Why Now is a Good Time for Advanced Estate Planning

Recently I’ve fielded many calls about advanced estate planning strategies, most likely brought on since the transfer of power in Washington to the Democratic party. President Biden’s election platform called for a vast reduction in estate and gift tax exemptions, and he apparently has the votes in Congress should he want to advance his tax agenda. 

A reduction of exemptions results in higher estate taxes paid when you die, if you have a “taxable” estate. As I write this the gift and estate tax exemption approximates $11.5 million. Should that exemption fall to $5 million or even $3 million, then more taxpayers will be caught by the tax. 

That’s why many clients consider advanced estate planning strategies to minimize transfer (gift and estate) taxes.  

What are advanced strategies? These consist of estate planning beyond your will or revocable trust, which should be anybody’s foundation. A will or trust does not, however, reduce the potential federal estate tax your estate may one day pay. 

In order to reduce your future estate tax burden, generally speaking, you need to transfer assets out of your estatewhich usually also involves the loss of control over those assets. Transferring assets can result in the loss of enjoyment of those assets, but it doesn’t have toThere are a variety of strategies that allow you to retain control and the enjoyment of transferred assets while reducing the estate tax burden.  

Advanced estate planning strategies typically entail making “completed” gifts to irrevocable trusts. An irrevocable trust, by definition, is a trust that the grantor (you) cannot change once it is signed and funded. But then again, there are back door strategies that a qualified estate planning attorney can employ that may retain significant amount of flexibility. There are dozens of traps for the unwary client and professional. 

A local trust company called me on one such example. The client created an irrevocable trust that contains powers vested in the client’s spouse and children that would serve to undermine the planning. In other words, the gifts to the trust probably aren’t “complete” as defined by our tax law, and therefore the value of the accounts and property transferred likely won’t avoid taxation. To make matters worse, the attorney who created the plan and filed the Form 709 Federal Gift Tax Return made critical mistakes on that return that will lead to complex problems when that client dies, if not sooner rectified. 

Which brings up yet another point. Federal gift and estate tax returns are not like income tax returns. They operate under an entirely different set of rules under a different chapter of the tax code. As an example, “income” is defined differently under the income tax code chapter than under the transfer (gift and estate) tax code chapter. Unfamiliarity with these rules leads to big problems, especially true when you consider the audit rate of gift and estate tax returns is multiples higher than that of income tax returns.  

It will cost this client far more (perhaps two to three times more!) to clean up the mess than what he would have paid a qualified attorney to implement a solid plan from the beginning. 

Another element of advanced estate planning involves “leveraging” your tax exemptions. If John makes a gift by transferring $1 million to his daughter Lori, then he has consumed $1 million of his gift and estate tax exemption. This isn’t good planning for those who may have larger estates. If John instead uses a strategy to transfer $1 million of assets to Lori but only consumes $500,000 of his exemption, all the better. This is how wealthy people transfer their estates while minimizing taxes. 

Family partnerships are one way to leverage gifts. The IRS frequently challenges family partnership planning. Those challenges may occur after the client’s death rather than during his lifetime. Another client came to me with convoluted family partnership planning, and further, he hadn’t adhered to partnership formalities. When reading the correspondence that he had with the attorney who put the plan in place, it was chock full of a discussion of the strategy’s advantages, but there was little mention of the disadvantages to how they intended to use the partnership.  

Again here, the federal gift tax returns filed over the course of many years compounded the problem. This is a classic case of a partnership that was ripe for challenge after the client’s death. 

So advanced estate planning can be extremely useful, if carefully strategized, implemented and maintained. Make sure you’re aware of both the advantages and disadvantages of any strategy, and that you’re talking to a professional who has the requisite experience to guide you to achieve the intended result. 


© Craig R. Hersch 2021 Learn more at

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