Menu
Tax Notes logo

Estate Planners Struggle to Sway Clients on Tax Savings

Posted on Apr. 21, 2020

Estate planners widely agree that right now is prime time for their clients to engage in estate tax planning. Convincing clients of that, however, is proving to be a challenge.

Low interest rates and depressed asset values have combined to create one of the best estate tax planning environments in recent memory, but several estate planners say their wealthy clients are choosing to hunker down financially rather than take advantage of the tax savings.

“This is the time when people should be full pedal to the metal, getting assets out while the values are down,” Bruce Stone of Goldman, Felcoski & Stone PA told Tax Notes. “It’s exactly the opposite.”

Stone said his clients have been spooked by the sudden drop in the market over the past few weeks, and even very wealthy clients who had been making large gifts are pulling the plug on some prior planning because they fear they won’t have enough for themselves or their spouse while they’re still alive.

“It sounds ridiculous, but even people with hundreds of millions of dollars are feeling poor” and putting the brakes on further tax planning, Stone said.

Jonathan Blattmachr of Pioneer Wealth Partners LLC similarly said that with many clients feeling financially vulnerable, they won't respond to pitches to relinquish large sums of their wealth.

“I know from past experience that going to someone and saying, ‘Man! This is a fantastic time to do estate planning because values are low, the IRS doesn’t have the resources to do much auditing, or whatever it may be; give, give, give!’ — that just isn’t going to happen,” Blattmachr said on an April 14 webinar hosted by Shenkman Law.

For Martin M. Shenkman of Shenkman Law, clients aren’t just missing out on a positive tax planning environment right now — there’s urgency as well.

The federal government has already enacted trillions of dollars of coronavirus-related relief and more may be on the way, and it has only two ways to pay for that: issuing bonds and raising taxes, Shenkman said.

“I don’t see how they can afford not to do both,” Shenkman told Tax Notes. Policymakers may be reluctant to raise income taxes for fear of choking off the benefits of the relief they just enacted, but expanding the estate tax wouldn’t have nearly as much impact on investment, he said.

Estate Planning Up, Tax Planning Down

While many estate planners’ clients may be largely shelving tax planning opportunities, several practitioners reported a surge in interest in basic estate planning services such as setting up healthcare surrogate forms or living wills.

“They’re deathly afraid of lying on a gurney in a crowded hallway with nobody there to be with them,” Stone said. Clients’ sudden interest in estate planning isn’t about missing out on a chance to save on taxes; they’re just afraid of dying, he said.

Jeffrey Eisen of Mitchell, Silberberg & Knupp LLP said he’s been inundated with calls from people he hasn’t communicated with in years who suddenly want to revisit their basic estate plan. “It’s nothing exciting or sexy, but the bread and butter of any estate planning practice is what there’s been a tremendous uptick in,” he said.

That’s not to say estate tax planning work has completely dried up.

Charles F. Schultz of FGMK LLC said he’s had a few of his “very well-heeled” clients express interest in tax-saving opportunities through planning with split interest trusts like grantor retained annuity trusts (GRATs) or charitable lead annuity trusts (CLATs), as well as through the use of intrafamily loans or loans to defective grantor trusts.

And Turney P. Berry of Wyatt, Tarrant & Combs LLP said he’s had a mix of clients who have shown renewed interest in estate planning — some because they’re more aware of their mortality and want their affairs in order, some because they want to jump on the tax savings, and some simply because they’re stuck at home with more time to think about bigger planning projects.

In addition to a substantial amount of work shifting depreciated assets around, Berry said he’s had some clients show a recent interest in tackling more complicated planning projects like what to do with a family homestead, vacation home, or art collection. Those are projects with “significant tax issues baked in” that take time to process but aren’t necessarily tax-intensive, he said.

Planning Considerations

Many clients — particularly the merely wealthy as opposed to the ultrawealthy — who aren’t willing to completely part with a large portion of their fortune may be more open to tax planning if it allows them to retain access to their assets.

“It’s the same old story,” said Eisen. “They’re happy to part with the property but they want to keep the cash flow — now more than ever — and that limits the techniques you can do.”

One way to do that is through spousal lifetime access trusts in which the spouses set up a trust for each other and their descendants and then make gifts to those trusts, according to Shenkman. Each spouse is the beneficiary of the other's trust at the discretion of a trustee. Such an arrangement is “arguably protected from creditors and from future estate tax,” he said.

Another key planning element to consider is asset protection. Shenkman noted that as the economy suffers, there will be many more bankruptcies, and likely litigation related to the pandemic. That should push clients to set up irrevocable trusts that can serve the dual purposes of protecting the assets they still save and reducing taxes, he said.

Tax Planning Menu

Clients may not be clamoring to set up tax planning structures right now, but if they were, they would have plenty of planning strategies to pick from, from the basic to the sophisticated.

On the simple side of the spectrum, there’s no substitute for making a direct gift, either to a trust for children or directly to the child, with the added benefit now that it will be a discounted gift, according to Eisen. “That’s the biggest estate tax reduction. You part with the asset and the cash flow,” he said.

The success of some estate tax planning strategies, like GRATs and CLATs, depends on the assets in those trusts outperforming specified interest rates. One of those rates, the section 7520 rate, which applies to GRATs and is updated monthly by the IRS, was recently pegged at 0.8 percent for May — the lowest rate since the statute was enacted in 1989.

That makes GRATs and CLATs ideal tax planning vehicles now, but several practitioners noted that it’s essential that the trusts be drawn up so that the grantor has swap powers, especially with such extreme market volatility.

If an asset in a GRAT suddenly jumps in value — “a true dead cat bounce” — the grantor needs to be able to swap the asset out for cash to lock in the value in case it swings back down, Schultz explained.

Eisen said some clients may have prior GRATs that have failed because the pandemic wiped out asset values, but the classic solution to that problem is to roll those assets into a new GRAT and wait for values to go back up. As a bonus, if an appraiser was hired to value the assets coming out of the original GRAT, that appraisal can be used when they’re put in a new GRAT, he noted.

One advantage to intrafamily loans that may appeal to clients is that they’re relatively simple and don’t require expensive appraisals or trusts, according to Eisen. And for clients with taxable estates, although the promissory note is still contained in the estate, the value is frozen — “the next best thing to a direct gift,” he said.

Stone likewise suggested intrafamily loans as an ideal planning strategy. Low asset values and “unbelievably low” interest rates make those transactions even more worthwhile, he said.

“There’s never been a better time to start doing something you should’ve been doing all along . . . if you’ve got the stomach and the courage to do it,” Stone said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

Copy RID