Finding the Silver Lining in the Dark Cloud of Continued Uncertainty

The headline of the November 10, 2010 posting on Forbes' "Estate of Confusion" blog by Hani Sarji sums it up, "Results of Midterm Elections Do Not Bring Certainty to the Federal Estate Tax."  While uncertainty about the long-term status of the estate tax is nothing new, it appears that the uncertainty will continue as we begin the New Year.

It appears pretty clear that both political parties are intent on continuing to use the expiring Bush-era tax cuts as a political football.  To a large extent, the status of the estate tax has been left on the bench in this political football game.  

Senate Majority Leader, Harry Reid (D-NV), says he will force votes on tax cuts that are meant to contrast Democrats and Republicans on tax policy - portraying the Democrats as protecting the middle class and Republicans as protecting the wealthy.  He intends to accomplish this by bringing up for vote a bill that would extend tax cuts for families earning less than $250,000 and individuals less than $200,000 and would allow tax cuts on the wealthy to expire.  And at the same time, he plans to call for a vote on legislation offered by Senator McConnell (R-KY) to permanently extend all Bush tax cuts including a permanent repeal of the estate tax. 

It is extremely unlikely that either proposal would gain the required 60 votes in the Senate.  Whether a vote for a temporary extension of all the Bush tax cuts, which is viewed as the most likely to have a chance to pass, will come up for a vote before the end of the year is uncertain.  And if it does, will the estate tax even be addressed?  The most common proposal has been to extend the estate tax as it existed under EGTRRA in 2009.  However at the end of last year H.R. 4154 - "Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009" - which called for a permanent retention of the estate tax as it existed under EGTRRA in 2009 and repeal of the Section 1022 modified carryover in basis - narrowly passed in the House by a vote of 225 to 200 without a single Republican voting for it and 10 Democrats joining the Republicans.  It never came up for a vote in the Senate.  

It therefore appears that we will begin 2011 with a $1M unified federal estate and gift tax exemption with graduated rates from 41% to 55%, and a GST Exemption of approximately $1.34 million ($1 million adjusted for inflation) and a flat rate of 55%.  Given all the possibilities the most likely alternative may be a two-year extension of the 2009 EGTRRA flat 45% rate for federal estate, gift and GSTT with a $3.5 million federal estate tax exemption, $1 million of which can be applied to lifetime gifts and a $3.5 million GST Exemption.  

All of this means that the uncertainty that has clouded the estate planning playing field for the past eight years is likely to continue through the current Congress until we see the make-up of the 2013 Congress and administration.  While there are flexible tax planning strategies that can help deal with this uncertainty from a planning perspective, uncertainty frequently leads to inaction on the part of the client.  It is the intent of this article to examine how dealing with uncertainty can actually create viable opportunities to examine how we approach our estate planning practices.

Lessons Learned from Uncertainty under EGTRRA (2002 - 2010)

Since uncertainty as it pertains to the future of the estate tax is nothing new, let's examine what we have learned since EGTRRA came into effect.  During my past eight years with WealthCounsel, LLC, a membership organization for attorneys specializing in estate planning with over 1,200 member firms throughout the nation, I have had the opportunity to spend time with a large number of estate planning attorneys.  A number of those firms have informed me that as the estate tax exemption increased and the uncertainty as to where the estate tax was going to end up continued, their practices suffered significantly.  On the other hand, a significant number of WealthCounsel members have consistently advised me that their practices have thrived during the same time period.

While every situation is unique, there was a common theme.  Those that reported their practices had suffered or "dried up" had practices that were primarily focused on strategies designed to obtain significant wealth transfer tax savings.  Whereas, those reporting that their practices were thriving and growing emphasized on what can probably be described as a holistic approach to estate planning. FN1. That is, estate planning is not focused on just the tax savings of implementing a particular estate planning design.  Instead, estate planning is viewed as a comprehensive dynamic process to help clients define and achieve their goals for a responsible transfer of not only wealth but also values to future generations.  

