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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

The Enduring Value of Sound Planning

By: Julia Weaver, J.D., Director, Family Office Services & The Trust Company of Oxford

While Congress attempts to tackle tax reform, including potentially a repeal of the federal estate tax, we need only look back over the past 15 years and three major changes to our estate tax laws to recall similar periods of uncertainty.

Taxing wealth at death actually dates back to our founding fathers' desire to break from the traditions of English aristocracy. The belief that concentrations of wealth led to concentrations of political power led some to advocate for a 100% inheritance tax.i Over the ensuing centuries, the philosophy behind the estate tax shifted to generating revenue.

It is interesting that, as a candidate, even President Trump in his platform could not resist this temptation to tax wealth at death. While suggesting estate tax repeal, his proposal replaced it with a capital gains tax triggered upon death, as we discussed in our article, "Estate Planning Considerations Post-Election – Time for Analysis, Not Paralysis", e.Insight, Nov., 2016.

What has remained indisputable over the centuries is the enduring value of comprehensive estate planning, despite the ever-changing death tax regime. We, therefore, provide our “top ten” 2017 planning issues.

Number One - The Unlikely (Permanent) Death of a Death Tax
The estate tax has been ongoing fodder for political debate for centuries. Even if the “estate tax” is repealed, will it be backfilled with a capital gains tax at death? Will a repeal be subject to sunset provisions under the Senate’s Byrd Rule? Could the estate tax be later reinstated? Will the gift tax also be repealed or will the lifetime gift tax exemption be reduced?

These are just a few of the many questions and concerns that make ongoing, uninterrupted tax planning the most prudent option for 2017.

Number Two – Planning for “True” Goals and Objectives
Many ancillary benefits result from estate “tax” planning. This current period of uncertainty may require families to ask the question: What planning is solely tax motivated versus what is inspired by the family’s unique goals and concerns? Such issues may include the following:

  • Spendthrift provisions for heirs.
  • Protecting children by restricting wealth distributions until they mature.
  • Protecting against claims of children’s spouses upon divorce.
  • Protecting assets for children of a first marriage.
  • Clarity of legacy provisions and avoiding family discord.
  • Developing benevolence or business acumen in heirs.

Each of these situations is worthy of center-stage planning regardless of our estate tax regime du jour.

Number Three - Enhancing Flexibility In Planning Strategies
Protecting against changing laws and circumstances requires embedding maximum flexibility into estate plans. Flexibility enhancements for these uncertain times may include:

  • Appointing Trust Protectors and Independent Trustees to provide flexibility for tax law changes.
  • Creating Powers of Appointment to enable certain persons to alter beneficiaries or collapse a trust in some cases.
  • Trust modifications and use of the most “trust-friendly” jurisdictions.
  • Carefully crafted features to enable spousal access to trust assets in certain types of trusts.
  • Granting an appropriate party the power to make loans to the Grantor.

Number Four – Asset Protection Planning
With ever-increasing civil lawsuits filed each year, it is safe to say we are a litigious society; therefore, asset protection planning is an essential element of estate planning. Such planning often includes the proper titling of assets, utilizing limited-liability entities and maintaining adequate property and casualty insurance.

More complex strategies include Domestic Asset Protection Trusts (DAPTs).ii Expert crafting is a necessity for such trusts. When properly structured, a DAPT is an excellent tool to protect generational wealth and, when domiciled in an appropriate state, to enhance flexibility to provide for changing tax laws.

Number Five - Income Tax Planning and Targeted Basis Planning
Targeted strategies for managing deductions, losses and certain tax elections can have a positive income tax impact that lasts for years. When the source, character and amount of income can be managed either during retirement or with certain entity planning, income tax planning opportunities abound.

Basis planning is also a key focus area for income tax savings for future generations. One strategy includes using swapping powers to shift high and low basis assets in and out of trusts in order to capture basis step-up opportunities.

Many questions arise from President Trump’s suggestion of a gain recognition at death and much will be discerned over the coming months. It is critical to have your team of advisors monitor the nuances of tax proposals for opportunities to both enhance income tax planning success and avoid negative outcomes.

Number Six - Retirement Planning and Financial Modeling
A measure of success of any wealth plan is whether it has provided a family with peace of mind. Whether your concern is the ability to maintain your lifestyle or how much surplus wealth is available for charitable planning, financial modeling can quantify your chances of success. It provides the “show me the numbers” results to your retirement and wealth planning concerns.

Number Seven - Succession and Exit Planning for Business Owners
Business succession planning can mean the life or death of a business operation. Along with saving significant tax dollars, a solid succession plan avoids unnecessary stress on business operations and can curtail customer run off and loss of key employees during times of stress on the entity.

Other advantages include providing liquidity for the buy-out of partners and avoiding conflicts within families or between surviving owners. A well-crafted succession plan can even improve the creditworthiness of the business, as it is reflective of a sound business operation.

Number Eight - Planning for Executive Compensation Issues
Executives also face unique challenges in their wealth and retirement planning. Equity-based compensation packages can result in significant wealth being tied up in company stock. Regulations can limit the executive’s control and flexibility over diversification strategies. Executives face a myriad of issues including complex stock option exercise strategies, deferred compensation and elections for qualified accounts. Planning expertise is required to determine the optimal strategies for complex compensation packages.

Number Nine - Charitable Planning
The deductibility rules are complex. Different types of property yield differing levels of deductions, some with carry forward features and others without. Different recipients of property can reduce the level of deduction as well.

Maneuvering through charitable planning options without the expertise of your wealth planning team can result in not only the loss of deductions, but can also trigger unnecessary tax to a donor. Sound planning is critical to find the most tax-efficient strategies to fund charitable goals.

Number Ten - Essential Document Review and Updates to Current Planning
Many wills and trusts use the federal estate tax exemption as part of a formula for funding trusts for a spouse and/or heirs. A significant revision to our estate tax laws could result in the underfunding or overfunding of certain trusts. These concerns illuminate the need to have your estate plan thoroughly reviewed upon any changes to the current tax laws.

Additionally, certain features may be worthy of immediate consideration, such as amending documents to enable certain trust funding decisions to be delayed until the death of the first spouse (when future tax laws are known).

Final Thoughts
Our Oxford advisors are continually monitoring the status of tax law proposals and the potential impact on our clients. Our team of experts understand the centuries of history, the decades of uncertainty and today’s most cutting edge planning options to maneuver through any changes to our current tax laws.

i See, generally, "Wealth and Our Commonwealth," William H. Gates Sr. and Chuck Collins, "The nation’s founders, Thomas Jefferson, Thomas Paine, John Adams and Ben Franklin and populace viewed excessive concentrations of wealth as incompatible with the ideals of the new nation.”
iiSelecting the optimal state jurisdiction is critical because the rights and restrictions of creditors under state law will affect how much “access” is attributed to the Grantor for federal estate tax purposes. The DAPT also involves complexity to avoid any claim of fraud on creditors.

The above commentary represents the opinion of the author as of 4.13.17 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.