When was the last time you reconsidered your estate plan? If your answer is, “It’s been a while,” it may be time for an update. In fact, with President-Elect Trump’s proposed repeal of the estate tax, anyone who structured their estate plan around minimizing their estate tax liability may need to restructure their plan to address alternative concerns.
What President-Elect Trump’s Tax Plan Means for Your Estate Planning
Consistent with what he promised during his campaign, President-Elect Donald Trump still plans to repeal the estate tax, according to his website. However, even with President Trump in office, there are certain taxes that will still apply at the time of death. Referring to the estate tax as a “death tax,” President-Elect Trump’s website states:
“The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.”
As a result, while Donald Trump is not yet in office, high-net-worth individuals with large estates and with substantial unrealized capital gains should start preparing now so that their estate plans are ready if and when the law changes during his administration. With an eye toward the future, here are some key considerations for building a solid estate plan in 2017 and beyond:
Estate Planning Considerations for an Era Without Estate Tax
1. Your A/B Trust Won’t Serve Its Intended Purpose
Traditionally, A/B trusts, also known as “bypass trusts,” were used to avoid married couples’ estate tax liability by relying on a well-known marital exemption. Under existing tax laws, when one spouse died, any assets inherited by his or her surviving spouse were exempt from estate tax. However, when the second spouse died, his or her entire estate (including the inherited portion) would be exposed to estate tax. As a result, the “exemption” was really more of a deferral, as the couple’s entire estate ultimately became subject to estate tax liability.
Under the right circumstances, an A/B trust would avoid this result. If the assets owned by the first spouse to die were valued below the threshold for estate tax liability, rather than leaving those assets to his or her surviving spouse (thereby increasing the value of the surviving spouse’s estate), the first spouse could transfer his or her estate into an irrevocable trust. The surviving spouse would be entitled to income from trust property (such as dividends and other investment income), and the trust documents would provide for the assets to transfer to someone else – typically the couple’s children – after the second spouse’s death. So, the surviving spouse received the income he or she needed, the couple’s children inherited the family’s assets, and estate taxes were avoided in the process.
In a world with estate taxes, this was a highly prudent estate planning strategy. With estate taxes reaching 40 percent for assets over the taxable threshold ($5.45 million in 2016), using an A/B trust could result in substantial savings for a high-net-worth couple’s children or other beneficiaries.
2. Shifting Focus: Managing Tax Basis in Capital Assets
Under President-Elect Trump’s tax plan, with exceptions for small businesses and family farms, capital gains on assets valued in excess of $10 million would still be taxed at death. So, with President Trump in office, high-net-worth individuals and couples may not need to worry about the estate tax, but they will still have other taxes to contend with when seeking to preserve their financial legacies for their families.
The good news is that, like the estate tax, for most individuals and couples, the capital gains tax can be avoided – or at least mitigated significantly – with appropriate estate planning. By his own account, Donald Trump has been extremely successful in avoiding capital gains taxes, and there are strategies that all individuals and couples can use to lawfully reduce their capital gains tax liability during their lifetimes, and to reduce their estates’ capital gains tax liability after death.
Some of the most effective strategies for minimizing capital gains tax liability include:
- Matching capital gains with capital losses
- Taking advantage of 1031 exchanges and other like-kind exchanges
- Investing more through your traditional IRA, Roth IRA, or 401(k)
- Making tax-exempt lifetime gifts to family members and charities
Note, however, that Donald Trump’s plan proposes to disallow contributions to family-held private charities for purposes of avoiding capital gains taxes at death. While gifts to charitable trusts and foundations are likely to remain important components of many high-net-worth individuals’ and couples’ estate plans, this strategy, too, may require re-examination during the Trump presidency.
3. Built-In Flexibility for Future Changes
Among the many lessons learned from Donald Trump’s election as President, there is one unifying theme: It is time to expect change. With this in mind, individuals and couples planning for the future need to plan not only for the changes we’ve been told to expect, but for the ones that may be waiting in the wings, as well.
When it comes to estate planning, there are a number of ways to add built-in flexibility. While this flexibility has always been valuable, it is likely to take on even greater importance in the years to come.
How can you increase your estate plan’s flexibility? Here are four options to consider:
- Decanting Power – “Decanting” is a highly underutilized tool in the estate planning field. Under various states’ laws, the decanting power allows a trustee (not the grantor) to transfer assets from one trust into another. When an irrevocable trust stops serving its purpose due to a change in the law, the decanting power can allow for re-planning where the grantor (the person who creates the trust for estate planning purposes) would be prohibited from making changes independently.
- Enhanced Trust Protector Powers – A “trust protector” is an individual who is appointed to oversee the management of a trust over time with the express purpose of protecting the trust’s assets from deterioration due to changes in law or policy. The trust protector essentially serves in a role between that of the grantor and the trustee. Depending upon the terms of the trust (as established by the grantor), the trust protector can have the power to amend the trust, modify trust distributions, and otherwise exercise control for the benefit of the grantor and beneficiaries.
- Marital Disclaimer – With a “marital disclaimer” trust, the spouse who lives the longest has the opportunity to choose between estate planning options at the time of the other spouse’s death in order to maximize tax savings. Essentially, if the tax environment warrants it at the time of death, the surviving spouse can disclaim his or her inheritance in favor of establishing a trust that avoids estate tax liability.
- The Clayton QTIP – A Clayton QTIP trust (QTIP stands for, “qualified terminable interest property”) operates somewhat similarly to a marital disclaimer trust in that it allows for a surviving spouse to elect not to receive all or a portion of a gift to be inherited from a deceased spouse. By taking the election, the surviving spouse allows the excluded assets to transfer into a trust, thereby avoiding the potential for estate tax liability.
Speak with an Estate Planning Lawyer at Jiah Kim & Associates
If you have questions about how President-Elect Trump’s policies could impact your estate plan, or if you are ready to update your estate plan with enhanced flexibility, contact Jiah Kim & Associates for an initial consultation. You can schedule an appointment online 24/7, or give us a call at (646) 389-5065 to discuss your needs in confidence today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.