After losing a spouse or longtime partner, it's difficult to look past your grief. However, it's crucial to understand the important and timely decisions you must make regarding your finances and personal estate plan.
The future is a big unknown for everyone. Significant uncertainty abounds as to the outcomes of US tax legislation proposals. Estate and gift tax exemptions may get cut in half or not, and whatever happens will likely affect all deaths and transfers of wealth after December 31, 2021. Whatever the outcome, there are still ways to legally reduce your estate and income taxes as part of asset protection in your estate planning.
Creating a strategic estate plan will take time and a great estate planning attorney who understands you, your business interests, and your family relationships. Do not overlook the importance of synergy among your family members in creating an effective estate tax strategy. Your children can be a strategically when passing assets before death, thus eliminating tax consequences to your overall estate.
The Importance of Tax Planning for Your Estate Plan
It is crucial to create a tax plan and estate plan together as they heavily influence each other. If you have a separate tax advisor, they need to coordinate with your estate planning attorney to avoid duplication of work effort and create a seamless strategy.
One of the most significant possible changes to tax legislation is a special income tax surcharge that will impact many existing trusts. Proposals currently target higher-income taxpayers with an additional five percent tax on income over ten million dollars, with an additional three percent tax on those above twenty-five million dollars. If these surcharge taxes take effect, it will change how many people structure their trusts like a credit shelter or create a family trust on the death of the first spouse.
The Value of a Trust in Your Estate Plan
It appears grantor trusts will remain taxable to the settlor; however, non-grantor trusts (complex trusts) generally pay their own taxes and will require close monitoring for regulation changes. A non-grantor trust pays taxes on all earned income; however, it receives a deduction for beneficiaries’ income (distributed net income). The cautionary tale is to stay tuned and act quickly on any legal changes.
Creating more than one scenario for your estate to remain flexible to tax law changes is key to implementing changes quickly. Bear in mind some of these proposals cite the date of enactment as the effective date for the rule; other proposals may be retroactive to the date they were brought forward to legislators. Options of action can include several provisions in your trust documents permitting you to change or modify the trusts. Some of these provisions can include:
- A decanting provision that allows the trustee to decant into a new trust. However, some proposals may restrict decanting, which may supplant any state law rights permitting decanting.
- Disclaimer provisions provide the right to designate a person as the primary beneficiary to disclaim all assets transferred into the trust; the disclaimer executes the assets to revert to the donor/settlor.
- A provision that permits the trustee to disclaim. However, it could be a violation of the trustee’s fiduciary obligation to all beneficiaries.
- A provision that allows a named person to turn off the grantor trust status assuring the ability to modify the trust’s income tax status if it proves advantageous in the light of the proposed harsh restrictions on grantor trusts.
- You name a trust protector with authorization to change trustees, governing law, situs, administrative provisions, etc.
- Give power to the trustee to divide the trusts to take different actions if it becomes useful.
- Name a broad class of beneficiaries, including charities, which gives the trustee flexibility to include capital gains income and provide broad discretion or distribution of income and perhaps principal out of the trust.
There are other tactics to employ, but it is evident that the complex law governing trusts and the potential for changes need to be in the hands of a competent estate planning attorney.
You likely have worked hard throughout your lifetime to build generational wealth for your family. Proper estate planning is the way to ensure your assets will not see a dramatic reduction due to taxes. The time to plan and implement your legal strategies is now. Some of these proposals may become law. Proactively getting out in front of the changes is in your best interest. If you’d like to discuss your particular situation, please don’t hesitate to reach out. Please contact our Cincinnati office by calling us at 513-771-2444 with any questions.