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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 | April 04, 2019

Will Tax Reform ‘Reform’ Your Estate Plan?

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

The new tax law essentially doubled each individual’s Estate, Gift and Generation Skipping Transfer (“GST”) tax exemptions. These exemptions increased from $5.6 million per person to approximately $11.2 million per person ($22.4 million per married couple)1. While this is cause for celebration for many wealthy families, some may find that the increased Estate and GST tax exemptions will cause unexpected consequences in their estate plan.

Many estate plans are structured such that certain estate distributions are based upon the amount of these exemptions, including the funding of marital versus family trusts or the funding of family versus charitable legacies. Hence, a significant change in the exemptions can cause significant shifts in the distribution of wealth.

In light of the unprecedented increase in these amounts under the new tax law, families should consider the following five potential impacts to their estate plan:

1. How are distributions to your spouse, children, other heirs or philanthropy altered?
2. Does your surviving spouse have enough income in light of altered trust funding?
3. Will charity still benefit in accordance with your goals?
4. Will you now skip too much wealth over your children in favor of grandchildren?
5. Will you unnecessarily lose the income tax advantage of basis step-up on the second spouse’s death?

Impact of Increased Exemptions on Wealth Distribution
The amount of the Estate or GST tax exemption is often the basis for formulaic funding of trusts and other distributions. In other words, the exemption amount may define the amounts benefiting a spouse, a couple’s children, children from a previous marriage, grandchildren or charity either through outright distributions or through amounts funding various trusts.

For example, a common estate plan structure for married couples subject to the estate tax is to fund an Exemption (a/k/a 'Credit Shelter') Trust upon the death of the first spouse. The Credit Shelter Trust (“CST”) is typically funded with the maximum available exemption amount and is, thus, one way to ensure both spouses’ exemption amounts are fully utilized. The rest of the family’s wealth may then be passed in a way that qualifies for the marital deduction, so that estate tax is avoided upon the first death. When the amount of the exemption significantly changes, as seen with the recent tax reform, so too may the amount of wealth funding each of these respective shares.

Impact of Altered Trust Funding on Spousal Income
Different types of trusts have difference income distribution provisions. Often Credit Shelter Trusts (versus Marital Trusts) are designed to trap as much wealth as possible inside the trust in order to protect it from estate tax. Therefore, the surviving spouse may or may not even be a beneficiary of the CST, or may have restricted access to trust income. However, a Marital Trust is likely designed to pass all income out to achieve the marital deduction from estate tax and to support a surviving spouse. When there are significant shifts in the funding of these trusts, the estate plan should be reviewed to ensure that a surviving spouse will have sufficient income to support spending goals and objectives.

Impact of Increased Exemptions on Charitable Residual
The increased exemption may also affect amounts intended for charity. For example, a plan may be drafted so that a portion of the estate in excess of the maximum exemption will pass to charity at the second death, thereby providing the estate with a needed charitable deduction. However, the more primary goal may have actually been to benefit charity, and not solely to mitigate estate tax. If a larger than anticipated amount is pulled into the CST, charitable provisions may go unfunded. This risk is elevated for married couples with an estate between the previous exemption of $11.2 million per married couple and the new increased exemption of $22.4 million per married couple. Your plan should be reviewed to ensure your charitable goals have not been negatively impacted.

Impact of an Increased GST Tax Exemption on Children’s Share
Additionally, your estate plan may have a provision to utilize your remaining GST tax exemption by carving out assets equal to this amount at the first and/or second death and placing them in a trust for grandchildren or in a Dynasty Trust for multiple generations. If your remaining GST exemption passes to a trust solely to benefit your grandchildren (and perhaps beyond) but not your children, a much higher than planned portion of your estate may essentially skip over your children, leaving insufficient assets in a structure that they could access if they needed the funds. If your estate plan includes this type of GST planning, it should be reviewed to ensure your goals and objectives for your children are still being met.

Income Tax Impact of Over-Funding Certain Trusts
A CST, as discussed above, is designed to ensure that the exemption of the first spouse to die is fully utilized. In this manner, the trust principal, as well as future appreciation, is maintained outside of the surviving spouse’s taxable estate, making these trusts good ‘estate tax’ planning vehicles.

However, a CST is not a good ‘income tax’ planning vehicle. Assets held in these trusts are not eligible for a step-up in basis at the second spouse’s death. If there has been significant appreciation in asset values, this can mean a significant loss of capital gains tax savings for future heirs.

For families with estates that are well below the individual exemption amount of $11.2 million, federal estate tax may no longer be a concern. In this case, a CST may actually be detrimental by increasing the family’s overall tax exposure.

Impact Analysis for Your Estate Plan
These are just a few examples of the issues that can arise when allocation of wealth is impacted by changing exemptions. Additionally, the increased exemptions are due to sunset on December 31, 2025, further complicating the question of how to plan with the new tax law. There are numerous ways to structure the funding and design of trusts to increase flexibility and realign your estate plan with your family’s goals and objectives.

If the preceding issues are relevant to your family’s situation, our Oxford advisors recommend having your estate plan analyzed with an Estate Flow Chart. The Estate Flow Chart is a visual depiction of your comprehensive wealth transfer plan. It incorporates the impact of your estate and trust documents, titling and value of assets, beneficiary designations, liabilities and expenses, as well as any changes in the estate tax laws.

An Estate Flow Chart provides families with a clear overview of the flow and ultimate distribution of their wealth. With this analysis in hand, your team of wealth planning advisors have real data to target recommendations and assure your family’s wealth transfer plan is protected for generations to come.

1Final inflation adjusted figures have not yet been announced.

The above commentary represents the opinions of the authors as of 2.12.18 and are subject to change at any time due to market or economic conditions or other factors.