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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.
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:
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.Print