You may be wondering how to create an estate plan when the country is still awaiting some possible major changes to U.S. tax policy from President Trump. Should you wait until there is a more-definitive policy? According to financial-planning.com’s recent article, “Estate planning when tax laws are uncertain,” the answer is a resounding “no.” We agree.
A major part of estate planning can be transferring assets to irrevocable trusts. This offers asset protection, divorce protection, and management structure for potential future disability. There’s really no reason to wait for new tax laws to implement planning that can be protective and vital—regardless of the final policies.
You should focus on planning for your futures, rather than the ever-changing tax debate in the nation’s capital.
In some cases, it might be smarter to go ahead with tax planning before any changes in tax policy are made. If Trump repeals the generation-skipping transfer tax, you might be prohibited from moving assets outside of the transfer tax system, since there may be no tax system from which to shift!
Here are a few ideas to consider:
Flexibility. Use trusts that are flexible in light of the uncertainties and variability in what might happen with tax laws.
Where to locate the trust. Look at “trust-friendly” jurisdictions instead of your home state. For example, consider these four states —Alaska, Delaware, Nevada, and South Dakota. These states have tax and legal environments that are very conducive to trusts. This is important because if there are significant changes in policy, these states may respond quickly with new laws. Other states might be slower to react.
Trust protectors. A protector can be an independent person who’s a fiduciary and is given the authority to remove and replace the trustee, change the situs (where the trust is administered), the governing law of the trust and other powers. This adds additional flexibility to an estate plan.
Determine who will benefit. Unless there is a personal, legal or tax rationale for another route, make your spouse the beneficiary, so you are able to benefit indirectly through your spouse receiving distributions from the trust.
Singles. For singles or those worried about only being able to access trust assets through a spouse, create what is called a Domestic Asset Protection Trust (DAPT). There are 17 states that allow them, so ask your estate planning attorney about them. With this type of trust, the assets are outside of your estate. However, you can still be a beneficiary. If this seems too risky, consider a hybrid DAPT. This gives a person, acting in a non-fiduciary capacity, the authority to add any descendant of your grandparents as a beneficiary.
Grantor Trusts. Most trusts should be created as grantor trusts—meaning that trust income is taxable to the grantor. The most common way to achieve this status is swap power. Under current law, this power can permit the settlor to swap assets from his or her personal name into the trust, in exchange for assets of equivalent value. It can be implemented to take highly appreciated assets out of an irrevocable trust, so they’re included in the settlor’s estate on death. They can also receive a step-up or increase in income tax basis, which is a benefit when calculating capital gains. If Trump enacts a capital gains on the death tax, this swap power can be used in reverse to swap appreciated assets from a client’s estate, where they’d be subject to a capital gains tax on death, into an irrevocable trust, where they might avoid that gain. This type of flexibility is another reason to plan now.
The tax law is uncertain, but estate planning should proceed as usual. If that planning is done with creativity and flexibility, you should benefit regardless of the final tax policies from the new administration.
Reference: financial-planning.com (March 2, 2017) “Estate planning when tax laws are uncertain”