Financial planners can use various strategies to navigate the estate-tax repeal. But, here's the burning question: Is the repeal is here to stay? Even if the repeal or reinstatement of the estate tax is resolved by the time you read this, there are long-term planning lessons you can learn.

On Feb. 2, Treasury Secretary Timothy Geithner and Senate Finance Committee Chairman Max Baucus (D-Mont.) said that they support extending the 2009 estate-tax rates to 2010, and that the tax increase should be retroactive to Jan. 1, 2010. Whatever happens, you can bet that the problems created by this legislative tax mess will forever change estate planning.

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. Determining tax basis will get harder for wealthy heirs who will need to consider far more holdings with lower basis than before. 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 decide, those decisions might turn out to be wrong. The children may be asked to refund money to the estate when they've already spent the funds received.

Gifting Challenges

Those born with a silver spoon in their mouth 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 to make gifts. If clients believe that the estate tax will remain repealed, they are likely to revisit their estate planning documents.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 reevaluated. Clients should also assess whether they want 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 materialize. This all follows the reduction in family gifts and related planning triggered by the recession and stock market meltdown. Not the best time for trust fund babies.

Tax Challenges

If the carryover basis remains law, affluent clients will have a much lower tax basis on inherited assets and much higher capital gains on tax rates on sales. So the old tricks that were popular before George Bush reduced the capital gains tax rate will be back 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. Such techniques as charitable remainder trusts, 1031 exchanges and exchange funds will become even more important.

What To Do?

These new trends, coupled with the estate-tax changes contained in President Barack Obama's budget proposals and an eventual resolution of the estate-tax quagmire, are creating a fluid situation. Advisors should maintain regular communications with clients.

Also bear in mind that as a financial advisor you will, under the Prudent Investor Act, have to consider the tax consequences of investment options. How do you advise an executor on what to sell and what to hold when the state of the law, and the tax basis in the assets he has a fiduciary responsibility to manage, are uncertain? Clients, particularly if serving as executors and trustees, should make a more concerted effort to update investment policy statements (IPSs) regularly and confirm that the IPSs are consistent with the trust's or will's investment mandates.

Whatever the outcome, estate-tax repeal has created unfathomable complexity and problems for advisors and their clients. Waiting for Congress to act could cost your clients. It's time to reemphasize some points that customers tend to ignore: