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Ghosts Past and Future Affecting the Estate Tax Practice

Posted on September 7, 2016 by van den Berg, DavidSagalow, Zoe

One presidential candidate wants to subject more people to the estate tax, another wants to wipe it off the books, and recent IRS guidance threatens to eliminate a long-standing estate tax planning technique -- making for a turbulent year for an estate tax profession that has already seen significant changes over the last 10 years thanks to rising exemption levels.

Estate tax professionals who spoke with Tax Analysts said they have been dealing with a changing industry for some time, thanks largely to changes in law that have left fewer people subject to the tax.

There were just over 5,000 federal estate tax returns filed in 2014, the latest year for which the IRS Statistics of Income (SOI) division has made data available. That number represents a general decline from a 10-year high of almost 23,000 in 2006. The drop is largely due to a rising exemption level below which estates needn't pay the tax -- $2 million in 2006 versus $5.34 million in 2014.

But for some estate tax practitioners, it's the political environment, not necessarily the dwindling number of taxpayers subject to it, that presents more volatility for estate tax practice groups.

Steven G. Siegel, president of consulting firm the Siegel Group in Morristown, New Jersey, said the political uncertainty due to the candidates' "very disparate plans" is the industry's biggest challenge right now. Republican presidential nominee Donald Trump is calling for outright repeal of the tax, whereas Democratic nominee Hillary Clinton is proposing to roll back the exemption to its 2009 level of $3.5 million.

The political viability of enacting either plan is subject to question. Dennis I. Belcher of McGuire Woods LLP said the chances of the estate tax system staying the same are probably at least 50 percent. Two factors make repeal unlikely, he said -- sentiment against the country's wealthiest people and a need for revenue. Clinton's plan to reduce the exemption has more of a chance of getting through Congress, but that has its difficulties, too, Belcher said.

But should Trump win the election and succeed in repealing the estate tax, "obviously estate planning focusing on taxes would not be necessary," Siegel said.

"There would still be income tax concerns in planning, but not 'death tax' concerns," he said, referring to the estate tax's sometimes politically charged nickname. The Trump campaign says his tax plan, including the estate tax repeal, is revenue neutral and that people now subject to the tax "earned and saved that money for [their] family, not the government."

Clinton wants to return the estate tax to 2009 levels, which would mean lowering the exemption threshold to $3.5 million and raising the rate to 45 percent, according to a Tax Foundation analysis of estate tax proposals by leading presidential candidates, which at the time included Sen. Bernie Sanders, I-Vt. A Clinton campaign document says her plan would only affect four of every 1,000 estates in the country.

While Siegel sees the candidate proposals and the resulting uncertainty as the largest challenge facing estate tax practice groups, other practitioners differed in their projections of what could happen if either plan became reality.

While a President Trump fully repealing the estate tax would mean "there probably won't be as much need for estate planners," said James F. Hogan, a managing director with Andersen Tax, he said he wasn't sure exactly the level of industry attrition the repeal plan would cause.

Richard L. Dees of McDermott Will & Emery in Chicago, said there would be a shift in tax work in the event that Trump repeals the estate tax. But Dees noted the tax's lapse in 2010 (after lawmakers allowed it to expire), saying that until repeal lasts for more than a year, "people will be worried about it coming back or worried about what its lost revenue is being replaced by."

And apart from that, there would be tax work for estate tax practitioners as the details of whatever plan is enacted are settled, Dees said. "There's a lot of estate planning that's been done based on the existence of an estate or a generation-skipping tax that may be less clear . . . when it's revealed what was intended by the parties," he said. "So there's going to be a lot of time involved in settling out how to interpret those things, perhaps by the courts."

Just as repeal of the estate tax under a Trump presidency wouldn't mean the end of estate tax practice, restoration of the exemption to 2009 levels under a Clinton plan wouldn't mean a sudden influx of people into the profession, according to Elizabeth R. Glasgow of Venable LLP in Los Angeles. In most cases, that group of taxpayers now under the exemption tax threshold likely already had a plan in place from when the exemption was lower a few years ago.

"In a lot of cases those types of individuals may already have estate plans that would just need to be tweaked and that were structured at a time when they themselves were subject to the estate tax," she said.

