Estate planning 101; What every CPA should know.

• Author: Weintraub, William M.
• Position: EstatePlanning

Most clients assume their CPAs are experts in all things financial, especially as related to tax matters. They believe that if there is anything important for them to plan for, their CPAs will raise the matter. One particular area that many clients neglect, however, is estate planning. Some do not want to deal with mortality issues, others do not want to confront family issues and still others think that the estate plan they made 20 years ago is fine.

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Moreover, clients are generally unaware of the state of the estate tax laws. For example, despite repeated efforts by Congress to repeal the "death tax," no agreement has been reached. The current law is effective until the end of 2010, then we revert to a prior estate tax law that, unless modified, will result in a big increase in both the amount of wealth subject to tax and the rate of tax applied.

Clients often do not realize that the estate tax, like the gift tax and generation-skipping transfer tax, impose a tax on the transfer of wealth. While clients bemoan the amount of income tax they pay, they are often in denial over the fact that they (or their estates) will be subject to a separate tax as their assets are transferred. However, there are exceptions to the imposition of transfer taxes.

Another factor to keep in mind is that estate tax reduction planning should first consider the long-term effects on the donor's financial planning status. After all, you don't want clients making gifts they can't afford.

Enter the CPA to help clients with these matters. CPAs are usually aware of the scope of their client's assets and often know something about their client's family relationships.

The following primer on federal estate tax rules can help provide CPAs with the tools needed to conduct a meaningful conversation with their clients about their estate planning.

The Common Exceptions

Basic estate planning involves using one or more techniques to reduce the tax cost of transferring assets to family members and other beneficiaries. Which techniques to use depends upon many factors, tax and non-tax related. Also, not every tax-free transfer should be made in all circumstances. Further, estate planning honors the client's wishes as to the ultimate transfer of their property. For example, charitable giving is often employed because of the client's love for the charity, not always with intent to reduce costs.

From an income tax perspective, it may not be advantageous to make any lifetime transfers. Assets that pass to a beneficiary upon death frequently receive an increase in tax basis for income tax purposes, which can provide additional depreciation or amortization deductions when applied to depreciable or amortizable assets.

Similarly, the increased income-tax basis can reduce the subsequent gain on the sale of such assets by the beneficiary. Therefore, if the amount of the potential estate in question is small enough that there will be no estate tax, a...