The tax policies being proposed in Washington represent a level of reform the US has not seen in over thirty years. This could bring major changes, including the possible repeal of the federal estate tax, and therefore warrants a review of your estate plan to be sure it addresses a tax environment in transition.
BRYAN: The short answer is no. If we take the last 15 years as our example, the federal estate tax regime has always been in flux. And, when we talk about estate planning, we are usually talking about wealth transfer when someone dies or loses capacity. Of course, we never know when those things will happen. In reality, we seldom know what the tax laws will be when an estate plan comes into effect.
The key has always been to create a plan that provides for what you would want to happen if you died or lost capacity now, yet has the flexibility to allow for changing laws as well as your family’s changing circumstances.
We look at each family’s current situation and anticipate potential changes down the road. We make sure our clients are surrounded by a team that can provide perspectives from different angles—including their attorney, accountant and investment manager—so we can put forth a durable, well-informed plan.
CRAIG: If a plan only works in the current environment or from one particular angle, a family can face unanticipated tax and other costs if there is a change of circumstance before the family has a chance to make necessary adjustments. So, while the repeal of the estate tax may change our short-term analysis, the goal is for our clients to have plans that have an eye for the long term as well.
BRYAN: One of the great myths in estate planning is that the primary job of a trust is to protect assets from taxes. While it is true that gifts to irrevocable trusts are regularly made to provide tax benefits, the more commonly-used revocable or “living” trust is not a tax tool.
Living trusts avoid the cost, publicity and bureaucratic process of needing to have a probate court proceeding to transfer your property when you die. Without a living trust, financial assets are frozen until your will or intestacy petition is submitted to the court and a personal representative of your estate is appointed. This may cause cash-flow problems for your family if they need to access funds to pay funeral expenses, medical bills or expenses to maintain a property.
Instead, if assets are held in a living trust, they can be available immediately to pay estate taxes, administration expenses and debts without waiting for the court’s approval.
A living trust also allows someone to step into your shoes and smoothly take over managing the property held in trust if you lose capacity. If a person becomes incapacitated without a living trust, an agent will need to act under a power of attorney document. A conservatorship may be necessary if no power of attorney document exists. Even with a power of attorney, the process can be more difficult than with a living trust.
Even in a world without estate tax, irrevocable trusts will still have a place in many estate plans. Irrevocable trusts provide a means to control how and when assets ultimately pass to your beneficiaries. And, irrevocable trusts can become especially important when assets may need to be protected from the claims of future creditors, such as for beneficiaries who work in high-liability professions (such as doctors and lawyers) or in the event of a divorce.
CRAIG: The tax policies being proposed, if enacted, will be a major event and warrant taking a close look at your estate plans. As it stands now, the timeline, including possible retroactivity and specific details of prospective tax reform, remains uncertain.
We continue to actively monitor developments in Washington as well as encourage our clients to review their estate planning strategies for current application in light of potential changes, and in light of the potential for further changes down the road. While taxes may be in flux, we always remain available to help you through the decisions that need to be made.