Editor's note: Although we don't frequently post articlesaimed at advisors with individual clients, we thought theinformation in this article would still be useful to somereaders.

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While the GOP tax reform framework clearly calls for acomplete repeal of both the estate tax and the generation skippingtransfer (GST) tax, the lack of details offered by the plan has created a confusing planningenvironment for clients—especially high net worth clients.

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If one thing is certain, it is that the framework creates an eraof uncertainty for clients whose estates would be valued above theestate tax exemption amount (currently $5.49 million perindividual).

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Despite the fact that the administration has made its support ofestate tax repeal clear, it is far from certain what shape futurelegislation will take and whether an estate tax repeal would evenbe permanent—meaning that developing flexible strategies tominimize transfer taxes remains just as important as ever.

Unanswered questions and possible answers

The tax reform framework proposal would eliminate the estate taxand the GST tax, but makes no mention of the current gift taxstructure.

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Under current law, clients may transfer up to $14,000 per yearto each donee during life without triggering the gift tax (spousesmay elect split gift treatment so that the $14,000 amount isdoubled to $28,000 per married couple).

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Lifetime gifts above and beyond this annual gift tax exclusionamount are taxed at the 40 percent gift tax rate.

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Although the framework does not address the gift tax, it iswidely expected that some form of the gift tax will remain in orderto prevent income tax evasion (which, for example, could beaccomplished by making lifetime gifts of property to family membersin lower income tax brackets).

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The tax reform framework also makes no mention of the currentlyexisting “step up” in basis that applies to property transferred atdeath. These rules adjust the basis of property transferred atdeath so that it equals the fair market value of the property atthe date of death (i.e., the property value used for estate taxpurposes), which allows heirs to avoid paying capital gains taxeson the appreciation in property value that occurred before theyeventually transfer the property.

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If the estate tax is eliminated, it is possible that thestepped-up basis provisions would also be eliminated—essentiallyimplementing a carryover basis regime that would apply capitalgains tax rules to property transferred at death.

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Others predict that a limited step up in basis could be createdto shield only property valued under a certain dollar thresholdfrom capital gains taxation.

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Potential planning options for transfer tax uncertainty

Because of the uncertainties surrounding potential modificationsto the current transfer tax regime, flexibility in planning forboth lifetime and testamentary gifts becomes especiallyimportant. Flexibility is also key to ensuring that clientsare not stuck with an undesirable estate plan in the event that theestate tax is repealed and eventually reinstated by a subsequentadministration.

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As a result, clients should consider giving independent trusteespower to make changes to the allocation of trust assets (forexample, a power of substitution to allow the trustee to exchangetrust assets for assets of equal value) in response to changes inthe estate and GST tax rules that occur over time. This canallow the client to avoid an unfavorable tax outcome if the rulesgoverning tax basis of assets transferred at death are changed.

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Powers of appointment can also be useful in allowing for changesin beneficiary designations or trust terms. Similarly,certain states (Delaware, for example) have passed modificationrules that can allow for more substantial modifications ofirrevocable trusts with the consent of certain parties.

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Generally, because of uncertainty in the gift tax area, clientsshould continue to be advised to avoid large lifetime gifts toavoid attracting substantial gift tax liability.

Maintain flexibility

Although clients may be tempted to rely upon the possibility ofcomplete estate tax repeal, it’s important that they be remindedthat the rules governing transfer taxes change frequently (evenso-called permanent rules can be repealed) so that maintainingflexibility is key to minimizing transfer tax liability in the longrun.

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For previous coverage of transfer tax planning strategies inAdvisor’s Journal and for in-depth analysis of the federal estatetax, become a subscriber with National Underwriter AdvancedMarkets. Subscriber questions and comments are alwayswelcome at our blog, AdvisorFYI, at Tax FactsOnline or contact the Panel of Experts.

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