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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

Estate Planning Considerations Post-Election – Time for Analysis, Not Paralysis

By: Julia S. Weaver, J.D., Director, Family Office Services & The Trust Company of Oxford and
Kara J. Talbott, CPA/PFS, CFP®, Senior Wealth Strategist, and Scott M. Simmons, J.D., LL.M., Wealth Strategist

In the wake of the election and armed with only campaign policy proposals, there are nonetheless several key estate planning issues to be considered... the first of which (albeit a twist on an age-old adage) is that the only thing certain with taxes is uncertainty.

Any sound estate plan should be constructed based upon the goals and objectives for family wealth transfer. With that said, we are very cognizant that much "estate planning" is done for the benefit of federal estate and gift tax savings. President–Elect Trump has been vocal in his disdain for this tax on transfers of wealth, calling into question what, if any, measures should be currently considered.

It is our position that "analysis" and not "paralysis" should be the drivers of your estate planning decisions in the coming months.

Campaign Proposals Relative to Federal Estate and Gift Tax
During the election campaign, both President-elect Trump and House Republican leadership introduced tax-reform proposals. While the proposals must go through the legislative process and could be modified greatly by Congress before any proposals become law, the plans do provide a starting framework for understanding their impact on families’ current wealth planning.

Both the House and Trump plans call for the elimination of the estate and gift tax. President-Elect Trump calls for replacing the lost federal estate tax dollars by eliminating step-up cost basis at death. This would create a new tax on pre-death appreciation, subject to a $10 million per couple exemption. In addition, under Trump's initial campaign proposal, charitable gifting at death of appreciated assets to private foundations would be disallowed.

So Sayeth The Estate Tax: "The News of My Death May be Highly Exaggerated"
As stated, the only thing certain with taxes is uncertainty. The federal estate tax has undergone significant change three times in the last two decades and will likely remain ongoing fodder for political debate and positioning.

  • In 2001, Congress made significant changes to estate, gift and GST taxes with the Economic Growth and Tax Relief Reconciliation Act of 2001. This is the law that, as a result of budget scoring rules, provided gradual increases in the exemption amount until 2010 where there would be no transfer tax at death (but only for that year). The exemption was to be reduced to $1.0 million thereafter.
  • This resulted in the 2010 Tax Act being passed to avoid the reduction of the exemption amount from taking effect. While this only postponed the sunset provisions for two years, it also increased the exemption to $5.0 million. The Act also introduced the concept of portability of the exemption between spouses and offered potential simplification of a married couple's estate tax planning.
  • Again, because Congress had included sunset provisions in the 2010 Act, The American Taxpayer Relief Act of 2012 was passed to address this as well as other "fiscal cliff" issues. The provisions of the 2010 Act regarding portability and an exemption amount annually indexed for inflation were made permanent with a new tax rate of 40% and an exemption set at $5.12 million.

As these ongoing tax law revisions demonstrate, maneuvering this ever-changing landscape requires the focused attention of your key advisors, each armed with a deep understanding of your unique goals and objectives. Dropping a premature atom bomb on current estate planning could prove disastrous and would be highly imprudent at this early stage. The proposals could change, perhaps substantially, because they still must navigate the legislative process. This may result in limiting any significant transfer tax reform as well. While the Senate is under Republican leadership, current Senate Rules allow the Senate Democrats to still filibuster legislation.

Additionally, even if the administration was successful in promoting a reprieve from the federal estate tax, the only guaranteed way to enjoy such tax relief would be death within such a period. Notably, we did enjoy such a reprieve in the 2010 tax year, providing many significant estates with a windfall of tax savings. One can only wonder, however, if the decedents also felt that they had "hit the lottery".

Should the transfer tax be revoked and later reinstated during a subsequent administration, it would be nearly impossible to replicate the tax advantages of many strategies and trust structures currently in place.

Estate Planning Flexibility is Crucial – Sometimes You Can Get the Toothpaste Back in the Tube
While planning paralysis is discouraged, we do recommend analysis of your current plan, as well as enhancing flexibility provisions in any current or new planning structures.

