Estate Planning in Turbulent Times

Overnight, our lives have been turned upside down. We are concerned about the wellbeing of family and friends but are advised (or ordered) not to be in their physical presence. Although it may seem as though circumstances are spinning beyond our control, we are not powerless. There are steps we can take to protect ourselves and our families, both physically and financially.

First, we can exercise caution in our interactions with others to ensure their health as well as our own, taking care to stay the recommended distance away from others, especially those who are more susceptible to illness, and washing our hands to avoid spreading germs. COVID-19 is a dangerous virus for some people, but the good news is that a large majority of people have not been infected, and most of those who have become ill are recovering fully.

Constant news reports about the COVID-19 virus have brought the wellbeing of ourselves and our families into a sharper focus, highlighting the importance of planning for the unexpected. A second concrete step you can take to ensure the welfare of your family is to pull out your estate planning documents and take a close look to verify that they still reflect your wishes and are able to accomplish your goals.

As you review your documents, ask yourself a few important questions:

Will your last will and testament and revocable living trust still achieve your goals? In these documents, you have specified how you want your money and property distributed to the beneficiaries you have chosen. In addition, if you have children, you probably have named a guardian in your will to care for them if you cannot and perhaps you have even specified a caretaker for your pet. In your revocable living trust, you likely have named a trusted person to be your co-trustee or successor trustee who can step in to manage the money and property held in the trust even during your lifetime if you are unable to do it yourself. In addition, you have specified how the money and property in the trust should be distributed to beneficiaries you have named in the trust document once you pass away.

Life is constantly changing, so it is important to review not only the people you have named as beneficiaries, but also to consider whether the people you named to act as your executor or trustee are still your top choices. Even if you are still comfortable with your previous choices, are the individuals you selected currently available to act in those roles? Is the person you chose to be the guardian of your children still available and willing to care for them? If several years have passed since you drafted your documents, your executor or trustee may have moved away or may not be willing or able to serve. In the current crisis, the person you have selected may be unavailable due to illness, quarantine, or a stay-at-home order, and if he or she lives out of state, may be subject to travel restrictions.

Are you still comfortable with the people you have named to be your agents under your health care proxy and power of attorney? As mentioned above, because of the prevalence of stay-at-home orders, travel restrictions, and self-quarantines, make sure the person you have chosen is currently available to act as your agent. Consider designating individuals you trust but who also live close by to act in these roles.

If you have a living trust, have you transferred all appropriate assets into the trust to avoid the cost and delay of probate?

If you have an estate that will be taxable under the federal and state estate tax laws, have you taken steps to minimize these taxes. Have you considered transferring assets to trusts to reduce your potential estate tax, freeze values for estate tax purposes and structured the trusts with maximum flexibility to permit use of trust assets by appropriate family members and yourself if that is an important consideration.

Does your living will, the legal document that spells out your wishes concerning end-of-life care, still accurately reflect your wishes, for example, whether you would like to receive life support if you are in a permanent vegetative state or have a terminal condition? Make sure family members have a copy of it or know where it can easily be found to ensure that they will not have to guess about what you would want if you become very ill and are unable to communicate your wishes.

Do the beneficiary designations for your retirement accounts and insurance policies still reflect who you want to receive the funds or proceeds? Now is the time to make any changes that are necessary.

Do you have a current list of all your accounts and important documents? The list should include bank and investment accounts, titles to vehicles and homes, credit card accounts or loans, digital accounts (e.g., Facebook, LinkedIn, and Twitter) and passwords, Social Security cards, passports, and birth certificates, which may be needed to manage your property if you become ill or to settle your estate if you pass away.

Our primary goal is to help you have peace of mind about the future—regardless of the circumstances. Eventually, this crisis will be over but right now, we want you to know that we are still here for you. Please call us if you wish to review your estate plan and discuss appropriate updates.