Robert S. Keebler of Keebler & Associates, a tax advisory and accounting firm in Green Bay, Wisconsin, said the lowered exemption "will certainly increase the number of people that need to do estate planning."

"And the profession will react to that probably with ease because there's still enough [of a] skill set out there from when the exemption was only $2 million and [$3.5 million] not that long ago," Keebler said.

The election proposals aren't the only development that estate tax practitioners found themselves dealing with in 2016. In March the IRS released temporary (T.D. 9757) and proposed (REG-127923-15) basis consistency reporting regulations. Sections 1014(f) and 6035, enacted as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41), mandate that the basis of some inherited property be consistent with the property's value for federal estate tax purposes, and require that the value of property be reported on Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return."

The IRS also released proposed regulations in August under section 2704 (REG-163113-02) designed to close a tax preference on valuing interests in corporations and partnerships for estate, gift, and generation-skipping tax purposes. The regs target taxpayers who put valuable property into entities such as family-owned partnerships or corporations just for the purpose of reducing the value in the property, a tactic a Treasury official described as one that "taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposes."

"The family business regulations will give us a real big shot in the arm for the next four or five months," Keebler said.

Belcher said the proposed regs are as significant for practitioners as anything since 2012 when the gift exemption threshold was scheduled to go to $1 million and at the last moment Congress pushed it up to $5 million. Practitioners will be "very, very busy" until the final regulations drop, he said. And "after that, practitioners will be busy in planning how to get around those rules or to take advantage of them," he said.

Guidance affecting charitable remainder annuity trusts was also released in August (Rev. Proc 2016-42, 2016-34 IRB 269), and the IRS is promising more guidance soon that will affect estate tax practice. Also pending are regulations under section 1022 providing guidance to recipients of property acquired from people who died in 2010, and final regs under section 2032 to clarify and update rules under reg. section 20.2032-1 "regarding whether certain transactions between an estate and related entity's trust and retirement accounts will be treated as distributions or dispositions for purposes of the alternate valuation date," an IRS official said during a May conference in Washington, where she discussed several pending projects.

A Look at the Numbers

The flurry of regulations follows years of exemption level increases, from $1.5 million in 2005 to its current $5.45 million. And while the overall numbers of estate tax returns filed are subject to the simple timing of death, as well as the nine months allotted to estates between the time of death and the filing of Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return," the rising exemption level has led to a dramatic decrease in estate returns over the last 10 years.

In 2014 about a quarter of the number of estates filed estate tax returns as did 10 years earlier, according to SOI's estimates. The revenue the federal government has gained from the estate tax has also decreased -- from almost $21.7 billion in 2005 to just under $16.4 billion in 2014. State-level volatility has varied: California has had its federal estate tax returns drop from nearly 4,500 in 2006 to just over 1,000 in 2014; states like Kansas have seen a similar percentage drop, but had far fewer estate tax returns to begin with (191 in 2006 versus 44 in 2014).



The increase in the exemption level, and the corresponding drop in estate returns, means there is less opportunity in estate tax practice than there was 10 or 15 years ago, Hogan said.

But even as that's happened, the number of practitioners hasn't changed much, according to Siegel. "I don't think there's been a big decline in the number of people doing it," he said.

The bigger change has come in the type of work done, Siegel said August 19 in remarks at the National Society of Accountants conference in Tampa, Florida. "Income tax planning is the new estate planning," he said.

Keebler said his practice has seen an increase in gift tax activity, and while the SOI data reveal fluctuations in the number of gift tax returns over the 2005-2014 period, they have stayed relatively stable in comparison to the estate tax numbers.

Estate tax return filings have dropped about 77 percent from their recent peak in 2006, but the number of gift tax return filings has more than recovered from a drop of about 25 percent over about the same time period. There were almost 277,000 gift returns in 2005, a low of almost 208,000 returns in 2011, and almost 335,000 returns in 2014, according to statistics available in the annual IRS data books from 2005 to 2014. (The Data Book uses fiscal years compared with the calendar years in the SOI estate data cited above, but the overall trends are still demonstrable.)

In describing his experience with increased gift tax activity, Keebler said, "I think what that spells out is with the higher exemptions people are attempting to move difficult assets during lifetime instead of waiting [until] death." He added, "There's also a tremendous awareness of asset protection which might be driving some of the gifting."

