Morningstar Advisor - October/November 2010 - 32

Spotlight

Prepare for the Worst
By Laura Lallos

With an uncertain tax situation, clients should focus on what they can control. Here are estate-planning moves clients should consider before the year ends.

Estate attorneys are trained to prepare for every contingency. But how do you plan for the unimaginable? Who would have predicted a U.S. tax system with no estate tax at all—and no certainty about what the estate tax will look like in 2011? The legislative squabbling that keeps taxpayers mired in uncertainty stems back to the Economic Growth and Tax Relief Reconciliation Act of 2001. For budgetary reasons, the legislation was written to sunset at the end of 2010. If no new tax law is passed by the end of the year, income and estate tax rates will revert back to 2001 levels. The law cut income taxes through 2010 and also gradually reduced the estate tax, dropping it to 45% after a $3.5 million exclusion in 2009, then repealing it outright for 2010. Few observers counted on the estate tax actually expiring this year—legislators were expected to hammer out a reduction by the end of 2009 that both sides of the aisle would find palatable. But Congress couldn’t devise a compromise. And so, on Jan. 1, the unimaginable happened: Congress allowed the estate tax to expire. Three cheers, right? Ben Neiburger, an attorney in Elmhurst, Ill., expresses a common sentiment: “I find it shocking that guys like George Steinbrenner died this year with

$10 billion in assets, and the government won’t collect. It’s unbelievable!” Even those who cheered the demise of the “death tax” have been wary: Will it be resuscitated in time to take effect in 2010? At this late stage in the year, a retroactively imposed estate tax is unlikely. Heirs of estates such as Steinbrenner’s would have ample reason, and means, to drag a challenge through the courts for years. Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., are making a bipartisan effort to reinstate the estate tax at a 35% rate, with an eventual exemption of $5 million. Any legislative attempt to renew George W. Bush’s tax cuts for the middle class might also include an estate-tax modification along similar lines. As 2010 draws to a close, however, it is increasingly likely that Congressional inaction will produce another scenario that no one would have anticipated just a year ago: The estate tax will revert to the hefty 2001 rate of 55%, with a mere $1 million exemption. “Common sense would suggest that it is not likely, but the repeated inability of Congress to act and make a decision gives me pause,” says Thomas Abendroth, an estate attorney with Schiff Hardin in Chicago. “You have to

contemplate that there is a decent chance they may not get anything done before next year.” The best strategy that financial advisors and attorneys can pursue now is to prepare their clients for the worst. On the bright side, some clients can also seize opportunities created by the gaping holes in the tax law for 2010.
Give More Away Now

“One of the frustrating parts about all this is that there aren’t a lot of special things this year that most people can do to anticipate a higher estate tax, other than die,” Abendroth says with a laugh. He reminds clients who don’t intend to take that option not to abandon the usual estate-reduction methods. They should continue to use their unlimited annual gift-tax exclusion, which permits gifts of up to $13,000 per recipient in 2010. Some clients might even want to use up their $1 million lifetime gift exemption now. They should also consider paying education and medical expenses for children and grandchildren, because payments made directly to schools and health-care providers are not considered gifts and don’t eat into the lifetime exemption. Colby Green, a sole practitioner in River Forest, Ill., recommends that clients give assets that

