(Forbes) - Trump’s victory means estate planning changes, not that it should be ignored.
With President Trump’s victory, and Republican control of the Senate and it appears likely the House too, it is unlikely that harsher estate taxes will be imposed on the wealthy in the next four years. Does that mean everyone can forget estate tax planning? That would not be prudent. But estate planning is now different from what it was only a few short weeks ago. The mantra of many estate planners has been “use your exemption before it is reduced in 2026.” That won’t cut the planning mustard in the new environment. But ignoring planning is probably more imprudent.
And hey, President Trump might just pull off something the Republicans have wanted to do for a very long time, complete repeal the estate tax. But even if that happens, non-estate tax benefits of planning will remain, so don’t give up on planning.
Really Wealthy Folks
For those with perhaps $50 million and greater net worth levels continuing to plan is essential. At some level of wealth, perhaps between $50-100 million the exemption amount, which in January 2025 will be $13,990,000 becomes less important to the planning process. So, no matter what happens with the exemption, planning should continue. Planning for the very wealthy should be flexible and with a multi-generational view, as the tax system will no doubt change and evolve with each future administration. Robust, dynastic trusts in trust friendly jurisdictions, with large wealth transfers should be the foundation of planning.
Techniques such as grantor retained annuity trusts (“GRATs”), valuation discounts, note sales, and other techniques should all continue during a Trump administration. There is less time pressure for the super wealthy to complete their planning, and the worry of what a Democrat victory would have done to tax planning is off radar for now. Nonetheless, it would seem imprudent to stop planning because future administrations will pick up the baton of the Widen, Warren, Sanders proposals of the past.
As even a simple example, wealthy people who have not yet undertaken major planning, or are in any way hesitant to do so, could simply create a series of GRATs for marketable securities. If the stock markets continue to be hot during a Trump administration, putting large portions of your securities portfolio into two year rolling GRATs is a great way to slice off the upside appreciation of the market. If the GRATs are structured with a nominal current gift value (some practitioners like to do that so that they have a value of a gift to report on a gift tax return), if the GRAT fails, there is really no downside. For those reluctant to plan, all they would be gifting away is the market performance above a mandated federal interest rate. But over four years of a Trump presidency, that could be a significant wealth shift. What a great way to dip your toe into the estate planning water.
Don’t Assume the Exemption Will Stay High
The transfer tax exemption is the amount you can transfer during lifetime as a gift or at death free of transfer taxes (i.e., without triggering gift, estate or generation skipping transfer taxes). The exemption amount was doubled from $5 million to $10 million during President Trump’s first term in the Tax Cut and Jobs Act of 2017. But that bonus exemption expires in 2026. With inflation adjustments the $10 million exemption is $13,610,000 in 2024 and will increase to $13,990,000 in 2025.
For years now estate planners have sun in unison their theme song “use your bonus exemption before 2026.” So, what of those lyrics now? Many people now assume that the Republicans will assuredly extend the bonus exemption so that there is no need to plan now. For the very wealthy, that’s a mistake as explained above. For the mere wealthy that is probably a mistake for two reasons. First, how can you be sure that the bonus exemption will be extended? Answer – predicting tax law changes is probably less certain that picking winning Lotto numbers. So, don’t wager, plan but plan differently then you might have done just before the election. Secondly, and quite importantly, estate planning never was and never should be only about estate taxes. If nothing else, protecting your wealth from lawsuits, claims and divorce, has been, is and will remain critical to wealth preservation. So, planning for those reasons should always be done. So put your planning hats back on, but let’s just think about some new spins on planning that address the new Republican estate planning environment.
Predicting the New Tax Rules is Impossible (So Don’t Try!)
Candidate Trump promised tax breaks on Social Security, tips and overtime. How will that be paid for? There are always trade-offs with every budget and tax policy decision. It may be viewed as more important to address the political promises made then to address an estate tax rule that benefits a few very wealthy people. The Republicans may determine that it is not worthwhile putting political capital towards maintaining the estate tax bonus exemption at the current level. Also, the reduction in the estate tax exemption is already in the law. So, letting the exemption be cut in half in 2026 does not require current political action.
Another unknown is tariffs. Candidate Trump stated that he would enact tariffs. Perhaps in the budget and tax calculus the Republicans might believe that new tariffs on China and perhaps others can cover the costs of extending all 2017 tax breaks and funding all of the newly promised tax breaks! So, perhaps the bonus estate tax exemption will be increased. And, as noted in the introduction, President Trump might find a way to use tariffs to repeal the entire estate tax!
So, this leaves wealthy taxpayers with a decision. Do you plan just in case the exemption drops. Or do you back off and take a “wait and see” attitude. But from tax perspective “wait and see” often translates to “you snooze you lose.” So, that is not the route to take. At minimum, you should consider getting your planning in place now, even if you don’t pull the trigger on transfers until what will happen becomes more clear. There are some planning approaches you might consider that can lock in your exemption but let you wiggle out of it if you later rethink that decision. So, you can plan now, to either be ready to use your exemption, or even use it, and possibly unwind the planning if the bonus exemption is extended. Techniques that you might consider include a standby plan, QTIP’able trust plan, a trust disclaimer plan, and perhaps recission. Each of these will be discussed briefly below.