SECURE Act: How It Will Affect You and the Beneficiaries of Your Retirement Accounts

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020. The Act is the most impactful legislation affecting retirement accounts in decades. The SECURE Act has several positive changes: it increases the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, perhaps the most significant change will affect the beneficiaries of retirement accounts: The SECURE Act requires most designated beneficiaries to withdraw the entire balance of an inherited retirement account within ten years of the account owner’s death.

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for.

Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act, the shorter ten-year time frame for taking distributions will result in the acceleration of income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated.

Estate planning goals likely include more than just tax considerations. You might be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your retirement account, it is important to act now.

Your trust may have included a “conduit” provision, and, under the old law, the trustee would distribute required minimum distributions (RMDs) to the trust beneficiaries, allowing the continued “stretch” based upon their age and life expectancy. A conduit trust protected the account balance, and only RMDs–much smaller amounts–were vulnerable to creditors and divorcing spouses. With the SECURE Act’s passage, a conduit trust structure will no longer work because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. You should consider the benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries.

For several years, we have been recommending that clients consider giving a beneficiary the right to establish an accumulation trust, which is an alternative structure that does not require the payout of the RMDs to the beneficiary directly. Under an accumulation trust structure, a beneficiary can make a timely election to be treated as an accumulation trust and thereby permit the trustees to retain distributions in a protected trust for them.

Since retirement accounts are often the largest assets that people will pass on to their family, it may be beneficial to create trusts to handle these retirement accounts.

How to Use Estate Planning to Transfer a Business Interest

If you own a business, you can transfer your business as part of your estate plan — or the value of it — to your chosen beneficiaries. Through proper estate planning, you can leave behind gifts, avoid taxes and help ensure your company’s long-lasting continuity.

The strategies you implement depend mostly on whether you want to transfer control of your business interest before or after you die, and whether you are transferring a functional business or liquidating your interest. An estate planning lawyer will help you determine the best solutions for your situation and goals.

The following are a few considerations to keep in mind as you work on your estate plan:

  • Your estate tax commitments:

If the value of your estate is close to the federal estate tax exemption limit, you should consider the effect a business stake could have on your potential estate tax liabilities. The Internal Revenue Service (IRS) calculates the estate taxes owed at your death based on your assets. If the value of your business pushes your estate value over that exemption limit, your heirs could be responsible for paying an expensive tax bill. Make the appropriate arrangements with the help of an estate planning attorney to shield your business interest from these taxes.

  • Your business’ legal structure:

The structure of your business can help you reduce your estate’s total value. For example, a limited liability company allows parents to transfer ownership of a significant portion of their business to their children (preferable in trust), while still maintaining control over the company. Corporations are able to provide voting stock to the owner and non-voting stock to their children under IRS rules.

  • Use trusts to pass down business interests:

A variety of trusts can help you transfer ownership of your company or manage any of the assets gained as a result of a business sale. Using a trust, you can get the business wealth out of your estate, which prevents it from counting in your overall estate value. The trust’s assets can then go to the next generation while bypassing the probate process.

  • Buy-sell agreements:

A buy-sell agreement is a specific type of business contract in which you sell your company when a specific event occurs, such as your retirement or your death. This agreement is most useful when you have a business partner who will receive full control of your business and you want to prevent your beneficiaries from worrying about negotiating a sale price.

These are just a few of the strategies available for transferring a business interest with appropriate estate planning.

Stand-Alone Retirement Plan Trusts

Dear Clients and Friends,

IRA’s, and in particular inherited IRA’s, represent one of the greatest sources of family wealth, yet many clients and estate planners are not aware of the significant benefits of utilizing Stand-Alone Retirement Plan Trusts, sometimes referred to as Stand-Alone IRA Beneficiary Trusts.

Who should read this letter? Owners of substantial IRA’s or benefits under retirement plans that permit a stretch-out of benefits.

What is a Stand-Alone Retirement Plan Trust? A trust document established by an IRA owner or participant in a qualified retirement plan. It is separate from the IRA agreement and the beneficiary designation form. The trust is a revocable standby trust which is not funded during the IRA owner’s lifetime but becomes the beneficiary of the IRA or qualified plan benefits upon the death of the IRA or plan owner or the death of the owner’s spouse, whichever is later.

