Last month's column ("Let the Tax Games Begin") discussed several strategies financial planners can use to navigate estate-tax repeal: re-titling client investment accounts, using a special executor to address tax uncertainty in estates, understanding insurance changes, and accounting for muni bond opportunities. But there's much more to think about. There's also a growing question of whether the repeal is here to stay.

On Feb. 2, 2010 Treasury Secretary Timothy Geithner and Senate Finance Committee Chairman Max Baucus (D-Mont.) stated that they support extending the 2009 estate-tax rates to 2010 and that the tax increase should be made effective retroactively to Jan. 1, 2010. By the time you read this article, the status of the estate tax for 2010 may be addressed. Then again, maybe not. But even if there is a retroactive fix, it won't resolve a host of issues. Whatever happens, the problems created by this legislative tax mess will forever change estate planning.

THE BUDGET

But wait, there's more. Because the economic recovery remains frail, President Obama has held off on imposing some of the more burdensome tax rules on the wealthy in the coming year. (But make no mistake, they will be coming.) Several changes are significant, however, and will affect planning for many high-net-worth clients. Here are some of the most important ones:

* Grantor-retained annuity trusts (GRATs) will have to last for 10 years. The old way of capturing short-term upside market volatility outside the client's estate will change. Older clients may be precluded from using the GRAT technique altogether, since, if they don't outlive the term of the GRAT, the assets will generally be included in their estate.

* Rules governing the sale of life insurance will be modified. If you buy an interest in a life insurance contract with a death benefit of $500,000 or more, stringent new IRS reporting requirements will apply. You'll have to disclose to the IRS the price paid, buyer's and seller's taxpayer identification numbers, name of the insurance company, policy number, etc. Too many transactions were escaping the tax net under the prior law. The transfer for value rules, which require certain insurance proceeds to be included in taxable income, will be tightened to snare more transactions.

* Discounts will be restricted with complex new rules.

The window of opportunity for exploiting these techniques is rapidly closing. Advisors who haven't reached out to their clients should do so quickly.

HARVESTING CHALLENGES

Investors often try to coordinate losses to offset gains by tracking tax basis. Until 2009, tax basis was relatively easy to determine on inherited assets-it was the fair value at death. But if the repeal remains real, the carryover basis rules require that the decedent's initial purchase price be determined. Then, that number may or may not be increased by a portion of the $1.3 or $3 million basis adjustments described in last month's article. Determining tax basis will get harder. For wealthy heirs, there will be far more holdings with lower basis than in the past. Even if the estate tax repeal is made retroactive, issues may remain.

Assume your client died in January 2010 while the estate-tax repeal was real. His children received distributions from the estate, and some sold the securities they received. Now, say estate-tax repeal is made retroactive. They have to recalculate the tax basis. If you assumed no step-up when helping them make decisions, those decisions might prove wrong. The children may be asked to refund money to the estate to pay tax when they've already spent the funds received.

GIFTING CHALLENGES

Babies born with silver spoons in their mouths could also have a rude awakening, as parents and other benefactors may cut back on gifts. Even if the estate tax is reinstated, it will likely have a $3.5 million exclusion. Very few clients will face a federal estate tax, which had been a major motivator for many to make gifts.

If clients feel the estate tax will remain repealed, they are likely to revisit their estate planning documents. Many may revise the gift provisions under all durable powers. Whichever scenario emerges, the purpose of gift clauses should be re-evaluated. Clients should also evaluate whether they wish to bear the risk of authorizing an agent to make gifts if the only tax benefit is a state estate tax savings that may not even materialize.

TAX CHALLENGES

If the carryover basis remains law, wealthy clients will have a much lower tax basis on inherited assets and much larger capital gains on sales, so the old tricks that were popular before George Bush reduced the capital gains tax rate will be again. Even if the estate tax is reinstated and the carryover basis deep-sixed, the almost certain increase in capital gains tax rates will reinvigorate the same planning.