If you have an estate valued at $3 million or higher…
You’ll want to have more flexibility in your estate plan this year. That’s because the estate and gift tax law is likely to change soon.
You should act now to avoid the worst effects of the new law.
But your plan needs some flexibility because we don’t know the details of the new law.
We do know that if you don’t take some actions now, higher taxes might be locked in before you can act.
Here are steps that increase a plan’s flexibility, enabling all involved to adjust to changing laws.
Details about disclaimers are in the October 2020 issue of Retirement Watch (you can sign up for full membership here), available in the Archive on the members’ section of the website. Disclaimers will be more important during this transition period.
Flexibility also can be built into irrevocable trusts.
A trust can have a power of appointment that allows someone to name or change a beneficiary.
For example, if the lifetime exemption is reduced and your spouse already owns enough assets to exhaust the exempt amount, the children or grandchildren can be appointed beneficiaries of a trust instead of your spouse.
A trust can have an independent trustee who is empowered to determine how trust income and assets are to be distributed, within broad standards you set, sometimes known as sprinkle trusts.
With this power, the trustees can balance the needs of the beneficiaries with the tax law to determine how to distribute income and assets.
Another option is for you to retain the power to later swap assets with the trust, allowing you to minimize taxes as the law changes.
This could be important if the step up in basis for inherited assets is eliminated.
You might want to move assets with low tax bases into the trust so the trustee can recognize capital gains taxes over time. A trust also should have a provision that allows decanting.
Decanting is when the assets of a trust are transferred to a new trust that has terms that better meet your current goals and circumstances than the old trust.
Many states, but not all, allow decanting.
You also might want to name one or more trust protectors.
A trust protector is an independent person who essentially is named to oversee the trust and the trustees.
The protector often is given broad flexibility to modify the trust terms in response to changes in the law or the circumstances of the trust creator or beneficiaries.
For example, you might put a substantial amount of property in an irrevocable trust in anticipation of a lower exemption amount and higher tax rates.
The protector could return some or all of that property to you if it appears there isn’t going to be an adverse law change or your financial circumstances change.
A good estate planner will help you determine which of these flexibility strategies is best for your situation and write the legal documents that will do the job without triggering adverse effects.
Once a new law is enacted and we know the details, your estate plan will need to be reviewed again and perhaps modified to reflect the changes.