What’s at Stake?

  1. Protection of children and grandchildren from divorced spouses and creditors.
  2. Providing for maximum stretch-out of benefits for maximum income tax deferral and wealth accumulation.

Why is Protection Necessary? In 2014, the U.S. Supreme Court ruled in Clark v. Rameker that inherited IRA’s are not protected by federal bankruptcy law. The effect of this ruling is to allow bankruptcy creditors to attach inherited IRA’s. Some states, including Massachusetts and Florida, have adopted laws that protect inherited IRA’s from creditors, but these state laws cannot be relied upon as beneficiaries often move from state to state and may live in a state where there is no exemption. If the IRA owner or qualified plan participant desires to protect the account for their children and grandchildren after their death, a trust should be part of the plan.

Separate trust shares can be established for each beneficiary and the beneficiaries can be a Trustee or Cotrustee of their shares and have significant control so that trust property will be available for their benefit when needed. These trusts can be structured as beneficiary controlled multigenerational trusts and be excluded from the taxable estates of the children and grandchildren and protected from their divorced spouses and creditors.

Why is an Accumulation Trust Beneficial?  In drafting a trust for a beneficiary, the IRA owner or plan beneficiary has two options (if authorized by the trust instrument): permit the beneficiary to select a “conduit trust” or an “accumulation trust”.

In a conduit trust, the required minimum distribution (“RMD”) is distributed from the plan to the trust and the trust is required to distribute the RMD to the beneficiary. The Trustee has no power to accumulate or hold the RMDs. The trust is protecting the underlying plan but not the RMDs for which it is merely a pass through or conduit to the beneficiary. Thus, a conduit trust is not the best tool for asset protection as the distributions when received by the beneficiary may be reached by former spouses and creditors.

An accumulation trust, however, offers much better creditor protection. In an accumulation trust, the plan distributes the RMD to the trust but the trust is not required to distribute the RMD to the beneficiary. Rather, the distributions may be retained and accumulated in the trust and be available for distribution to the beneficiary when needed. The RMDs can be retained in the accumulation trust and be protected.

In order for the trust to qualify as an accumulation trust, specific issues need to be dealt with in the trust drafting: identifiable separate trust shares must be established and linked specifically to beneficiary designations under the plan; a mechanism (such as an authorized Trust Protector) has to be included in the trust to prohibit trust distributions to persons significantly older than the trust beneficiary whose life expectancy is to be used for calculating RMDs; and other technical provisions should be included.

Living Trust vs. Stand-Alone Retirement Plan Trust. Since maximum stretch-out of benefits is desired, naming the living trust as the beneficiary of an IRA or retirement plan may create substantial uncertainty as to whose life expectancies will control the RMDs. Unless the living trust is coordinated with a division detailed in the IRA beneficiary designation form, the beneficiaries will all be required to use the life expectancy of the oldest beneficiary of the living trust, or possibly a five-year period, depending on the living trust terms.

Also, an accumulation trust is difficult to draft in a living trust since a mechanism is necessary to remove contingent beneficiaries whose life expectancy would shorten the term of the payout and such removal is usually inconsistent with the IRA or plan owner’s objectives for the disposition of assets not in the IRA or plan.

Recommendation: For owners of substantial IRA’s or retirement plan benefits, strong consideration should be given to establishing a Stand-Alone Retirement Plan Trust granting beneficiaries the option to establish accumulation trusts and retain all or part of the RMDs in such trusts thereby building wealth in a vehicle that is creditor protected for beneficiaries and their descendants.

Remember to Include Your Digital Assets in Your Estate Plan

As you develop your estate plan, you must consider what will happen to your digital assets, such as your online accounts, websites, blogs, social media profiles and any other digital files. In most cases, you cannot include these items in a will, as you do not actually own them in a traditional sense. The law is developing in this field and legal access to these assets may be limited. Nevertheless, working with a knowledgeable estate planning attorney, you can provide instruction and authority to the personal representative of your estate, who will do what they legally can to carry out your directions.

