Estate Planning: Time for a Tuneup

What's the state of your clients' estates?

January 2009
by William Weintraub and Michael Allmon/Journal of Accountancy

A CPA is in an excellent position to help clients address the issues of estate planning. CPAs are usually aware of the scope of their clients’ assets and often know something about family relationships, recent marriages, children, grandchildren and other key facts. They see their clients annually in connection with the preparation of income tax returns. Therefore, clients will not be surprised when a CPA raises the issue of estate planning, particularly when an estate tax could be substantial. In fact, a good CPA would be remiss for failing to address these issues. For all the hand-wringing over income tax planning that occurs prior to April 15 each year, the potential estate tax savings that can be achieved with basic planning will often dwarf a lifetime of potential income tax savings. Therefore, every discussion of estate planning should include a review of the common exceptions to gift and other transfer taxes.
Clients also need to be aware of the currently unsettled state of the estate tax laws. This year, the size of an estate exempt from estate taxes stands at $3.5 million, with a top tax rate of 45 percent. Barring further action by Congress, the exemption in 2010 will be unlimited, only to return to the pre-2001 level of $1 million and a top rate of 55 percent thereafter.  

Whether any or all of the techniques for transferring assets to family members and other beneficiaries should be used also depends on many factors besides tax, such as whether the client can afford to or is willing to transfer assets before death. It may be disadvantageous to heirs’ income tax liabilities to transfer appreciated property that they stand to inherit after the donor’s death, since at death such assets typically receive a stepped-up basis for income tax purposes (modified for 2010 only). Therefore, if the estate appears likely to fall under the exemption amount, there may not be a tax benefit by taking advantage of a tax-free transfer during the client’s lifetime. Nonetheless, the strategies to reduce estate tax should be reviewed with clients.

This article has been excerpted from the Journal of Accountancy. Read the full article here.