Have Estate Planners Fallen for an Urban Legend ?

Originally Published on forbes.com on November 11th,2011

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I wrote the other day about a supposed proposal by the Super Committee to reduce the gift tax exemption from $5,000,000 to $1,000,000 effective November 23.  This is creating a bit of a panic in estate planning circles.  I first became aware of the rumor when I received an e-mail from Dean Mead, a prestigious Orlando law firm.  I have since heard from several planners, who mostly do not want to be quoted.  The consensus seems to be that they do not believe the rumor, but that it would be irresponsible to ignore it.  Lauren Detzel made the decision to post the rumor on Dean Mead’s blog and do the e-mail blast. She explained her decision to me as follows:
I have received similar info that it is unfounded and I personally don’t believe it especially with senator Kyl on the committee. He is the biggest advocate of estate tax repeal in the Senate and the 5 million exemption base last December was his bill, but the reason I sent out the email was I didn’t want a client to say if it does pass with a short effective date that “If I had only known I would have made a gift”. On the positive side, in just this short period of time, it has motivated a number of people who were holding off making gifts decide to do so now which is a good thing.
Do things happen in the estate and gift area, where some decision that should take a lot of deliberation has to be made on a short fuse?  Just last year it did happen.  When last year’s estate tax fix was finally absorbed alert planners noted that for the last several weeks of December there was no generation skipping tax in effect (or rather there was a generation skipping tax, but its rate was 0%).  I wrote about it on my blog citing a post by my esteemed editor Janet Novack, who was somehow managing without yet having discovered me making bright observations for possibly scores of readers.  That drama must have ruined Christmas or Solstice or some other early winter holiday for many an estate attorney.  So the allure of this rumor is that it creates the motivation to get a few deals executed prior to Thanksgiving possibly making this Christmas season a little less taxing.

The other point that Lauren makes is about one of the great sources of estate planners’ frustration – client procrastination.  My theory is that deep down clients believe that, with all the smart people spending all that time devising estate plans, eventually, one of them is going to come up with a technique to actually allow you to take it with you.  And if that happened you would really regret having squandered much of it on inter vivos gifts and Alaskan dynasty trusts.  So something that motivates clients to stop procrastinating is a good thing even if it is only possibly true.

I tried to trace the rumor as it has bounced around the tax blogosphere, which like most, if not all, blogospheres is something of an echo chamber. (I mainly write from original source material (cases, rulings, etc.)  that is otherwise largely ignored.  I rely on The Wandering Tax Pro’s Buzz to surveythe  other tax bloggers.)  One of the earliest mentions of the rumor referred to Jeffrey Verdon.  So I gave him a call.  He explained to me why the move would make sense in terms of the way Congress scores revenue raisers.  He mentioned two sources of the rumor, one of which was the firm of Handler Thayer LLP.  InterestinglyHandler Thayer’s piece on the idea (which dates way back to October 27) that the exemption might be at risk does not mention the possibility of a November 23 effective date.  Mr. Verdon promotes a trust that he calls HYCET (which stands for Having Your Cake and Eating it To).  It allows for making a gift to an irrevocable trust which can possibly make distributions back to the grantor.  I ran the concept by another attorney who indicated that it is probably based on PLR 200944002.  It addresses the problem of people who have net worth in the 5 to 10 million range, who like the idea of getting the assets out of their estate but prefer tuna fish to cat food.  One of the several e-mails that I have received included this:

“We’ve been looking into this rumor since it started circulating.  It is true that folks are trying to close business.”

 I think we have an urban legend on our hands here:

As with all folklore and mythology, the designation suggests nothing about the story’s veracity, but merely that it is in circulation, exhibits variation over time, and carries some significance that motivates the community in preserving and propagating it.

Urban legends typically include one or more common elements: the legend is retold on behalf of the original witness or participant; dire warnings are often given for those who might not heed the advice or lesson contained therein (this is a typical element of many e-mail phishingscams); and it is often touted as “something a friend told me,” while the friend is identified by first name only or not identified at all. One of the classic hallmarks of false urban legends is a lack of specific information regarding the incident, such as names, dates, locations, or similar information.

The community in this case is estate and gift tax geeks.  Being a skeptical bunch they mostly say they do not believe it, but because of the dire consequences they do not think they can ignore it.  That the rumor will motivate people to do what they probably should have already done makes it relatively benign.  Someone whose net worth is not that much over $1,000,000 would, however, be ill served if they went to hasty elaborate steps in the next week to save their heirs $100,000 or so.  After all even if you can’t take it with you, what has posterity ever done for you?