32 Morningstar Advisor October/November 2010



Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010

Morningstar Advisor - October/November 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What estate-planning strategies are you and your clients doing before the end of the year?
Next Steps for ETFs
Investment Briefs
Taking It Personal
A Model Practice
Find the Right Fit
Will REITs Put You in the Penthouse?
Prepare for the Worst
Tips for Common Family Situations
Might Makes Right
Built to Last
Four Picks for the Present
Tactical Strategies Miss Their Mark
Time to Hop on the Commodities Bandwagon?
Retailers Balance Caution and Catalysts
In Search of … Recession Survivors
Turmoil-Tested Small-Cap Funds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Rise in Second Quarter
The Third Rail
Morningstar Advisor - October/November 2010 - Intro
Morningstar Advisor - October/November 2010 - Morningstar Advisor - October/November 2010
Morningstar Advisor - October/November 2010 - Cover2
Morningstar Advisor - October/November 2010 - 1
Morningstar Advisor - October/November 2010 - 2
Morningstar Advisor - October/November 2010 - Contents
Morningstar Advisor - October/November 2010 - 4
Morningstar Advisor - October/November 2010 - 5
Morningstar Advisor - October/November 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2010 - 7
Morningstar Advisor - October/November 2010 - Contributors
Morningstar Advisor - October/November 2010 - Letter From the Editor
Morningstar Advisor - October/November 2010 - What estate-planning strategies are you and your clients doing before the end of the year?
Morningstar Advisor - October/November 2010 - 11
Morningstar Advisor - October/November 2010 - Next Steps for ETFs
Morningstar Advisor - October/November 2010 - 13
Morningstar Advisor - October/November 2010 - Investment Briefs
Morningstar Advisor - October/November 2010 - 15
Morningstar Advisor - October/November 2010 - 16
Morningstar Advisor - October/November 2010 - 17
Morningstar Advisor - October/November 2010 - Taking It Personal
Morningstar Advisor - October/November 2010 - 19
Morningstar Advisor - October/November 2010 - A Model Practice
Morningstar Advisor - October/November 2010 - 21
Morningstar Advisor - October/November 2010 - Find the Right Fit
Morningstar Advisor - October/November 2010 - 23
Morningstar Advisor - October/November 2010 - 24
Morningstar Advisor - October/November 2010 - 25
Morningstar Advisor - October/November 2010 - Will REITs Put You in the Penthouse?
Morningstar Advisor - October/November 2010 - 27
Morningstar Advisor - October/November 2010 - 28
Morningstar Advisor - October/November 2010 - 29
Morningstar Advisor - October/November 2010 - 30
Morningstar Advisor - October/November 2010 - 31
Morningstar Advisor - October/November 2010 - Prepare for the Worst
Morningstar Advisor - October/November 2010 - 33
Morningstar Advisor - October/November 2010 - 34
Morningstar Advisor - October/November 2010 - 35
Morningstar Advisor - October/November 2010 - Tips for Common Family Situations
Morningstar Advisor - October/November 2010 - 37
Morningstar Advisor - October/November 2010 - Might Makes Right
Morningstar Advisor - October/November 2010 - 39
Morningstar Advisor - October/November 2010 - 40
Morningstar Advisor - October/November 2010 - 41
Morningstar Advisor - October/November 2010 - 42
Morningstar Advisor - October/November 2010 - 43
Morningstar Advisor - October/November 2010 - 44
Morningstar Advisor - October/November 2010 - 45
Morningstar Advisor - October/November 2010 - Built to Last
Morningstar Advisor - October/November 2010 - 47
Morningstar Advisor - October/November 2010 - 48
Morningstar Advisor - October/November 2010 - 49
Morningstar Advisor - October/November 2010 - Four Picks for the Present
Morningstar Advisor - October/November 2010 - 51
Morningstar Advisor - October/November 2010 - Tactical Strategies Miss Their Mark
Morningstar Advisor - October/November 2010 - 53
Morningstar Advisor - October/November 2010 - 54
Morningstar Advisor - October/November 2010 - 55
Morningstar Advisor - October/November 2010 - 56
Morningstar Advisor - October/November 2010 - 57
Morningstar Advisor - October/November 2010 - Time to Hop on the Commodities Bandwagon?
Morningstar Advisor - October/November 2010 - 59
Morningstar Advisor - October/November 2010 - 60
Morningstar Advisor - October/November 2010 - Retailers Balance Caution and Catalysts
Morningstar Advisor - October/November 2010 - 62
Morningstar Advisor - October/November 2010 - 63
Morningstar Advisor - October/November 2010 - 64
Morningstar Advisor - October/November 2010 - 65
Morningstar Advisor - October/November 2010 - In Search of … Recession Survivors
Morningstar Advisor - October/November 2010 - 67
Morningstar Advisor - October/November 2010 - Turmoil-Tested Small-Cap Funds
Morningstar Advisor - October/November 2010 - 69
Morningstar Advisor - October/November 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2010 - 71
Morningstar Advisor - October/November 2010 - 72
Morningstar Advisor - October/November 2010 - 73
Morningstar Advisor - October/November 2010 - 50 Most Popular ETFs
Morningstar Advisor - October/November 2010 - 75
Morningstar Advisor - October/November 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - October/November 2010 - 77
Morningstar Advisor - October/November 2010 - VA Sales Rise in Second Quarter
Morningstar Advisor - October/November 2010 - 79
Morningstar Advisor - October/November 2010 - The Third Rail
Morningstar Advisor - October/November 2010 - Cover3
Morningstar Advisor - October/November 2010 - Cover4
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