Is Your Estate Plan Ready for Tax Reform?

03.23.2017 - Bryan Kirk

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.

Q. With the possibility of a tax overhaul in mind, what steps should families take to be sure their estate plans are still appropriate?
BRYAN: Whenever tax laws change, first, it is important to consider what doesn’t change. That is the need to answer and keep updated the fundamental questions of any estate plan: Who will manage your personal and financial affairs if you die or lose capacity? Who will receive your property? And how?

While taxes are a crucial consideration, what we know from working with families over our 85-year history is that how they answer those questions and how their plan is carried out can be as important—if not more important—than any tax benefit. And those core decisions do not necessarily change because of tax laws.

CRAIG: Yet taxes do drive a lot of decisions. If tax motivation is leading the charge for a family’s particular plan, there will likely be changes to consider if tax laws change. Similarly, tax reform itself may create opportunities that families will want to seize upon.

It is fairly clear that large, tax-motivated gifts that would require payment of gift tax should be postponed. Likewise, the timing of implementing complex planning structures, especially those involving long-term commitments of property or administrative burdens, should be closely evaluated. The proposed tax changes may diminish the benefits of such plans, while the burdens would remain for years to come.

BRYAN: Married couples should be aware that they most likely have some tax planning built into their revocable trusts. Provisions for “Credit,” “Bypass,” or even “Marital” trusts to be established upon the death of the first spouse to die may not work the way they are intended if the estate tax is repealed.

CRAIG: Also, parents and grandparents who are leaving property in continuing trusts for their descendants need to understand the tax planning involved in those trusts. There typically should be flexibility to address changing tax circumstances. At the same time, the trusts should be structured to disperse assets in the way the parents or grandparents would want, even if there wasn’t a tax motivation.

Q. Would an estate tax repeal affect the way you approach estate planning?

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.

Q. Would trusts still be necessary in a no-estate-tax environment?

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.

Q. What’s next?

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.

This communication is intended solely to provide general information. The information and opinions stated are as of March 23, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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