Standby Trust Plan
If you wait to do anything and find out in late 2025 that it looks like the bonus exemption will disappear (i.e., the exemption will drop from about $14 million to $7 million) you may not be able to get any planning done if you decide at the last minute that you want to plan. Many practitioners will stop taking on new client work as they may be overwhelmed with clients trying to complete planning. There may be no estate planners with the bandwidth to do planning. The take home point is don’t wait to the last minute. But what planning option might you pursue if you’re just unsure what to do? Perhaps the standby trust plan will feel comfortable for you.
Set up whatever type of irrevocable trust that fits your planning needs as if the exemption will in fact be reduced. Gift to that trust a small amount sufficient to open a brokerage account. You want to set up a trust brokerage account now to be certain all bank or investment firm requirements are met and that the account is fully operative. The trust is thus in “standby” mode. If it appears that the Republicans can’t or won’t prevent the sunset of the bonus exemption, you have a trust ready and can just transfer securities into at the last minute without the need to involve your advisers (who may be too busy). If the Republicans extend the bonus exemption and you don’t want to proceed with the plan (which is a mistake from an asset protection perspective) the modest initial gift can be paid out to a trust beneficiary and the plan closed down. All you will have lost is the cost of the setup. But that is peanuts compared to losing your exemption if the opposite occurs.
The standby trust plan can also be done on the cheap if that makes you more comfortable. Create a simpler trust in the state in which you live with a family member trustee who won’t charge. That is much less involved and less costly then creating a more robust trust in a trust-friendly state (e.g., AK, NV, SD, DE) with an institutional trustee. Name a trust protector in the trust and give them the power to change trustees, situs and governing law. If the bonus exemption is permitted to sunset and you use the standby trust plan, then the trust protector can move the trust to a better jurisdiction, name an institutional trustee, and if advisable the trust can be decanted into a more robust trust.
QTIP’able Trust Plan
A common estate planning technique is the qualified terminable interest property trust (“QTIP”). This is a trust that qualifies for the unlimited gift and estate tax marital deduction so that one spouse can transfer unlimited assets into a QTIP trust for their spouse with no tax cost. This technique can be adapted to provide a way that you can be prepared to lock in your bonus exemption now (but wait until 2025 to do it) and defer making that decision until late in 2026 when you will likely know what the new law will be. For true fence sitters this might be an ideal approach. This is called a “QTIP’able” trust because it will meet all the tax requirements of a QTIP but it is really only able to become a QTIP when you file a gift tax return reporting to the IRS that it is in fact a trust that will qualify for the marital deduction. So, until that decision is made in late 2026 it is QTIP’able.
The QTIP’able trust plan is an approach married couples who are not certain whether they want to make a large gift to secure some of the bonus exemption can use. It effectively lets you have your tax cake and eat it too! You make a gift of up to the $13,990,000 2025 exemption amount to a marital trust you create now (called an inter-vivos QTIP trust). This trust must meet the requirements to qualify as a QTIP marital trust under the tax laws (those requirements are listed below).
Create a QTIP’able trust in 2025. The trust should not be funded in 2024 as that would restrict the time frame for the decision process. If the QTIP trust is created in 2025 you would have until October 15, 2026, to determine whether to elect QTIP treatment on the gift tax return. This gives an extended period of time by which it would be anticipated that the status of the bonus exemption would be known. If you decide to use your exemption, the gift tax return would not reflect a marital or QTIP election to cover the trust. Specifically, the trust would not be covered by the QTIP election available on form 709. You must file a gift tax return to make the QTIP election, there is no other means to qualify (merely having a trust that meets the QTIP requirements alone is insufficient).
If QTIP is not elected, then your bonus, and regular gift, and presumably GST, exemptions would be used as the transfer would not be protected by the marital deduction. This is why the trust is referred to as “QTIP’able” as it meets the requirements for a QTIP marital deduction so it is QTIP’able. But it is not intended at the outset to assuredly be a QTIP as the decision as to the election is deferred. If in fact the bonus exemption is extended, and if you decide at that time not to have the gift treated as a gift using exemption, the QTIP election would be made on your gift tax return.
The trust must meet the requirements (other than the gift tax reporting which is independent of the trust document) qualify for the marital deduction:
· The trust must be irrevocable.
· Your spouse must be a US citizen.
· Your spouse must be given a qualifying income interest for life which is carefully defined in the tax law. This includes that all of the trust’s income must be paid at least annually to your spouse.
· The beneficiary spouse’s rights during his or her lifetime cannot be terminated or reduced.