Fortunately, one of the byproducts of the ever-changing landscape of transfer taxes is that planners have developed strategies for enhanced flexibility. As such, pulling the trigger on otherwise appropriate estate planning is less concerning in light of the following opportunities:

  • Trust Protectors and Independent Trustees can provide flexibility to adjust trust terms in light of tax law changes, including the ability to amend dispositive provisions (and distributions), and limit or expand beneficiaries under certain circumstances.
  • Powers of Appointment can enhance flexibility by enabling certain persons to alter beneficiaries or altogether collapse a trust structure in some cases.
  • Trust modifications can offer flexibility. For example, Delaware now has a "Modification by Consent" statute which would enable significant modifications or even termination by consent of certain key parties to the trust.
  • Structuring a strategy as a sale versus an outright irrevocable gift can enhance future options to "undo" the effect of the transfer.
  • Strategies can be enhanced with the option to later swap assets in and out of a trust depending upon changes in the tax laws.
  • A provision enabling the Grantor to buy-back certain assets enhances flexibility, as does granting an appropriate party the power to make loans to the Grantor without adequate security.
  • Be wary of certain direct gifts to heirs (not utilizing trust structures), as these may result in irrevocable transfers that cannot later be "undone".
  • Use of other unique state laws for the trust situs can enhance flexibility and provide state income tax mitigation in some situations.
  • Including decanting provisions in new documents (particularly in states without decanting statutes) may enable revisions in light of changing tax laws.
  • A Domestic Asset Protection Trust (DAPT), domiciled in an appropriate self-settled trust jurisdiction, may enable an Independent Trustee or Trust Advisor certain broad distribution discretion to provide for a changing tax law structure.
  • For new revocable trust documents, the following funding methods may enhance flexibility and allow for consideration of future tax law changes:
    • Disclaimer Trust Funding - Upon the death of the first spouse, the tax laws and circumstances of the client can be evaluated to determine if and to what extent assets should pass into the surviving spouse's bypass trust.i
    • Clayton QTIPs – The decedent's entire estate is left to a single marital trust and a post-mortem evaluation occurs to determine the amount for which a partial QTIP election should be made, enabling consideration of any changes to tax laws. Any property that does not qualify for the marital deduction will pass to a separate bypass trust.

    • As with any tax planning strategy, your team of tax and estate planning advisors should be thoroughly consulted and should review all such structures.

    Family Wealth Goals and Objectives Should Always Govern Decisions
    Apart from tax savings, trust structures offer key advantages for management of wealth transfers to heirs. Saving significant tax dollars provides estate planners with great leverage to get clients to undergo the sometimes arduous process of estate planning. Nonetheless, much is accomplished as ancillary benefits to federal estate tax planning.

    Such issues may include avoiding a flood of wealth being transferred into the hands of the next generation without staggered distributions, protecting spendthrift or special needs family members and enhancing asset protection. Other benefits include creating clarity in legacy provisions in order to avoid family discord and crafting provisions to develop benevolence or business acumen in heirs. These types of issues are certainly worthy of taking center stage irrespective of the state of our tax laws.

    Analysis of Current Planning is Crucial to Avoid the Inadvertent Disinheritance of Loved Ones
    Many estate plans use the federal estate tax exemption amount as part of a formula for funding trusts for a surviving spouse and/or trusts for children. As the exemption amounts change (or in the case of a total repeal in the estate tax), the funding formula may change commensurately. In some cases, this may potentially result in the disinheritance of certain loved ones, or greatly protracted outright distributions.

    This issue may be particularly concerning for couples who have children from prior relationships. While these scenarios are highly contingent upon each specific estate plan structure, these concerns illuminate the need to have your estate plan thoroughly reviewed upon any changes to the current tax laws.

    Please contact your team of advisors for a detailed review of your unique situation to avoid these potential disruptions to your wealth planning goals and objectives.

    iThe elements of a qualified disclaimer include that the surviving spouse cannot accept the underlying assets or any benefits thereof under Code Section 2518(b)(3). In addition, some planning control is also relinquished because the disclaimer trust cannot provide the surviving spouse with a limited power of appointment.
    iiThe terms and beneficiaries can be different from the QTIP trust and therefore can include the children and grandchildren. Additionally, the surviving spouse can be given a Limited Power of Appointment over the remainder interest with a Clayton QTIP.

    The above commentary represents the opinion of the authors as of 11.10.16 and is subject to change at any time due to market or economic conditions or other factors. This information is not intended to serve as tax or legal advice. As always, tax and legal counsel should be engaged before taking any action.