Developing a Holistic Approach to Estate Planning

As I see it there are three components to a holistic approach to estate planning:

• The legal skills to competently design and draft a plan to achieve the client's goals;
• The skill and compassion to engage the client in legacy planning; and
• A systematic process to deal with changes that impact the client's estate plan.

1.    Legal Skills

It is a common misconception that value or legacy-focused estate planning is somehow a substitute for understanding and using sophisticated and advanced transfer tax planning strategies.  Nothing could be further from the truth.  In fact the formation, operation and transfer of family investment entities, whether in the form of limited partnerships or limited liability companies are not only powerful strategies from a wealth preservation perspective but are very important when it comes to preserving and promoting family values and goals for future generations.  Family investment entities provide an excellent forum for parents and their descendants to work together in truly productive and meaningful ways that are the core of true legacy planning.

The likely return to a $1 million federal estate tax exemption and maximum rates of 55% means that many of the traditional advanced transfer tax planning strategies will need to be implemented more frequently.  Many of the tools that were put on the shelf as the applicable credit amount rose under EGTRRA will have to be dusted off and put to use in successfully navigating the wealth transfer system.  These include irrevocable life insurance trusts, grantor retained annuity trusts, and charitable lead trusts.  Not only are these tools of much greater importance with a return of a $1 million applicable credit amount, but GRATs and CLTs, as well as strategies tied to sales to grantor deemed owned trusts (GDOTs) and family members are particularly attractive with the current historic low interest rates.  The Section 7520 rate for December is a historic low of 1.8% and the annual AFRs are 0.32% short-term, 1.53% mid-term and 3.53% long-term.

A holistic approach to estate planning does not involve an abandonment of the strategies involved in preserving and transferring wealth in favor of non-financial planning like values, morals and faith.  A holistic approach to estate planning means integrating the transfer of wealth with the transfer of a legacy.  And because both the future estate planning environment is uncertain and family situations are dynamic, the process must be designed to deal with the changes that are certain to occur.

2.    Legacy Planning

The key to any successful business is having customers who are not just satisfied; but having customers who are "Raving Fans" as described in the book by the same name. FN2. Unfortunately, estate planning attorneys by and large do little to create raving fans.

There was an eye opening article that appeared in Private Wealth Magazine in August 2008 based upon the results of why many wealthy clients failed to follow through on the implementation of their estate planning efforts with attorneys. FN3. This article is a must read for all estate planning attorneys.  The article is based upon two survey samples conducted in 2003 and 2006 of families having a net worth in excess of $10 million who had not implemented their estate plans after beginning the estate planning process.

Findings from the studies included the following:

• The overriding reason cited in both studies was that the estate plan did not deal with the client's goals, wants, needs and objectives;
• The attorneys had been unsuccessful in identifying their core issues but proceeded with plan development anyway;
• 82% in the 2003 study and 93% in the 2006 study said that the trust and estate lawyer made them feel uneasy; and
• 91% of the families surveyed in 2006 said that they were unable to determine if the final plan presented by their attorney was, in fact, going to help them accomplish their objectives.
  

Of even greater concern was the nonchalant attitude expressed by the attorneys for their clients' lack of follow-through.  In the 2003 study, only 13% expressed concern and the number dropped to about 7% in the 2006 study.  It is a small wonder that, of those interviewed in 2006, only 4.6% stated they would do more business with the attorney or the firm, only 3.6% stated they would refer other people to the attorney or firm, and 74.1% said they would recommend other people avoid the attorney or firm.  It would appear that there is frequently a big disconnect between what the client is looking for and how the estate planning attorney views his or her role.

In 2005 Allianz Life Insurance Company, in collaboration with Dr. Ken Dychtwald of Age Wave, created The Allianz American legacies Study to better understand the hopes, fears and motivations related to the passing of values, assets and wealth between generations. FN4.  