The following is a brief overview of some of the digital assets you may wish to have your personal representative control and the important considerations associated with each.

Facebook and other social profiles

Every social media company has a policy of what it will do with accounts belonging to deceased users. Facebook, for example, recently started putting accounts of deceased members into a special “memorial” status, allowing others to continue to view the profile and leave messages or photos. One person retains control of the account. Other sites may simply delete or deactivate the account upon request. Of course, someone must inform the company that the individual in question has died.

You may provide your personal representative with your login information and either instruct that person to post a final status update or delete your account (or individual items on your account) entirely. An estate planning lawyer will provide you with more options if needed.

Email accounts

Again, what happens with your email account is primarily based on the policy of the company hosting your account, such as Google, Microsoft, your employer or an internet provider. However, most companies delete inactive accounts after a period of time. You may provide your personal representative with your login information and have that person send, delete or print emails before the account expires. Or, you may instruct that your account gets deleted immediately.

Blogs and websites

If you run a blog or website, you may consider having your personal representative publish a final post so that your readers know what happened. The personal representative could also take the blog down or put its contents into an archive.

If you own the domain name for your blog or another website, consider what you want to have happen to that site. In your estate planning documents, you could name to a new owner.

Digital files

These days, more people than ever are taking advantage of cloud-based systems to store their photos, movies, music and various other files. You will need to consider how your personal representative will be able to access those files, and what should happen to them. In most cases, hosts delete or disable these accounts after a certain period of inactivity. To that end, it’s important to leave instructions for how to handle them so that nothing important is lost.

The Importance of Updating Your Estate Plan

What steps should I take to update my estate plan?

Creating an estate plan is only the first part of the estate planning process.  It clarifies your wishes and provides for those you love. However, because your life and the lives of those around you are constantly evolving, we recommend that you review your estate plan at least every five years. Circumstances that may require you to alter your original estate plan include: marriages, divorces, births, illnesses, deaths, and buying or selling of real estate or businesses. There may also be more subtle changes in relationship or status that influence your decisions about how you want to distribute your assets.

What should you consider when reviewing your estate plan?

There are several things to take into consideration when you look over your existing estate plan. These include

  • Has the value of your assets changed considerably?
  • Have you moved to a different state or purchased real estate in another state?
  • Are there any new health issues for you or your family? Have any special needs arisen?
  • Are your named fiduciaries, such as trustees or health care agents, still appropriate choices?

Which documents should you review?

While you’re reviewing your overall estate plan, it is a good idea to review your existing estate planning documents as well.  The documents that you should review include: your will, power of attorney, living will, healthcare proxy, and trust. Because life events may alter your views, it is important to have your latest wishes reflected in your estate planning documents.

Don’t Overlook Your Insurance Coverage

Life insurance is one way to pass income tax-free assets to your heirs. It may also be a critical aspect of sustaining family members who depend on your income. As you review your life insurance, it is critical to take note of any changes in the circumstances of your beneficiaries. Have they married, divorced, had a child, become independent, lost a job, become ill, retired? These factors may affect how much life insurance you should be maintaining.  Because life insurance proceeds are taxable for estate tax purposes, you should also discuss with your lawyer whether or not an irrevocable life insurance trust is advisable.  An ILIT is a strategy to avoid taxes on insurance proceeds.

Minimizing Your Taxes

It is usually wise to incorporate a trust into your estate plan to reduce exposure to federal or state estate tax.  A trust will also make managing your assets much easier if you become incapacitated and save your heirs the complications and expenses of probate after your death.

Keeping Life Insurance Out of Your Taxable Estate

How can you use life insurance trusts to minimize estate taxes on the proceeds of life insurance policies?

Life insurance can be an effective way to leave a large sum of money to a loved one free of  income tax. But mistakes may prevent beneficiaries from reaping the full advantages as well as create adverse estate tax consequences.

