New legislation and statutes put in place should be an indication for everyone to review their current estate plan and assess by asking yourself simple, yet critical questions. “When was the last time I examined my will or trusts?” “Power of Attorney?” How about “What are my current plans to gift assets?” These questions are serious to think about, especially given the new ordinances in place. Under the new Tax Act, only a mere .08% estates will owe federal estate taxes (until the Act sunsets) opposed to the .2% of estates that owed estate taxes previously. If you have not already, now is the best time to review your situation, and make sure you are maximizing your plan under the new laws of the Tax Cuts & Jobs Act.
Thinking back, it was not long ago that people with estates under $1 million had to be concerned about estate taxes. Many people believe that because the estate exemption has doubled, there is no need to review their plans. The number of documents that should, and likely need to be reviewed in light of these changes in law are exponential as many of these trusts, wills, etc. have formulas that relate back to the previous lifetime exclusions which could now result in unintended tax consequences.
Keeping in mind, however that another provision to this change that also needs to be addressed is the sunset clause. In eight years, this lifetime exemption will be cut in half to $5.5 million, prompting issues all over again. So the question becomes, do we maximize our gifting now, or hold off until after death?
The main takeaway from this, is that any plan or documents should be reviewed, however simple it seems at the surface. Also, a point to remember, that nothing here is set in stone i.e. sunset provisions.
Even if estate taxes are no longer a factor, trusts are important to control the disposition of assets. When reviewing your trust, ask yourself, “Does this trust still make sense?” “Is this trust serving its main purpose?” “Does my will still protect my spouse and children with a flexible trust?” Be aware of changing legislation that may affect your asset distribution.
Take a look at this example that helps illustrate my point in relation to the ever-changing laws in place.
The year is 2003, and the estate tax exemption was $1 million. This client gave the maximum amount allowed to a credit shelter trust that eliminated estate taxes and the rest to his spouse. The trust was for the benefit of her children from a previous marriage and his spouse. His estate was valued at $4 million, meaning that $1 million went to the trust, and $3 million went to the husband. Due to the new act, if he passes, the whole estate would go to the trust and nothing to the husband, due to the new limit of $11.2 million exemption per person.
Currently, you are able to give up to $11.2 million tax-free during your lifetime. Giving now may be an attractive option, because come 2026, this may not be the case due to the sunset provisions.
In relation to gifting, considering a GRAT (Grantor-retained annuity trust) is very attractive for high net worth individuals. GRATs are used to make significant financial gifts to family members without paying gift taxes by transferring property into an irrevocable trust in exchange for fixed annual annuity payments. Keep in mind that this strategy will only work if the assets that are transferred into a GRAT will appreciate greater than the interest rate, which is currently very low (2.6%) and is easily obtainable.
Although this Tax Act was intended to make taxes easier, it seems to be anything but. Reviewing documents that are put in place and speaking to professionals as needed is the best approach to keeping your retirement and documents up to date, as there are many changes upon us. Retirement is the most important event in life to plan for, however it does not need to be as intimidating as it seems.