Key findings from the study include:

•    There are significant gaps in what baby boomers and their parents expect from, and define as, inheritance.

•    Non-financial items that parents leave behind--like ethics, morals, faith, and religion--are 10 times more important to both boomers and their parents than the financial aspects of inheritance.

•    Legacy Gaps exist because boomers and their parents are not having the in-depth conversations about legacy and inheritance in any truly productive and meaningful ways--even though they say they are having such conversations.

•    Thorough discussions about legacy planning include talking about the "four pillars" that are the core of a true legacy: values and life lessons, fulfilling final wishes and instructions, personal possessions of emotional value, and financial assets and real estate.

Scott Farnsworth, creator of SunBridge Legacy Builder Network, a service which trains advisors in a different style of estate planning, says he started the service after a client questioned him sharply about how his trusts were connected to the life he had lived.  Quoting Mr. Farnsworth, "We all have a larger wealth that goes beyond money and property. It includes the wisdom we acquired, the insights that have allowed us to make better decisions as we get older, and our heritage. When you add that in with money and property, then you pass along real wealth." FN5.

In her article, "Square Peg, Round Hole" Hanna Shaw Grove points out that many clients begin the process not knowing exactly what they want or are unable to express it clearly, hoping that the attorney will be able to guide them and help them crystallize their priorities and values. FN6. Instead the attorney too frequently spends time educating the client as to what the client needs instead of spending the time learning what it is the client wants.  The old axiom "God gave us two ears and one mouth for a reason" comes to mind.  If we are to do our jobs correctly, what must take time to learn from our clients?  How else can we make the connection between the documents we deliver and the life which the client has lived?

John A. Warnick, founder of the Purposeful Planning Institute and Family Wealth Transitions & Solutions, describes this as having a "Purposeful Conversation" with the client.  Quoting from a workshop brochure, "Given an opportunity, most clients are interested in deeper conversations around the impact of their wealth on their children, grandchildren, and favorite causes.  Purposeful Conversations provide a simple, enjoyable, and gratifying process for helping clients think deeply about the significant issues underlying their most important estate planning decisions.  From their answers, we can discern the real purposes behind their planning and we can glean the words to express their purposes, hopes, and dreams to trustees and beneficiaries.  The clients' own words and stories are the best source for the wisdom that should inform trust decision, and for the bedrock principles that should guide the trust through uncharted waters." FN7.

Once a client's core issues have been properly identified and explored, it is up to the attorney to make sure the client sees how these core issues have been addressed in the planning.  The client needs to be able to see that the planning is a reflection of themselves and not the attorney.  One way to accomplish this is to include purpose and intent statements in the documents drafted.  Interestingly, the comment to Section 801 of the Uniform Trust Code states, "This section confirms that a primary duty of a trustee is to follow the terms and purposes of the trust and to do so in good faith. Only if the terms of a trust are silent or for some reason invalid on a particular issue does this Code govern the trustee's duties."

While the trust, or other estate planning documents, should express the client's hopes, fears and dreams, the client will need help in expressing and drafting their guidelines.  I would suggest that the attorney practice drafting guidelines to cover various situations such as motivational incentives, expressions of love and statements of faith, substance abuse, spend-thrift concerns, educational desires and similar topics.  It will then be much easier to work with the client during the design phase to draft guidelines that are specific to your client.

When the focus is on transferring not only monetary wealth but also the larger wealth involved in passing on one's heritage as described by Scott Farnsworth, the creation, operation and transfer of family management and investment entities take on a whole new purpose that is separate and apart from transfer tax planning.  Planning and operation of family limited partnerships and limited liability companies provide a productive and meaningful mechanism to have the in-depth and on-going family interaction necessary to close the "Legacy Gap" described in The Allianz American Legacies Study.  Family limited partnership and limited liability planning approached from this prospective is more likely to follow the road map to success from IRS challenge as it has been developed through case law over the last 20 years.  There becomes a non-tax motivated purpose to the planning that is of greater significance than the tax motivation.  Even if the estate and generation-skipping transfer tax were repealed the planning has a significant purpose, and even greater value.  This helps not only in overcoming a challenge by the Service; it also helps deal with client reluctance due to uncertainty.

3.    Continued Engagement

The third component to a holistic approach to estate planning is to create a systematic process to deal with changes that impact the client's estate plan.  Unfortunately, the traditional estate planning process focuses on creating a plan consistent with today's laws, existing assets and the client's present family circumstances.  However, it is not until the client dies that the surviving family members must rely on the plan to work from both a tax perspective and a legacy perspective.  

The factors that impact a client's estate plan are not static; they are dynamic.  A person's life is more accurately viewed as a river flowing through time than as a nice calm lake that does not change.  Sometimes the river is moving fast at other times it is meandering with relatively calm.  When we are retained by a client to put together an estate plan we are creating a plan for an unknown point in the future at which time any number of factors may have changed since the plan was first designed and implemented.

There are three types of changes that can impact a client's estate plan.  The first are changes to the tax laws.  The second are changes to the client's financial and personal situation.  The third type of change involves changes in the state of the art of estate planning both at the attorney level as well as at the industry level.  These are the changes and modifications to the estate planning strategies we read about in articles in estate planning journals and hear of at estate planning conferences like the Heckerling Institute on Estate Planning, the Notre Dame Tax Institute, WealthCounsel's Planning for the Generations and others.  Even if the client's assets and circumstances were the same, would you and the client design and implement the same estate plan today that you would have even 5 years ago?

Interestingly, the most common practice among estate planning attorneys when it comes to dealing with changes that impact a client's estate planning is to try to shift the responsibility to the client by terminating the engagement by means of a "well drafted" disengagement letter.  The following quote from an article posted on the Estate Planning Section of the Utah Bar Association website is typical of that practice:

Upon completion of the services, the advisor should send the client a letter terminating the engagement, disavowing any obligation to keep the client informed of changes in the law that may affect the client's planning and inviting the client to contact the advisor at periodic intervals for a review and update of the client's planning. FN8.

Obviously the intent of this practice is to limit malpractice exposure by shifting responsibility to the client to deal with future changes, notwithstanding the fact that the client is least qualified to recognize when changes are needed.  Also, it is questionable whether terminating the engagement really limits malpractice for a failure to anticipate change when there was a substantial likelihood of change at the time of the engagement.  The past year presents a prime example of this fact.  Repeal of the estate tax and IRC §1022's modified step-up in basis has been on the books for 2010 since 2001.  However, very few estate plans drafting during this period of time contain any provisions for dealing with this situation should the client die with no federal estate tax and limited step-up in basis.  As a result, it is quite likely that a number of surviving spouses will lose the advantage of the additional basis increase for property acquired by surviving spouse under IRC §1022(c).  During the Heckerling Institute on Estate Planning in January 2010, a panel was asked whether in such a situation the client would have a case for malpractice against the drafting attorney?  The reply from Carlyn S. McCaffrey was "I don't know." FN9. Not to mention, what are the clients' impressions upon receiving a disengagement letter from their attorney?

As an alternative to disengagement, a growing number of attorneys have implemented client maintenance programs as a mechanism for continuing the engagement post signing.  Is this, to use a line from the movie, "The Aviator" by Leonardo DiCaprio as Howard Hughes, "the way of the future?" FN10. Ten years ago, document drafting systems were generally frowned upon by the estate planning community.  It is now generally recognized that the use of a document drafting system to assist the attorney in creating the initial draft of a client's estate planning documents will actually result in better drafted documents.  Currently, terminating the engagement is now recognized as the accepted practice.  I anticipate that over the next five to ten years, continuing the engagement by means of a systematic client maintenance program will become the accepted practice.