Belcher noted the massive increase in the gift tax exemption, from $1 million in 2010 to $5 million in 2011, as a factor in the rise in gift return filings.

"So only a few clients made gifts in 2011 (which were filed in 2012) but a lot of clients made gifts in 2012 because of the increased gift tax exemption to $5,000,000 and those returns were filed in 2013," he said. "Many of those clients who did not make gifts in 2012 made gifts in 2013 and filed gift tax returns in 2014."

Keebler said the higher gift exemption opened up considerable opportunities for planning. "The higher gift tax exemption has created many opportunities for families to fund dynastic and other trusts," he said.

People haven't been leaving the estate tax practice, particularly because the practice requires so much specialized knowledge that to give it up would be a major professional change, Glasgow said. But she said practitioners face pressure to offer additional services.

"For example, they may specialize, in addition to estate planning, in family law issues or in elder care issues," Glasgow said, adding that elder care issues are becoming an increasingly important part of an estate planning practice.

Describing the state-by-state experience, Dees said that while estate planning practice isn't stable anywhere, greater wealth can be found where greater concentrations of people can be found. "A house practically puts you in a taxable estate in California," he said. "That's not going to happen in Alabama."

CPA Steven J. Hanson contrasted the California experience with his own at Piehl, Hanson & Beckman PA in Minnesota. His firm has 10 CPAs and offices in Coakto and Hutchinson, and files about a dozen federal estate tax returns a year, he said, but it does more state-level estate tax work in Minnesota, which has a $1.6 million credit and exceptions for family farms and businesses.

"The fact of the matter is if you lived in a Naples, Florida, you might have an awful lot more millionaires than you do in Hutchinson, Minnesota," he said. "Geography makes a big difference. Although we certainly have some folks that do quite well, that have certainly accumulated some wealth."

There are other factors that can determine how lucrative an estate practice can be, however. Belcher described the variance that can occur not only state to state but city to city.

"There are clients who need the services of a competent estate planning lawyer with the type and level of service depending on the demographic makeup of the citizens," Belcher said. "There may be more wealth in Silicon Valley than in Palm Beach [Florida], but the wealth in Silicon Valley is owned by younger individuals who don't necessarily think of estate planning as a necessity."

The Road Ahead

Regardless of where they work, estate tax practitioners have seen the effects of external forces on their profession before. The Urban-Brookings Tax Policy Center, in its "Briefing Book" about the federal tax system, notes that the federal estate and gift taxes, including the generation-skipping tax, "have changed virtually every year since 2001" and that many lawmakers have advocated their repeal.

So what's different now? The country is getting older, for one. According to the Census Bureau, the population aged 65 and older is expected to be 83.7 million in 2050, nearly double its estimated 2012 number of 43.1 million.

"You've got people of the baby boom generation turning age 50 I believe at the rate of 12,000 per day," Siegel told Tax Analysts. "And as a result, a lot of people need to address issues of estate planning whether they're going to be taxpayers or not by getting their affairs in order for their families."

There is a real concern that there won't be enough estate planners to accommodate taxpayer needs given the sheer number of baby boomers compared with the number of estate planners at all different service levels, whether for high-net-worth or "nontaxable but family-motivated estates," Glasgow said.

Estate practitioners are aging, too, Keebler said. "There are many older practitioners with a high skill level and that allows the work to stay in the firms that have been servicing the client for many years," he said. "When that group of practitioners retires, it is very likely that general practice firms will send the work to more boutique practices."

For Ruth H. Godfrey, an enrolled agent with Godfrey & Hardy Tax & Business Services Inc. in Upland, California, an infusion of youth isn't necessarily the answer to the pending talent drain. Recent college graduates usually go work for one of the larger accounting firms, she said, and estate tax practice groups make a mistake when looking to them to fill openings. They should instead look at "the second-career individual who's not that old necessarily but has been forced out for one reason or another from the job market they are used to and are going to some of the technical, vocational universities," she said, adding that training programs could bring them up to speed.

For those who do go into it, the work offers "more of a human connection" -- practitioners both help families meet their goals and deal with the technical work that all practitioners do, Hogan said.

Dees said that as someone who has extensive experience in the field, he "can't imagine doing anything else." But younger practitioners are less likely to see the attraction.

"It's not a sexy thing for young lawyers to do," Dees said.