For example, if the life insurance is payable to your estate, rather than to a specific person, it may be subject to probate which can be a lengthy process. The beneficiaries of your estate may  have to wait up to one year to receive their share of the death benefits from your life insurance policy. Even if you name a beneficiary, the proceeds from your life insurance policy are included in your taxable estate. When combined with your financial assets, the value of your home, and other assets, the proceeds from your life insurance policy could increase the value of your estate substantially, thus resulting in an estate tax.

Create a Life Insurance Trust

If a life insurance policy is owned and payable to an irrevocable trust, the proceeds of the life insurance policy will not be considered part of your taxable estate and the proceeds are not considered taxable income. A transfer to a trust has other advantages. You can name the persons you want to serve as trustees who will manage the investment of the proceeds. You can also set forth the distribution terms for the beneficiaries which is particularly important for minor and disabled beneficiaries. You can also provide for the trust to pay the insurance premiums.

The transfer of a life insurance policy to an irrevocable trust is subject to the “three-year” rule, which requires that the transfer to the trust occurs at least three years prior to your death.

If you wish to keep life insurance proceeds out of your taxable estate, a qualified estate planning attorney can help you design and implement an irrevocable trust.

Sometimes Seemingly Simple Estate Planning Ideas Add Complexity and Confusion

Why is giving title of your assets to your children not a good idea?

Contemplating one’s own death is never easy, so we often look to simplify the estate administration process. Unfortunately, unless we do this with the assistance of a competent estate planning attorney, we are likely to create additional issues.

Adding your children to the title of your assets, so that they already have possession of your assets if you become incapacitated or die, may seem appealing. The idea here is that, once you put your child’s name on your home, bank accounts, vehicles or any other titled assets, that property avoids probate when you die and passes directly to your child.  In addition, your child is able to manage these assets if you become physically or mentally incapable of doing so.

Your intention is to make for a smoother transition if you are incapable of managing your own affairs or when you die. You fully expect that the child to whom you give this responsibility will share the remaining property with his or her siblings when the time comes.

There are two major problems with this line of reasoning. One is that, by putting your child in co-control of your assets, you make those assets vulnerable to his or her actions. The other is that the arrangement may not be carried out as you wish and may provoke family disputes after you die.

Your Assets Become Vulnerable

If the child that you added to the title of your assets gets into legal difficulty of any kind (causing vehicular damage or personal injury, being on the wrong end of a lawsuit, getting arrested, getting divorced), your property is in jeopardy. Because all of your assets belong to your child as well, they can be used to settle any judgment against him or her.

Your Wishes May Not Be Carried Out and You May Inadvertently Cause Family Conflicts

Typically, when you add a child to the title of your assets, you choose the child who has the easiest access to your affairs, usually the child who lives closest to you. Even though, in this scenario, you make it clear to all of your children that this decision is being made for convenience, and that you intend for all your children to inherit equally after you die, this may not happen.  Legally as a co-owner of your assets, upon your passing, the child is entitled to 100% of the assets.   That child has no legal responsibility to split the assets with his or her siblings.

All too often, the child who is given title to the assets is also the child who assists you during your declining years. This child is frequently the one who shepherds you to doctor appointments, on shopping expeditions and social visits, and also arranges for, or performs, household cleaning, banking, bill paying, and so on. For this reason, when it comes to dividing up the assets after you pass away, this child may feel entitled to the lion’s share of the assets and be unwilling to share equally with his or her siblings resulting in family conflicts.

The way to avoid both of these pitfalls is to create a living trust with the accessible child named as co-trustee or successor trustee. This allows that child to step in and take control when you become incapacitated, but avoids the problem of co-ownership. With the living trust in place, the designated child would not own the assets in question, so they could not be attached in case of any lawsuit or financial difficulty of the child. In addition, at the time of the parent’s death, the designated child would have to distribute the remaining assets according to the instructions the parent has written into his or her living trust. It would not be possible for the child who is named as trustee of the living trust to change the terms of the living trust or the beneficiaries.

