Being Proactive Helps You Stay Ahead of Change

Do you know your legacy? It takes work to plan who you want to give your assets to, understand what exactly they may receive and decide how they will ultimately receive it. But just when you think you have it all set, the tax rules change.

Since it’s nearly impossible to know exactly what will ultimately pass to your heirs because of the fluidity in the tax laws, it can be challenging to decide on how to structure your assets or even decide who you want to give what. 

With a new administration in Washington, we are once again waiting to see whether our tax laws will change. For 2021, individuals can leave $11.7 million to anyone during their lifetime or at death without being subject to federal gift or estate taxes (married couples can give $23.4 million).  But those amounts are scheduled to be cut in half in 2026 and could change sooner under the new administration.  

In addition, we could see a change in the rules that allow you to avoid capital gains on the sale of assets you inherit—the so-called “step-up” in income tax basis. Changes may occur as soon as 2021, or they could occur after the next elections in 2022, or those in 2024. State rules vary and also can change, as we’ve seen recently in California and Connecticut. 

5 Strategies That Can Help You Take Control of Your Legacy

1. Know Your Goals

It’s easy to tiptoe into estate planning. Many people complete wills, powers of attorney and revocable trusts as they need them. Others may start making annual exclusion gifts of $15,000 (or $30,000 for a couple) to their children because they realize there’s a tax benefit. Depending on the size of their estate, some people may also consider larger or more complex gifts. 

The problem with this approach is that the vision for what they really want to happen with their assets is not developed. And it’s that vision that provides stability and guides you when the laws change.

For example, a client wanted to leave $10 million to his son and give the rest of his assets to charity. With the federal estate and gift tax exemption decreasing in 2026 or possibly sooner under the new administration, his vision for his legacy allowed him to decide what to do. He decided to make the $10 million gift to his son now, while he could do it without tax under the current rules. He then updated his estate plan so the rest of his estate would go to charity at his death, without a tax implication at that time. 

2. Seize “No Regrets” Opportunities

Once you know your goals or vision, there are often opportunities you can take advantage of immediately. This could mean funding 529 College Savings plans for your grandchildren, funding your private foundation or donor-advised fund to fulfill your philanthropic goals, or putting aside money to help your children buy a first home when they’re ready.

There is generally an estate tax benefit to making gifts sooner rather than later. That’s because any future appreciation of the assets isn’t subject to estate tax since it’s already in the hands of your beneficiaries. Many people miss out on this advantage. They also may find themselves on their heels when laws change, scrambling to do things they want to do before it’s too late rather than having the satisfaction of knowing they’re already making progress.     

Making a lifetime gift can be a big decision but making these gifts in trust can help alleviate some concerns, such as giving up use of a property or retaining access for your spouse. For example, if you want to give a vacation home to your children, you can use a Qualified Personal Residence Trust (QPRT) to discount the value of your gift for estate tax purposes. This kind of trust also allows you to live in the residence for a period of years.  Another type of trust, a Spousal Lifetime Access Trust (SLAT), can be used to make a gift to future generations while allowing your spouse to access the trust funds during his or her lifetime. Trust strategies such as these often create significant tax benefits. 

3. Understand Your Scenarios

Of course, not all estate planning is straight forward. Large gifts involve a range of factors, including family dynamics and governance.  From a tax perspective, your plan should embrace the reality that rules change, and it’s impossible to be certain what the rules will be when you die.  

When we evaluate larger, complex gifts, we run scenarios for various estate tax rules, such as if exemptions stay where they are, drop to $5 million or $3.5 million, or the step-up in income tax basis is removed. The result can be a complicated spreadsheet, but this information allows you to be more confident in the gifts you make and the positive impact for your family.

Knowing your options can also lead to specially drafted trusts and other structures designed to optimize your tax benefits. For example, you may use Grantor Retained Annuity Trusts (GRATs) to pass appreciation to your family tax-free without using your exemption amount. Or you may fund a Family Limited Partnership to provide for governance and discounting opportunities that may go away in the future with decreasing exemption amounts. 

It’s possible to build flexibility into your trust. Naming a Trust Protector can allow for changes to a trust instrument if the law changes. Locating your trust in Delaware can also add flexibility because the law can make it easier to make changes and adapt to circumstances as they develop.  

4. Don’t Set Aside Your Plan

Treat your estate plan as a living document, not simply something that is used when you die. You have a range of options for how you leave your assets to your heirs. In one extreme, you could give them their entire inheritance today. On the other extreme, you could leave it in trust when you die to be held for your descendants long into the future. In between, there are many opportunities that you can take advantage of if you are engaged in the process.

Actively engaging with your estate plan also can bring out the non-financial aspects of wealth.  Your engagement may prompt education opportunities for your children, help you better understand the personal relationships around the family’s assets and come closer to finding a purpose in your wealth beyond the goals you’ve set for yourself.