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Post TCJA Estate Planning Checklist

mug martin shenkmanThe Tax Cut and Jobs Act enacted in late December 2017 transforms estate planning making the CPAs role more important than ever before. Too many practitioners dismiss estate planning in light of the large exemptions (Gee none of my clients are worth more than $22 million!) but that mischaracterizes the planning environment. The following is a checklist of planning ideas to help practitioners get over the “doesn’t apply to my clients” hump and create significant benefit for clients, and great business opportunities for CPAs.

Not Just Taxes

You’ve heard many times, but really estate planning was rarely ever only about estate taxes and for most clients certainly is not only about estate taxes now (but read on). The lessening importance of estate taxes makes this for huge business opportunities for CPAs. Clients will be less likely than ever to meet with their estate planning attorneys. They will not view the cost as worthwhile if there is no likely estate tax savings. That is a terrible mistake but the result is that unless CPAs educate clients about the importance of proper estate planning in the current environment, no one may be doing so. So ramp up your efforts to have estate planning discussions with clients.

Asset Protection is Critical. Every client, not just physician-clients, needs to take prudent steps to protect their assets from lawsuits and claims. Society will not be less litigious then before because of changes in the tax law. Few clients take sufficient steps. Asset protection should start with practical steps like making certain the client has adequate property, casualty and liability insurance. An excess personal liability policy is key to this layer of protection. Practitioners will be surprised at the frequent and significant gaps that can be uncovered in the course of a casual conversation with the client even before an insurance expert is brought in. Most clients hold investment real estate and business operations in separate LLCs. The primary purpose of that is to safeguard their home and savings from attack in the event of a claim. But shockingly many clients hold multiple assets in a single LLC (so a suit on one could jeopardize all assets inside that entity). Many clients never put rental properties or a home-based business into an LLC. Often the investment or business “just got started” and they never took the time to consult with an attorney. Every client should have these concerns and most practitioners can provide considerable help. Without the estate tax driver pushing the clients to meet with an attorney these critical non-tax steps will be overlooked.

Divorce Protection. How many clients worry about their children getting divorced and losing much of their inheritance? All! But most of these clients have wills that leave all inherited assets outright to their children at some age like 30. Why? Because no one explained to them the risks that creates and that with the simple technique of a long term trust the child can be protected. Review the client’s will. Don’t fret that you are not an attorney. It is usually pretty simple to see what trusts are used and if any when they end. Simply updating their wills can provide incredible divorce protection for their heirs. Not a difficult or costly process relative to the benefits involved.

Old Wills Bad Formulas. Many clients need to review their wills (or revocable trusts if that is the primary dispositive document) in light of the tax law changes. Many wills were drafted using formulas to determine how much of the estate passes to a credit shelter trust and how much to a marital bequest (e.g. a qualified terminable interest property or QTIP trust). Many of the formula clauses in old wills just won’t work with the new law. Here’s an extreme example, but don’t assume it is unrealistic many of these have already surfaced.

Example: Grandmother wrote a will when the estate and GST (generation skipping trust) exemption was a mere $1 million. So, she left a bequest outright, no trusts, to her ten grandchildren of equal shares of the GST exemption, the remainder to her children. Conceptually that made sense because it used her GST exemption, and perhaps for $100,000 or less per grandchild she did not want the cost of a trust incurred tenfold. With an exemption over $11 million under the new law, her $10 million plus estate passed all the grandchildren with each grandchild inheriting more than a $1 million unprotected. A disaster. Don’t assume this is so rare that your clients need not worry. Another common scenario might be funding a credit shelter trust for the surviving spouse and children from a prior marriage with the exemption amount. That might have been reasonable if the exemption were a mere $1 million but now the entirety of the estate might end up in that trust. Depending on the distribution provisions, who is named as trustee, and other factors, this could range from a bad result to an unmitigated disaster. Many clients do not understand these issues and merely dismiss the need to go back to their estate planner since they view the exemption as beyond them. Regardless of the fact of their estate perhaps not incurring an estate tax, the change in law may completely undermine their intended dispositive scheme; a non-tax consideration of extreme importance. Practitioners again should not feel uncomfortable at least trying to help clients identify what happens to their estate so that the client can be directed back to their estate planning attorney to confirm if there is in fact and issue an if so resolve it.

