The year-end scramble is on. Planners and estate lawyers around the country are facing an unprecedented rush of clients seeking to transfer wealth to their descendants because Bush-era tax exemptions may expire at year's end.
And planners who lack familiarity about estate laws could wind up inadvertently keeping clients from taking advantage of a rapidly closing window that may never reopen, several lawyers say.
"The wealth we see being transferred this year could be 20-fold [that of] any prior year," says Martin Shenkman, an estate planning attorney in Paramus, N.J., who has begun turning away new clients for the first time in his career.
"In 30 years of doing this, I've never seen this many people of means trying to plan in such a short time frame," he adds. "People ... are panicking. Never have I seen the system of estate planners, the accountants, the lawyers and the appraisers so backlogged that they are refusing to take more work on."
A primary reason for the urgency: The combined estate and gift tax exemption, which currently stands at $5.12 million, is scheduled to drop to $1 million next year unless lawmakers act. The change is commonly understood by clients, Shenkman and others say, and has generated a flurry of phone calls and activity.
Shenkman is hardly alone. Steve Oshins, a Las Vegas-based estate lawyer with Oshins & Associates, says he has doubled the number of new clients he brings in every month, to as many as 40 from 15 to 20 as the year-end deadline has grown closer.
Tim Lee, managing director at Monument Wealth Management in Alexandria, Va., echoes their comments, but also highlights a complicating factor. "It's late to get real estate appraised and assets appraised and titles transferred" - a necessary component of wealth transfer, especially when assets are being placed in a trust. "We're down to the wire now, where you've probably got 30 days or less to get documents drafted and rushed through," Lee says.
DYNASTY TRUST CRACKDOWN
That points to another, less well understood issue that's complicating the end-of-year frenzy: an expected Obama administration clampdown on dynasty trusts.
Currently, high-net-worth investors can place assets into dynasty trusts that, over time, will keep those assets out of the tax system for hundreds of years - or even in perpetuity, depending on the rules of the states in which the trusts are created.
Now, Shenkman says, with the administration and Congress in discussions to resolve the so-called fiscal cliff, the White House is seeking to limit the time frame over which assets may be protected, to just 90 years from the date when a trust is created. If this change becomes law, he says, it would mark a historic break from previous trust laws that have allowed wealthy dynasties to pass down assets, tax-free, to their heirs in perpetuity.
Such a change would likely affect the rules for such trusts going forward, but anything placed in trust by the end of this year would almost certainly remain protected, planners and estate lawyers say.
In particular, this has consequences for clients who want to pass on family-owned businesses to their descendants. If those businesses can't be shielded from estate taxes in a trust, they may need to be sold upon the death of an owner or parent. Often, say planners, such a sale is the only way to satisfy tax bills that can be half of the value of the business.
HUNTING FOR APPRAISERS
To speed as many privately held businesses and other assets into dynasty trusts as possible, planners and lawyers are scrambling to find appraisers still able to asses the values of those concerns in the remaining weeks of the year. (See the sidebar on page 48, Emergency Workarounds, for what to do if you can't get a dynasty trust done this year.)
Even when passing along cash or liquid assets to heirs, many wealthy clients don't understand the risks entailed with not protecting it in a trust. "The worst thing is when I hear a client say, 'I just want to make a simple gift to my child,'Ã¢â‚¬â°" Shenkman says.
Under the lure of "simplicity," he and others say, both planners and clients may fail to understand some of the critical benefits offered by placing assets in a dynasty trust. These benefits include protections against the loss of assets in a divorce or from creditors, as well as protection from estate taxes.
"If someone makes a simple gift to a child who then loses it in a divorce or loses half of it to estate taxes, that is a waste," Shenkman says.
Right now, much of the workload is being caused by the rush to place assets in protected trusts. Overworked appraisers are being stretched to their limits in trying to value a whole host of difficult-to-appraise assets - from privately held companies to real estate to ownership stakes in non-traditional holdings.
Despite a large staff, Oshins says he could end up having to turn clients away. "We are getting to the point where I can take new clients only when I can do a simple asset gift," Oshins says.
Because dynasty trusts are an Oshins specialty, the firm actually has customized trusts for most of its regular clients, says Richard Oshins, an estate lawyer at the firm (and Steve Oshins' father). The firm is well-positioned to do this work because it's based in Nevada, one of several states with the most protective laws regarding dynasty trusts.
Trusts set up in Nevada, they say, will protect assets for 365 years following the death of a grantor's youngest living descendant at the time a trust is created. (Shenkman, for example, often asks the Oshins to set up Nevada trusts for his clients.) Other states with optimal dynasty trust laws include Alaska, Delaware and South Dakota, where trusts may be set up that last in perpetuity, the Oshins say.
Another challenge for planners: Some clients simply took too long to understand the urgency of making changes this year.
In Virginia, many of Tim Lee's clients are people with assets ranging from $5 million to $50 million in the value of companies they founded and own, he said. If they fail to place those companies into trusts, their heirs run the risk of having to sell the companies to satisfy the roughly 50% estate tax bills to the IRS, Lee says.
"Most of the people I know who are in that bucket have two views of their wealth. One, I need to make my future comfortable, and two, I need to know my wealth will be passed to future generations in a way that reduces tax liability," Lee says. "We've had discussions with pretty much all of our clients about it this year."
Some of the most difficult clients to engage are those who still think of themselves as so young that they aren't yet thinking about estate planning.
Lee says he took one 45-year-old client out to lunch repeatedly to explain to him, in great detail, why he should place his current wealth into trust now.
Lee urged the client - who had a net worth of $30 million to $40 million, largely in a business he owns - to put a gift of about $15 million into a family limited liability corporation. The LLC would act as a "unifying tool" to bring a lot of disparate assets, in real estate, hedge funds and other instruments, into one basket. Then, the LLC would go into a dynasty trust.
The nearing deadline finally pushed the client to sign the trust into effect on Sept. 29. "We've been running since then to get all the documents in place," Lee says.
Ann Marsh is senior editor and West Coast bureau chief of Financial Planning.
Several experts say there are several workaround strategies available to clients and their planners to take advantage of the deadline to entrust assets under current laws.If clients lack the time to fully appraise assets, they could take some of the following steps now, according to Las Vegas estate lawyer Steve Oshins.* As a stopgap measure, place liquid assets that do not have a valuation requirement into a trust. The trust can then include a power for the client to swap out those assets later in exchange for a share or percentage of another asset that must still be valued.* Tailoring a document (sometimes called an assignment) to state the client's intention to transfer a specified dollar amount of an asset into a dynasty trust, instead of a fixed percentage interest in that asset or entity, may allow the client to avoid the tax risk of transferring more than the $5.12 million exemption. This strategy also permits the client to await an appraiser's valuation of that asset at a later date. It accomplishes the asset transfer for tax purposes now, but allows the client the freedom of determining how many shares, or what percentage, of an asset ultimately will be placed into the trust. However, Oshins cautions, clients need to get an appraisal as soon as possible after creating the assignment in order not to raise red flags with the IRS. Creating the assignment document itself is not complicated, Oshins says. "I could dictate it to you over the phone and you could say I hereby assign $5 million in voting interest [in a certain company] to be transferred on this date to ABC irrevocable trust," he says. "That's how simple it is." But don't forget the notary.* Have an estate lawyer create a simpler trust into which assets will be placed this year, but include a provision empowering a friend as trustee to make changes to the trust's structure later. Doing so will enable a law firm to get assets into a trust rapidly and then take the necessary time in the new year, after some of the current workload has abated, to further customize a trust to a client's needs, according to Oshins.