This being said, it is wise for the parent to take into account the extra burden put on one child during the parent’s declining years, since, if this is not done, family disputes and hard feelings may still surface. It is often wise to provide the caretaking child with an allowance while you are still alive to pay for groceries, gas, car maintenance and other additional expenses they incur.

2018 U.S. Tax Reform is Here: What You Need to Know About Estate Planning Implications

In December 2017, Congress passed the Tax Cuts and Jobs Act that changes significantly tax planning for corporations, small businesses and individual creating unprecedented planning opportunities for both individual and business clients.

This memo focuses on some of the estate planning implications:

Gift Planning

The doubling of the estate, gift and generation-skipping tax (“GST”) exemptions means that, beginning in 2018, taxpayers can transfer up to $11.2 million of assets without transfer tax consequences. Between January 1, 2018 and the sunset of the increased exemptions on December 31, 2025, clients have the opportunity to remove assets from their estates and exempt future appreciation from taxation.

Whether a client should make taxable gifts depends on many factors, including the effect of state-level estate taxes and the tax basis of the property to be gifted. If the client is considering gifts for non-tax reasons (such as asset protection), the increased exemption amount may be enough to tip the scales in favor of a lifetime gift. This is especially true if the client has a gross estate significantly above the exemption amount.

Spousal Lifetime Access Trusts

Some clients who would otherwise make gifts to irrevocable trusts for tax planning purposes may be reluctant to do so because of the loss of control. These clients may be concerned that lifetime gifts will deplete their funds to such an extent that they can no longer support their current and future lifestyle. For married clients, these concerns can be alleviated with a spousal lifetime access trust (SLAT).

A SLAT allows one spouse (donor spouse) to make a gift to a non-reciprocal, irrevocable trust that names the donor spouse’s spouse (beneficiary spouse) as a lifetime beneficiary of the trust. The beneficiary spouse or the couple’s children may serve as the trustee if his or her discretion to make distribution of trust assets is limited by an ascertainable standard. The gift constitutes a completed gift to remove the asset from the donor spouse’s estate, but ensures that the donor spouse will still have access to trust assets through the beneficiary spouse as long as the couple remains married to each other. The SLAT may also give the beneficiary spouse a limited (but not a general) power of appointment to distribute assets among the couple’s children after the beneficiary spouse’s death.

Clients should evaluate whether to establish SLATs (or make transfers to existing SLATs) before the increased exemption amounts expire. As long as the gifts to the trust are below the increased exemption amount, a transfer to a SLAT may offer increased protection against future changes to the tax laws with little downside risk.

Opportunities for GST Planning

The increased exemption amounts also create opportunities for GST tax planning. For example, grandparents can combine lifetime gifting with GST tax planning and make lifetime gifts directly to their grandchildren (skip persons) instead of their children. This would be particularly beneficial in light of the December 31, 2025, sunset of the increased exemption amounts because it will allow an additional $5 million of assets (twice the current exemption amount) to escape estate taxation at the children’s death, by which time the exemption amounts may have reverted back to the 2017 levels.

Instead of making outright gifts to skip persons, clients can also establish a GST trust and allocate the increased exemption amount to such trust, which may render it fully exempt from GST tax even when the increased exemption sunsets. For clients with existing trusts to which no GST tax exemption was allocated, 2018 (until the sunset) may be the time to make a late allocation. For clients with existing GST tax exempt and non-exempt trusts, the period of increased exemption could be the ideal time to make distributions out of the non-exempt trusts either directly to skip person beneficiaries or to a GST tax exempt trust.

Assuming there is no clawback of any or all of the doubled exemption amount, a proper allocation to a trust of the increased GST exemption amount should render the trust fully exempt from GST tax for the duration of its term, even after the reversion of the exemption amount back to the 2017 level. It is important to remember that there is no portability of the GST exemption, so each person must use his or her exemption either during lifetime or on death. Otherwise it is lost.

