Despite Possible Phaseout of Estate Tax -- Everyone Still Needs a Will or Trust.

If the proposed legislation that would phase out the federal estate tax over the next 10 years becomes law, what will estate planners do?

That is the question facing lawyers who have dedicated their careers to understanding the estate tax rules and to devising strategies to help their clients reduce those taxes.

Though unlikely to survive President Clinton's expected veto, a strong possibility exists that estate tax repeal will become a reality if George W. Bush is elected in November. If Al Gore is elected, though, he can be expected to veto estate tax repeal as well. However, if this fall's election reconstitutes Congress, a Gore veto might be overridden and estate tax repeal would become a reality.

If the estate and gift tax laws are eliminated, estate planners will need to rethink their practices to continue to be viable members of the legal community.

Luckily for these lawyers, the proposals currently before Congress to eliminate the tax law are in the form of a phaseout over the next 10 year period. Therefore, estate planners will still be able to provide benefits to their clients through advice on estate taxes during the next 10 years.

After the phaseout is complete, though, those lawyers will need to shift their emphasis to post-death administration, income and charitable tax planning, dispute resolution, and "clean-up" of trusts no longer needed due to changes in the law. These tasks might break down into the following categories:

Creating revocable living trusts. Clients will still want to avoid probate, so revocable living trusts will still need to be created. "Pour-over wills" that accompany them will be needed as well to protect clients' distribution wishes for assets that may fall outside the revocable living trust.

Assuring clients that their assets pass to the persons they intend at death. The need for wills and revocable living trusts will remain strong.

Resolving disputes. These disputes will arise in the form of beneficiary and trustee lawsuits over the proper administration of trust assets, or disputes between beneficiaries as to their entitlement under certain inter vivos or testamentary documents (such as a revocable living trust or a will).

Establishing and administering charitable foundations. These foundations will be established only for income tax deduction purposes, not for estate tax deduction purposes. However, lawyers will still need to assist clients in ensuring that these foundations are properly administered.

Maintaining control over assets set aside for young or irresponsible family members. Parents generally wish to maintain control over assets set aside for their children. Trusts will still need to be established to be sure that children don't receive funds at too young an age.

"Undoing" trusts that were established for estate tax reduction purposes. Many trusts established for tax planning purposes would no longer be needed, and leaving them in force would cause administrative complexity for the client and his or her family.

For example, there would be no need for a life insurance trust to hold proceeds paid on the first spouse's death during the lifetime of the surviving spouse. California Probate Code Section 15409 allows for a trust to be terminated "due to changed circumstances not anticipated at the time the trust was created." Because no one anticipated repeal of the estate tax, the courts would likely allow these types of trusts to be eliminated.

Income tax planning. If the estate tax is repealed, a basis step-up for an individual's assets upon death would probably no longer be allowed for income tax purposes. Since estate lawyers are generally tax lawyers, they could begin to develop a specialty in this area: income tax planning to reduce, defer or avoid gain on the sale of those assets by a client's heirs.

If the law is passed, estate lawyers will be required to notify their clients of the change to the law. Most clients will want to have their estate documents reviewed in light of the law change, and will ask to have amendments made to make sure that they are obtaining the maximum tax advantage during the period of the phaseout.

At the same time, clients might want to revise their documents to provide for the date that the tax law is eliminated in its entirety. However, it will probably take some time to carefully determine what the documents should say if the tax law doesn't apply. Therefore, it seems likely that the "final" amendments will occur near the end of the phaseout period.

If that is the case, a second round of amending a client's will and/or trust(s) would take place after the phaseout is complete. Such amendments could include married clients wishing to revise their trusts so that if their surviving spouse remarries, assets set aside in trust for that spouse would immediately pass to the deceased spouse's children. Under current law, the marital deduction prohibits that approach. Without estate taxes, though, approaches like this would need to be developed and implemented.

New irrevocable trusts might also include provisions that currently aren't applicable but would be viable after the phaseout ends. For example, parents typically want to act as trustee of trusts for their children, but for tax purposes, they cannot. After the phaseout, parents would be able to act as trustees of the trusts for their children.

The prognosis? Estate lawyers will need to change their focus if the estate tax law is eliminated. There will still be plenty of work to do, but lawyers will need to develop their capacities in other areas to keep their practices strong.

If the law is passed, there will be 10 years to accomplish this task -- but wise lawyers should start soon!

Andrew M. Katzenstein is a partner in the Los Angeles office of the national law firm of Katten Muchin Zavis, where he focuses his practice on estate planning, probate and trust administration, and charitable tax planning.