Continuing the engagement certainly increases the likelihood that the client's estate planning objectives will be achieved.  By continuing the engagement the attorney and the client continue to work together to deal with the three types of changes that impact the client's estate plan with the passage of time.  

Most estate plans contain components that require ongoing attention.  No matter how detailed a set of instructions a client may receive, leaving it to the client to maintain the estate plan on their own is likely to lead to failure.  Even in rather simple estate plans clients frequently neglect beneficiary designations and proper titling of assets.  In the more sophisticated estate plans involving Crummey notifications and ongoing maintenance of family investment entities, planning is even more likely to fail without ongoing attorney attention.  

A systematic client maintenance program that clearly defines not only the responsibilities on the part of the law firm but also on the part of the client should decrease malpractice claims rather than increase malpractice exposure.  Maintaining the engagement will definitely strengthen and maintain the relationship between the client and the attorney, and likely create a strong relationship with the client's beneficiaries.  There can be no question that a strong healthy attorney client relationship is the best insurance policy an attorney can have against malpractice claims.  A client maintenance program also provides the attorney with frequent opportunities to review the client's planning in light of current law, the attorney's current level of expertise and the client's current financial and personal goals.

Vincent E. Bonazzoli, a Massachusetts estate planning attorney and founder of the Client Maintenance Academy, describes a client maintenance program as follows:

A client maintenance (or membership) program is an estate planning model based on ongoing representation of the estate planning client. It goes against the traditional "transactional" model (Here are your documents --call your attorney when you want to make changes) and toward a "relationship" model. Maintenance plans vary, but at their most basic level, consist of a periodic review of estate planning documents, asset ownership, client goals and other estate planning-related matters. The main distinction between maintenance-centric and non-maintenance-centric estate planning is that maintenance-centric estate planning is a proactive engagement between the estate planning attorney and client whereby the attorney is hired (and typically paid annually) to maintain the plan and the client is obligated to continue to provide information to the attorney. The goal of the representation is not just to have "good" legal documents, but to have a plan which will succeed when the client dies. FN11.

For most attorneys the biggest barriers to implementing a client maintenance program are concerns about client acceptance and profitability.  Based upon my discussions with attorneys that have implemented successful client maintenance programs, clients are very receptive to the concept.  Clients are already familiar with the concept of frequent medical and dental check-ups and the value of preventive care in the health industry.  A client maintenance program based upon an annual "flat price" will remove one of the primary barriers preventing clients from being in communication with the attorney to provide information necessary to keep their planning up-to-date.  That is, the uncertainty of the cost and the feeling that the "meter is running" whenever the attorney or firm is contacted.  

While a client maintenance program can enhance the value of an estate plan to the client by ensuring that their plan incorporates any changes to the law and their financial and family situation, there are also some benefits for the attorney as well.  Perhaps the greatest financial benefit of a maintenance program for an attorney or firm is the increased referrals and recurring revenue the program will generate.  Mr. Bonazzoli has identified six sources of revenue that result directly from a maintenance program:

1. Annual maintenance fees generated by the annual maintenance program;

2. Additional work needed by the client apart from the original engagement or annual maintenance services;

3. Client referrals;

4. Client family members and fiduciaries becoming clients as a result of the generational planning and as a result of the Family Care Meeting™;

5. Trust administration fees from clients; and

6. Referrals from clients' other advisors after being part of the Family Care Meeting™ and seeing the maintenance program in action. FN12.

Additional benefits include increase value and marketability of your practice and satisfaction from knowing that you are doing a better job of meeting your clients' expectations.

Before implementing a client maintenance program for your own firm, examine what others are doing.  Make sure to talk to not only those that have implemented successful programs but those that have tried and failed.  It is important to understand that one-size does not fit all.  Take the time to make sure the program you decide to implement will work for you.  

