Two weeks ago I left you with a number of questions about the recent Estate Tax legislation.  To my mind, the most important of those was:  What should clients be doing now to position themselves for a future repeal or reduction of the $5mil exemption?  Today, we answer that question.

The easy answer is give, give, give, and that certainly applies.  The question is how?  Nothing has changed about the techniques we would normally utilize to achieve some sort of discounting (FLP's etc.).  The concept of gifting away appreciating assets is certainly not new.  So if those haven't changed, what has?  Two things:  timing, and management of the assets once they are outside the estate.

The timing issue is compelling, as the 24 month window before the game changes again will slam shut before you know it.  If your client happens to have an extra $10 or $20 mil lying around this is kind of a no brainer.  Of course, if they are not ready to give away everything, we need to be a little more sophisticated.  Let's use a client who can give away $5 mil, but needs the rest of their estate for income during their lifetime.  Seems simple enough, but follow this fact pattern:

• Married couple gifts $5 mil to their ILIT using the new increased exemption
• The exemption is rolled back to $3.5 mil in 2013

How much exemption remains? 

That depends.  If we are talking about joint property and they allocated $2.5 mil to each spouse, they now have $2mil left.  If, however, the client used separate property and they allocated the entire gift to one spouse, they have $3.5 mil left.  Same amount gifted, much better position if there is repeal or reduction in the future.  No matter what other technique for discounting or other planning goal, this one, simple fact can pass an additional $1.5 mil free of estate tax just based on the ownership of the gifted asset.  Think of it as a way of harvesting the current $5 mil exemption.

From there it is really a matter of how to best manage the gifted asset?  I still think using life insurance as part of the portfolio makes a ton of sense (for more on that, click through to the Weekly Rant Archive in the left hand column and re-read the B Trust series).  If the client is gifting to an ILIT we may have an entirely unique scenario from some of the recent conventional wisdom about not accumulating any cash to speak of in a trust.  The ability to integrate life insurance into the overall portfolio design will be a critical skill going forward. 

I was asked twice this week about "the new hot product" for 2011.  While there may not be much new coming from the carriers, I would be talking about this kind of strategy with any high net worth client over the next few weeks and months.  It's on their mind.  Time to strike while the iron's hot!