Domestic Asset Protection Trusts and Hybrid Domestic Asset Protection Trusts

Now may be the best time in a client’s life to contribute to self-settled domestic asset protection trusts (DAPTs). This is especially true for unmarried clients that cannot use the SLAT strategy described above. There are various ways that DAPTs can be designed with built-in flexibility, such as by naming a trust protector or non-fiduciary with authority to add the grantor back as a trustee at a later time (hybrid DAPT). Establishing and funding a DAPT not only removes assets (including future appreciation) from the estate, but also provides ongoing asset protection for the term of the trust.

Review and Revision of Prior Estate Plans

All clients that have previously engaged in tax planning should revisit their estate plans, including the dispositive provisions of all testamentary and non-testamentary trusts. These plans should be evaluated for tax purposes, but—perhaps just as importantly—for non-tax purposes. For example, many estate plans make bequests equal to the federal estate tax exemption amount. Clients that may have been comfortable with a $5 million bequest may not be comfortable with a $10 million bequest, and with the built-in expiration of the increased exemption already in place, clients should consider the effect of another change in 2026.

Power of Appointment Planning

Depending on the circumstances, clients should also consider giving older, trusted relatives a general power of appointment for basis step-up purposes. Giving an elderly relative a general power of appointment over a trust can result in a basis step-up for the trust assets on the death of the elderly relative. If clients have considered this strategy but have been reluctant to move forward because of the size of the elderly relative’s own estate, those concerns may be alleviated—at least in the short term—by the increased exemption amounts.

Building Flexibility into Plans

Given the scheduled sunset of the increased estate, gift, and GST tax exemptions and the possibility that changes in Congress and the White House will change the tax laws, flexibility is more important than ever for clients with potentially taxable estates. For example, in appropriate cases trusts should include powers of appointment that allow trust assets to be re-vested in the grantor to obtain a basis step-up. Trust protectors, formula powers of appointment, and other strategies designed to future-proof planning strategies should be considered.

Uncertainties Arise in World of Estate Planning After Election

Throughout his presidential campaign, President-Elect Donald J. Trump pledged to repeal the federal estate and gift taxes or replace them with a capital gains tax at death.  After his victory, it is important that estate planning attorneys discuss with their clients the possible repeal of estate and gift taxes.

Under current law, any individual whose estate exceeds the estate and gift exemption of $5.45 million ($10.9 million for couples) is subject to taxation at a rate of 40 percent. For gift tax purposes, if gifts of more than $14,000 per person are made in a single year, there is a gift tax filing, however, there may be no gift tax owed.

With Republicans controlling the U.S. House of Representatives, Senate and White House after the 2016 election, repeal of these taxes is possible. However, it is worth noting that Republicans do not have the filibuster-proof supermajority of 60 seats in the Senate—something that could delay the process.

Possible estate planning changes on the way

There are no certainties regarding what the new Congress will do with respect to federal gift and estate taxes. Most estate planning lawyers agree the following are a few of the potential changes that could take effect in the coming months:

  • An immediate, permanent repeal of gift, estate, and generation-skipping transfer (GST) taxes.
  • A permanent repeal of all transfer taxes that would take effect over a certain phase-out period (such as 10 years), as happened in 2001. This would pose the risk that elected officials would again change the tax during the phase-out, so it’s unclear if Mr. Trump, as president, would approve of this arrangement.
  • A repeal of the estate tax, but a retention of the gift tax.
  • A repeal of the estate tax—regardless of gift tax status—and a new capital gains tax to go into effect upon one’s death.

The timing of potential changes is also completely up in the air at this point. It’s unclear whether President-Elect Trump and the Republicans in Congress would make repealing estate taxes a priority. Mr. Trump’s 100-day plan does include the potential for eliminating these taxes, but the media has paid much more attention to other actions likely to take a higher priority, such as the president-elect’s plan to repeal the Patient Protection and Affordable Care Act.

To that end, you may be wondering about the actions you should take as it pertains to your estate plan. Right now, most attorneys would agree that you should wait until President Trump takes office and see what unfolds over the first four to six months of 2017. While there may be some changes on the way, it’s also far from a certainty that a repeal or reduction of estate and gift taxes are on the horizon at all.