Here is an outline of issues you will need to address in designing your client maintenance program:

Pricing
     What is included in the basic fee
     Pricing for what is not covered

What is covered
     Amendments - frequency, classification (simple word processing or technical)
     Restatements - Scheduled or as needed
     Phone calls
     Office conferences
     Family meetings
     Educational Workshops

Clearly defined client responsibilities
     What must the client provide and when
     Consequences of breach by client

Termination procedure
     For client's breach of responsibilities
     Attorney initiated terminations

Create systems necessary to implement and maintain the program

Summary

While uncertainty will continue, this should not come as a surprise.  After all, Heraclitus, a Greek philosopher (c. 535 BC - 475 BC) is known for his doctrine of change being central to the universe.  The only thing constant is change.

When searching the internet for insight on how to deal with uncertainty, I discovered the following suggestions:

• If you're able, try embracing uncertainty. Maybe think back to the thrill of discovering new things when you were younger - uncertainty then just meant something new and exciting to discover.
• Embrace uncertainty as an opportunity for new and exciting adventures. Life is full of experiences. Uncertainty allows you to experience more of life than you would without uncertainty.
• The best practice to follow so that you can avoid uncertainty is never leaving today's decisions or work for tomorrow. Make careful decisions as every decision you take will have a tremendous impact on your life and your future.

So as we look for a silver lining in the dark cloud of continued uncertainty, realize that all of the publicity over the uncertain status of the estate tax will create tremendous public awareness of the need to review current estate plans. FN13. It also provides an excellent opportunity to use the dramatic events that have taken place under EGTRRA since 2002 - and in particular the estate tax repeal in 2010 and Sunset in 2011 - as real life examples of why a more proactive ongoing estate planning process is needed to ensure that the planning implemented yesterday or started today will work when needed.


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1. Merriam-Webster online dictionary defines holistic as "relating to or concerned with wholes or with complete systems rather than with the analysis or, treatment of, or dissection into parts."

2. Ken Blanchard and Sheldon Bowles, Raving Fans:  A Revolutionary Approach to Customer Service William Morrow and Company, Inc., New York, 1963

3. Hanna Shaw Grove, "Square Peg, Round Hole," Private Wealth Magazine, August 8, 2008, http://www.pw-mag.com/articles/178/1/Square-Peg-Round-Hole/Page1.html

4. For complete information on The Allianz American Legacies Study visit their website, https://www.allianzlife.com/MediaCenter/AmericanLegacies.aspx.

5. Andrew Gluck, "The SunBridge Story," Financial Advisor Magazine, August 2007

6. Shaw 2

7. "The Purposeful Trust, Bringing Life and Energy to Estate Planning" a two-day workshop for estate planners and attorneys created and presented by John A. Warnick and Scott Farnsworth, http://www.purposefultrust.com/PDF/Puposeful_Trust_BrochureV6.pdf.

8. H. Reese Hansen and Stanley D. Neeleman, "Essential Estate Planning," November 16, 2009, page 22, http://www.utahbar.org/sections/estateplanning/assets/Essential_Estate_Planning_Utah_11_16_09.pdf.

9. Steve R. Akers, Ronald D. Aucutt, and Carlyn S. McCaffrey, "Charting New Paths for Estate Planners Through the Changing Landscape of Tax Laws and Regulations," The Heckerling Institute on Estate Planning, January 25-29, 2010.

10. The Aviator, dir. Martin Scorsese, perf. Leonardo DiCaprio, Warner Bros. Miramax Films, 2004

11. Vincent E. Bonazzoli, "How to Implement an Estate Planning Maintenance Program - NO KIDDING!" WealthCounsel Quarterly, April 2010, page 1, http://www.wealthcounsel.com/newsletter/Vincent-Bonazzoli-How-to-Implement-an-Estate-Planning-Maintenance-Program.pdf.

12. Vincent E. Bonazzoli 2

13. See See Estate Taxes: How to Beat The Levy That Won't Die, November 20, 2010 Wall Street Journal, online at http://online.wsj.com/article/SB10001424052748703374304575622891968168632.html?mod=WSJ_PersonalFinance_PF4.