of Americans have had no chance of amassing sufficient assets to be impacted by the estate tax, and the estate planning needs of this sizable population will remain unchanged by any repeal. On the other end of the financial spectrum, in the rarified world of the very affluent, there has always been a need for sophisticated dispositive planning – a need that existed long before the existence of the estate tax. With the advent of repeal, these estates will no longer be diminished by the traditional transfer taxes. With more assets flowing into the hands of financially naive beneficiaries, proper long term wealth management and dispositive control will become critical. Rather than decreasing the need for sophisticated trust and estate planning, this new affluence will likely increase it. In a society in which one in every two marriages ends in divorce, control over the ultimate disposition of a married decedent’s assets is becoming more vital than ever. Antenuptial agreements to control the financial exposure of individuals before they get hitched, and long-term trusts to control the flow of assets after the death of the first spouse, are and will continue to be greatly significant to clients. Ensuring that one’s inheritance passes to one’s issue, and not to the issue of some hypothetical future spouse, has been a concern since time immemorial, and it is not likely to be repealed with the estate tax. Trusts will always be needed to provide long-term asset administration for those incapable, due to youth, inexperience, temperament or disability, to fend for their own financial interests. Time and again, we see the disastrous aftermath of wealth inherited by individuals ill-equipped to handle the challenge. Capital painstaking accumulated over a lifetime or several generations can be dissipated in an eyeblink by beneficiaries dazzled by sudden affluence and unfamiliar with the subtleties of adequate financial planning. It is the responsibility of the estate planning attorney to educate the clients, to anticipate problems and to eliminate them before they occur. Clients are often discomfited by issues pertaining to their own mortality, and thus inattentive of them, and the results of such inattention can be terrible. For example, many young parents have never thought about the financial impact of their early and unexpected deaths would have upon the long-term financial prospects of their minor children. Such clients may have millions of dollars of life insurance coverage, but no instruments in place to provide for the rational management of such funds. In most cases, the beneficiary designations simply provide that the proceeds are to be paid to the surviving spouse, and if there is no surviving spouse, to the decedent’s children. In such a situation, the children would receive the funds, possibly millions of dollars, outright upon attaining the age of majority. Answer truthfully: If this scenario had happened to you, where would you be today? Would you have gone to college? Would you have bothered with law school? Or would you have committed yourself to a lifestyle that you had no reasonable chance of supporting, and quickly squandered the funds? With the elimination of the estate tax, more assets will pass to beneficiaries who are more and more removed from the engines of economic creation and from the financial sophistication and judgment that created perhaps the greatest development of personal wealth in the history of mankind. Thus, the role of individual estate planning is more important now than ever before, due not to a need to avoid a confiscatory tax, but rather to the very repeal of such a tax and liberation of personal wealth that such repeal engenders. Beyond simple dispositive planning, the estate attorney can help clients arrange their affairs to promote the preservation of wealth during lifetime. In a world perceived, rightly or wrongly, as being overly litigious, where it is difficult to accurately assess one’s risk of liability, proper estate planning can steer a client to safe harbors in which the client can provide security for his or her family’s economic well-being. Even without entering the dubious world of self-settled spendthrift trusts and offshore protection strategies, it is possible to do real, effective proactive planning which will limit a client’s exposure. Numerous useful strategies still exist to help clients at the end of their lives, when custodial care may be required. Protecting the family’s assets from quick depletion by the crushing financial burden of long-term custodial care is yet another important task of the estate planning attorney which would remain unchanged in the face of repeal. Although the probate procedure in Massachusetts may not be quite as onerous as that of many other states, the costs, publicity and delays of probate are still worth avoiding. Especially in the larger estates, where an impressive inventory could attract unwanted attention, the privacy of trust ownership can be a very desirable alternative to the public disclosure of probate. Although the probate avoidance benefits of estate planning may not be as fascinating to the planner as the challenge of designing advanced tax avoidance strategies, the benefit to the client may be easily as great. Business succession planning, special needs planning, charitable planning, estate settlement, fiduciary services – all are growth areas in today’s aging society, and all are within the purview of the modern trusts and estates attorney. Perhaps more importantly, the long-term nature of the relationship between the estate planner and the client can and should develop toward the role of family counselor, advisor and confidant, and natural clearinghouse for the legal services, of whatever nature, that circumstances may require.
©2014 Massachusetts Bar Association