Reuters Money

When you think about what the outcome of the highly political battle over the estate tax might be, just remember: Last year’s common wisdom that lawmakers would not allow the estate tax to expire for one year proved wrong. Even after the deaths of billionaires including George Steinbrenner; Janet Morse Cargill of the family that founded Cargill; Texas pipeline magnate Dan Duncan; and California real estate mogul Walter Shorenstein, the gap year has continued without any clarity.

Talk to estate attorneys and advisors and they laugh at their own predictions for the estate tax, whether past or future. With so many competing proposals, and heated rhetoric on both sides, it’s hard to see what will happen in the 13 weeks remaining till yearend. “It’s been an experience not unlike the market experience, where fear has taken hold and analytics have taken a backseat,” says Frank Dubreuil, national managing director at Bernstein Global Wealth Management in San Francisco.

The issue is, of course, that if Congress doesn’t act, either before yearend or retroactively in 2011, the estate tax will come back at a level that no one seems to want. Where the exclusion was $3.5 million (that’s $7 million for couples) in 2009 — a level at which it affected relatively few households — it will be $1 million (or $2 million for couples) in 2011. The tax rate would also rise, from 45% in 2009, to 55% in 2011.

Competing proposals in Washington place the exemption levels and tax rates all over the map, as Republicans (many of whom would like to permanently repeal what they refer to as the “death tax”) and Democrats (who want it reinstated) fight it out. The Obama Administration wants to return the estate tax to its 2009 level, with a $3.5 million exclusion and 45% rate.

Many states also levy their own estate taxes with a variety of rates and rules, which adds to the complexity for anyone trying to come up with a financial plan.

Despite the flux, there are numerous moves that wealthy people can take to minimize the impact of the estate tax on their heirs down the line. That’s because today’s depressed valuations let you get assets out of your estate and over to your kids or other beneficiaries with less gift tax, while low interest rates create additional opportunities for those who use trusts in wealth planning.

“It’s a lot easier to prepare for whether the exemption is $1 million or $3.5 million than it has been to prepare for the no-estate tax year, which we are already three-quarters of the way through,” says Cheryl Hader, an estate attorney at Kramer Levin Naftalis & Frankel in New York.

Give it away while you’re alive. Even for those who don’t have enough assets to consider more complicated strategies, this is the simplest thing to do. The rules permit anyone to give away up to $13,000 per beneficiary tax-free this year. That means a couple with three children could give $26,000 to each of their three kids, excluding a total of $78,000 from gift taxes (and getting that $78,000 out of their future estate).

Beyond that, this year, there are extra advantages to gifting while you’re alive. Even when gift and estate taxes are at the same tax rate, gifting (which has a $1 million lifetime limit) is a better deal. That’s because the government tallies the bill exclusive of tax for gifts versus inclusive of it for estates. In a simplified example, what that means is that if you had $3 million in assets and a 50% tax in both instances, you could give away $2 million while you were alive and pay $1 million in gift tax, or you could die with that $3 million and pay $1.5 million in estate tax. This year, however, the gift tax is at a low 35% rate, creating additional opportunities for many people.

Set up a trust. The acronyms can be enough to make you want to run screaming from the room: GRATs, CRATs, CLATs and the like. But these trusts, in general, are worthwhile estate-planning tools.

A GRAT, or grantor retained annuity trust, is an irrevocable trust designed to transfer the appreciation on assets contributed to it with minimal or no gift-tax consequences. It’s a popular strategy for transferring wealth in a low interest-rate environment, and the Internal Revenue Service rate that applies to GRATs is just 2.0% for October, a historic low. If the assets in the trust appreciate more than the annuity payments you are required to take out of it — and the odds of that are high with a low “hurdle” rate of 2.0% — the excess goes to your beneficiaries tax-free. (If it turns out the asset has appreciated less than the payments to you, the trust fails; the asset returns to you, and you can start another GRAT and try again.)

One of the most popular strategies for GRATs, which is designed to take advantage of today’s market volatility, is to set them up in rolling, two-year intervals. Research by Bernstein Global Wealth Management has shown that over the long term, a strategy of rolling two-year GRATs funded with publicly traded stocks is almost always preferable to a long-term GRAT because it captures the market volatility and because it keeps more of the funds committed to the strategy. “If you could do rolling two-year GRATs indefinitely with marketable securities, you would choose them,” Dubreuil says. “Rolling two-year GRATs take advantage of the volatility in the market, while longer-term GRATs take advantage of locking in a low rate for life expectancy.”

There’s been much talk of placing limits on GRATs, which would require longer terms, but thus far that legislation has failed to pass. But the flux and the fact that GRAT limitations still lurk as a possibility in the background complicates the decision-making process, Dubreuil says. The challenge, he says, is that the two-year rolling strategy “requires time to produce successful results in a very effective way.” So if legislation were to crack down on this strategy over the next few years, it may turn out to be preferable to lock in today’s historically low rates for the long term.

Check your will. It’s one of the most unpleasant tasks, so it’s easy to put this one off, even though it’s the single most basic thing you can do for estate planning (and even those who don’t have enough money to worry about estate taxes should still keep their wills up to date). With the estate tax flux, it’s especially important that wills be written in a way so that they say what you mean, regardless of what the estate-tax laws happen to be at the time of death. One way of maintaining flexibility is to permit beneficiaries to “disclaim” assets after death. As lawyer Hader puts it: “I allow the client to do post-mortem planning.”

Photo: A monument to former New York Yankees owner George M. Steinbrenner at Monument Park at Yankee Stadium. REUTERS/Mike Segar