Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Should You Put Your Estate Planning Strategy On Hold? (8-Point Checklist)

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Tax reform proposals are slowly being developed in Congress, including changes in the estate tax. People are asking, “Should I delay my estate planning until the new law is clear?”

We’ve been down this road before, and the answer is: You shouldn’t delay.

Congress is looking at changing only the federal estate and gift taxes, not the rest of estate planning. For most people, those taxes aren’t relevant now because of the high exemption amount.

The main change being discussed is to exempt even more people, probably to the extent of repealing the estate tax.

Of course, it’s far from a sure thing that the estate tax will be repealed; even if the estate tax is repealed, the timing is unclear.

Another uncertainty is how long a repeal would be in effect. A change in control of Congress could easily result in a return of the estate tax within a few years.

Also, as with the last time a major change was made, a sunset provision probably will take effect after 10 years.

Moreover, the details of the repeal are up in the air.

Traditionally, we’ve had what is called the unified estate and gift tax. The two taxes (estate and gift) have the same exemptions and tax rates.

Taxpayers have a lifetime estate and gift tax credit, not just an estate tax credit. Lifetime gifts above the annual exempt amount reduce the lifetime credit, so a lower credit is available to the estate.

Also, a major feature of the current law is that, after property is inherited, the beneficiary increases the tax basis to its current fair market value, which is known as a stepped-up basis. Appreciation during the deceased’s ownership period avoids any capital gains tax.

The proposals discussed the most would do away with stepped-up basis.

In one widely discussed proposal, the beneficiary would inherit the asset and take the same basis the deceased had. This one is known as the carryover basis.

In a second widely discussed proposal, the estate would have to pay capital gains taxes as though the asset was sold on the date of death, and the beneficiary would take the asset with a stepped-up basis.

It is likely the gift tax would remain even if the estate tax is repealed. The generation-skipping tax might also remain.

So, what’s a person to do about estate planning in the face of this uncertainty?

Those who currently aren’t exempt from the estate tax probably face the biggest dilemma. Ironically, it likely is best for them to go ahead with estate tax reduction strategies.

Under current law, they can remove assets from their estates through gifts and transfers. The beneficiaries generally would take a carryover basis in the properties, and owe capital gains taxes when the property is sold.

Importantly, future appreciation would be out of the estate.

But if these wealthy individuals wait until the estate tax is changed, the assets might be locked in their estates.

They might owe gift tax if they try to transfer the assets under the new law, and their estates might owe capital gains taxes on the assets they retain.

They will not be able to shift future appreciation out of their estates without paying a tax first.

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Which is why you are likely to have more options, flexibility, and lower costs by acting now than by waiting for a new law to be enacted.

More importantly, as I’ve stressed before, taxes should only be a small part of estate planning for everyone.

The non-tax elements of an estate plan are more important and shouldn’t be delayed.

Most parts of the estate plan are to protect assets from waste, mismanagement, conflict and other forms of leakage.

Traditional estate planning will continue on, as in the past, and you shouldn’t delay taking action because of some uncertainty over the tax law.

Use this 8-point checklist to work with your estate planner:

Flexibility. Many estate planning actions can be revised or changed later, so you aren’t locked in if the law changes. Also, many of the inflexible strategies aren’t done primarily for tax reasons, so there’s no reason to delay them.

Even inflexible strategies, such as creating irrevocable trusts, often can be structured to adapt to changing circumstances.

There can be a trust provision that allows you to swap assets with the trust, as long as they are of equal value. The trustee can also be empowered to make loans of trust cash or assets to you.

The trustee can have the power to “decant” the trust. When the trust’s terms aren’t optimum, because of changes in the law or circumstances, a new trust with different terms can be created, and the assets can be moved from the old trust to the new trust.

You can also create the role of trust protector. This person oversees the trust and can make changes such as removing a trustee, moving the trust to a new state, and more.

Rather than delaying an estate plan, discuss with your planner ways to keep some flexibility in case the tax law changes.

Avoiding probate. Some states have streamlined probate processes, so avoiding probate isn’t a big deal. But other states have slow, expensive probate processes, and it’s important to avoid probate as much as possible.

Don’t delay actions to avoid probate simply because there’s uncertainty about the tax law.

Decide which assets should avoid probate and how to do it. You can avoid probate through a range of tools: living trusts, joint ownership of property, transfer on death (TOD) accounts, annuities, life insurance and more.

The will. The estate and gift taxes don’t have much influence on the key elements of the will, so don’t delay having your will written or updated.

You need an executor (or group of executors) to manage the estate, put it through the probate process and eventually distribute the assets according to the terms of your will.

The will, of course, states how the assets are to be distributed among the objects of your affection.

It should also appoint a guardian for any dependents you have. The will might create one or more trusts and also direct which assets will be transferred to any trusts you have.

There’s much more to cover on this important topic… so next week, we’ll review the remaining 5 points of my estate planning checklist.

You can check Part 2 of this post here.

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