Former IRS Attorney At Baird Offers Unique Insight On Estate Tax Reform

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Richard Behrendt, Senior Estate Planning Attorney at Baird and a former IRS attorney, shares his unique perspective in working to help high-net- worth families navigate this uncertainty and reduce their taxable estate with a few prudent steps.

"With no clear direction in the near term on where estate taxes are going, Behrendt suggests a few prudent action items that can help reduce a taxable estate and are valid regardless of future estate tax law changes."

Sometime between now and Dec. 31, 2009, Congress is expected to enact legislation to eliminate the uncertainty from the current federal estate tax system. Richard Behrendt, Senior Estate Planning Attorney at Baird and a former IRS attorney, shares his unique perspective in working to help high-net- worth families navigate this uncertainty and reduce their taxable estate with a few prudent steps.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Congress gradually increased the estate tax exemption from $1 million in 2002 to the current high of $3.5 million in 2009. On Jan. 1, 2010, the estate tax will be temporarily repealed for one year. However, the changes under EGTRRA expire on Jan. 1, 2011 and we revert back to the $1 million exemption level (see chart).

There is much speculation about what Congress will do to address the current situation:

  • If Congress takes no action, the federal estate tax is temporarily repealed for anyone dying in 2010, but comes roaring back in 2011 at a $1 million exemption and a 55% top tax rate. However, this option appears unlikely.
  • Other legislative measures aim to extend the tax, either at its current exemption and tax rate or at slightly elevated or reduced levels.
  • Others have suggested Congress may pass a one-year patch that would buy additional time to tackle estate tax reform as part of comprehensive tax reform legislation next year.

With no clear direction in the near term on where estate taxes are going, Behrendt suggests a few prudent action items that can help reduce a taxable estate and are valid regardless of future estate tax law changes:

  • Given the complexity of the law, consult with an attorney who specializes in estate planning to determine whether estate planning documents are flexible enough to be effective no matter what the level of federal estate tax exemption.
  • Consider basic techniques that reduce a taxable estate, especially if it also serves non-tax objectives. For example, make gifts to children or grandchildren to fund a college education or make annual gifts to a qualified 529 Plan. This will likely make just as much economic sense whether the level of the federal estate tax exemption is $1 million or $3.5 million. The annual gift tax exclusion, indexed for inflation, is $13,000 for 2009.
  • For larger estates, use wealth transfer techniques that take advantage of today's “perfect storm” – a combination of depressed asset valuation (equities and real property) and historically low interest rates. Some of these techniques include: grantor retained annuity trusts (GRATs), installment sales to grantor trusts (ISGTs), and low-interest loans to family members.
  • Depending on age and health, life insurance may offer a tax-efficient strategy for increasing the amount that can be passed to heirs. By owning life insurance in an irrevocable life insurance trust (ILIT), the insured is able to leave a legacy to heirs that passes without being subject to either estate or income taxation.

About Rich Behrendt
Behrendt joined Baird in 2006, where he serves as a general estate planning resource for Baird Financial Advisors and their higher net worth clients. Prior to joining Baird, Behrendt spent twelve years working as an Estate Tax Attorney with the Internal Revenue Service auditing estate, gift, and fiduciary income tax returns. He is a member of the State Bar of Wisconsin, the Milwaukee Bar Association, and the Milwaukee Estate Planning Forum, as well as an Adjunct Professor of Law at the University of Wisconsin Law School where he teaches a course in advanced estate planning. Behrendt earned his law degree from Brooklyn Law School in 1994.

About Baird
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has more than 2,400 associates serving the needs of individual, corporate, institutional and municipal clients. Baird oversees and manages client assets of more than $73 billion. Committed to being a great place to work, Baird ranked number 14 on FORTUNE’s “100 Best Companies to Work For” in 2009 – its sixth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s private equity operations. For more information, please visit Baird’s Web site at http://www.rwbaird.com.

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