Small Estates Bad Planning

For small estates, or simpler situations, some attorneys left assets outright to the surviving spouse. For moderate estates a disclaimer provision may have been included in the will to permit the surviving spouse to direct some of the funds to a credit shelter trust if it was determined after the first spouse’s death that such a trust should be used to save estate taxes. These approaches, while cheap and seductively simple, leave all the estate exposed to remarriage and creditors of the surviving spouse. Those issues are too often ignored or minimized. With longevity and burgeoning elder financial abuse that is a mistake. A better approach for many of these clients is to have a will, post-TCJA, leaving all of the estate to a marital QTIP trust. That trust could even include a right or the surviving spouse to disclaim. With document generation software technology building a better will is not particularly costly. Using an “all to QTIP unless disclaimed to credit shelter” approach gives the surviving spouse protection for lawsuits, future spouse, creditors and predators. That’s important. As to tax planning, for clients that needn’t care about the estate tax, all QTIP assets will be included in the surviving spouse’s estate and thereby qualify for a basis step-up if applicable. The QTIP also creates a range of more sophisticated planning options that are worth having “just in case.” For example, GST exemption can be allocated to the QTIP and those assets can then grow outside the transfer tax system after the surviving spouse’s death if left in long term trusts for heirs (which they should be for the same reasons- protection and flexibility). If the surviving spouse might remarry a disclaimer of any portion of his or her income interest in the QTIP can trigger a current gift thereby using up the deceased spouse unused exemption (DSUE) from the first to die spouse. That could be prudent since the death of the new spouse would eliminate the DSUE from the first or prior spouse. Depending on the changes in the law and other factors that could be useful.

Terminating Old Planning

Many clients have already and will continue to show up at their CPA’s door to seek help unwinding old plans that they view as costly and irrelevant in light of the new exemption amounts. Many clients will seek out their CPAs viewing the process as less costly then returning to their estate planning attorney. CPAs should be very cautious in pursuing any of these “unwinds” without first carefully considering all of the issues and ramifications. Few clients will begin to evaluate these situations beyond the “I don’t need this.” Many clients bought life insurance to pay an estate tax that is likely irrelevant. These clients might seek to terminate the coverage and cancel the trust. Depending on the facts, that old insurance coverage might remain a prudent investment and a ballast to more risky investments the client has in the rest of her portfolio. If the client has a health issue that coverage might never again be obtainable. What if the estate tax exemption lowers to ½ the current level in 2026 as is provided for in the law? What if a future administration, in reaction to the benefits of the wealthy under the current law, revert to an even lower exemption? If the insurance is cancelled and the insurance trust unwound it may be impossible to reconstruct. The cost of keeping the old trust in place is insignificant. The cost of creating it is a sunk cost. Some taxpayers with family limited partnerships (FLPs) or LLCs may seek to liquidate those entities since, after all, they might not need the discounts. Perhaps not but what of the asset protection, management, probate avoidance and other benefits an FLP or LLC might provide? What will your liability exposure be as a practitioner that helps liquidate an entity only to find that the next month the client is subject of a large lawsuit? What of a QPRT (qualified personal residence trust) established when the exemption was a mere $1 million to save estate tax and now the only result is the loss of a step-up in basis and no estate tax savings? Liquidation of the QPRT might sound sensible and simple to the client (just deed the house back to mom, right?) but it could be far from that. What of the liability to the trustee for violating the terms of the trust? What if the beneficiaries of the QPRT differ from the beneficiaries of mom’s will? What if mom has a new boyfriend no one knows about? Again, clients need objective, broad-perspective, analysis not a quick reaction to a change in the law that may yet change again.

Using Temporary Exemptions

While many clients, and even many practitioners, might view the new $11 million exemption as of stratospheric proportions, is it really? First, as noted above, the exemption drops by ½ in 2026. Further, no one has a crystal ball to guesstimate the likelihood of a future administration change the rules to a harsher result than that. So now, many clients of moderate wealth might still benefit by shifting wealth into irrevocable trusts to grow that wealth out of their estates. Before dismissing this need, as many clients already have, consider the growth in the client’s estate by 2026 when the exemption will drop. A not insignificant number of clients might well face an estate tax. Do a projection of the client’s assets growing at a reasonable rate for 10 years. What does that number look like compared to the $5 million (not $10 million) inflation adjusted exemption in 2026?

Income Tax

For a decade or longer the default approach for many irrevocable trusts was to structure them to be grantor trusts taxed to the settlor creating the trust. Now, however, for the first time in a very long time the use of non-grantor trusts might provide valuable income tax savings. Non-grantor trusts that own some of the equity in a client’s business might qualify for a full IRC Sec. 199A 20% business income deduction because the trust’s income may be under the income thresholds mandated under 199A. If a client cannot benefit from charitable contribution deductions, transferring investment assets to a trust and having the trust make the contributions can secure a full income tax deduction since trusts do not have the standard deduction individual taxpayers do. Just be sure the trust meets the requirements of IRC Sec. 642(c) to qualify. The trust will salvage an otherwise lost/wasted contribution deduction and the client will still have their full $12,000 or $24,000 standard deduction. A nice tax savings. Practitioners will be critical to this income tax oriented trust planning. This change in focus is yet another reason that the CPA will prove to be the catalyst to estate planning happening. In many instances estate planning attorneys will not have a strong income tax background and will more than ever need the assistance of the CPA on the planning team.

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