So, if you are not sure what to do but you don’t want to lose out on the almost $7 million bonus exemption that might disappear, you can hedge your bets and protect your tax benefit with a QTIP’able trust plan.
Disclaimer Trust Plan
A “disclaimer” or renunciation is where a beneficiary decides to forgo the benefits of a gift or bequest. There are state law and tax requirements that have to be met. People will sometimes disclaim if they don’t need the money so that the assets will pass to other later beneficiaries instead of the initial named beneficiary. People have disclaimed if they are in the midst of the lawsuit and in that way the wealth involved passes on to someone else rather than being exposed to the primary beneficiary’s creditor. But this common legal and tax planning concept can be adapted to provide you with the opportunities to make a gift to a trust now to lock in your bonus exemption but unravel it in the future if the tax law changes make you choose to do so. Similar to the QTIP’able trust plan discussed above, this planning idea takes a common planning concept and tries to tweak it to work for you in the current estate planning environment.
With the disclaimer trust plan you make a gift to an irrevocable trust to use your exemption now, but with a “switch” to unravel the plan if you change your mind at a future date. If the you make a completed gift to a trust with this mechanism, you can use hindsight (i.e., seeing if President Trump extends the bonus exemption or eliminates the entire estate tax) to unwind the plan. So, if you appreciate the importance of planning and using bonus exemption but feel hesitant because of the possible repeal of the estate tax this may provide a viable approach to consider. The disclaimer plan is possibly just a simple as adding a disclaimer provision to whatever irrevocable trust document you would have otherwise use in your estate plan. It is adaptable to many of the plans that would otherwise be pursued and can reasonably be integrated into a trust plan that is in process but which is being reconsidered in light of the election results.
Evaluate adding a disclaimer provision into the trust the trust document that, if triggered, would unravel gifts to the trust. Name a person who will initially be characterized as the primary beneficiary of the trust. The trust would grant the power to disclaim trust assets on behalf of the entire trust. And if they do so the idea is that they would deflect or unwind all of the gifts made to the trust. This is not the typical disclaimer described earlier in which a person disclaims so that they are treated as if they predeceased the transferor. Rather, this disclaimant is given the express power to disclaim on behalf of all beneficiaries, i.e. on behalf of the entire trust. Further, as a result of this disclaimer being exercised the assets would not remain in the trust for the other beneficiaries, rather the assets would be effectively rejected by the trust and revert to the settlor/donor who created the trust, as if the transfer had never been made.
Recission
The above approaches might help those who have planning in process or who were considering planning. But what if you finished your planning recently and now are unhappy with it given the Republican victory? There is another tax concept, called “rescission” that may provide a mechanism to unwind planning you did in 2024. But rescission, if it works, is limited and must be reviewed as an option immediately as you might have to effectuate it before the end of this year. Recission is the concept of treating a transaction, such as a gift to an irrevocable trust, as void from inception. If the income tax law on recission can be applied to a gift then the income tax requirements for an effective recission would have to be applied to a gift. You would have to take the actions that would restore the parties to the relative positions that they would have occupied had no contract been made. The actions must be taken within the same tax year in which the transaction initially took place. A rescission may be effected by mutual agreement of the parties, by one of the parties declaring a rescission of the contract without the consent of the other if sufficient grounds exist, or by applying to the court for a decree of rescission.
This is a tricky one so consult with your tax advisers to see if it is a possibility. If it is not a comfortable approach, have your advisers review your trust document and the documents used to transfer assets to the trust for other options that might at least modify your already completed plan.
Reduced Estate Tax Worries Suggest Increased Access to Trust Assets
Clearly estate tax worries are much lower post-election than they had been before the election when many were speculating about the possibility of the recent Elizabeth Warren estate tax proposal being enacted (or similar Democrat proposals over the years). So, if you’re less worried about the estate tax, but realize that asset protection benefits remain important, and perhaps planning is worthwhile just in case, why not increase access to trust assets? The more access you have to trust assets perhaps the more comfortable you may be planning even with less current worries about an estate tax cost.
Instead of gifting assets to a trust for your heirs, or to a spousal lifetime access trust (“SLAT”) for your spouse and heirs (which has been one of the most common planning techniques) consider instead pursing planning that gives you more access to the assets after you gift them away. This approach comes in two flavors. First, you might use a trust technique that gives you more access:
· DAPTs – Domestic Asset Protection Trusts in which the persona creating the trust (the settlor) is a beneficiary.
· Hybrid DAPTs – A trust that is not initially a DAPT but one to which the settlor can be added back as a beneficiary.
· SPATs – Special Power of Appointment Trust is a trust that is not a trust to which the settlor can ever be a beneficiary, but one to which a person, in a non-fiduciary capacity, can direct the trustee to make a payment to the settlor can be added back as a beneficiary.
The second flavor is to add to whatever trust you use, if feasible, mechanism that might give you more access:
· Tax reimbursement clause which gives the trustee the right, but not the obligation, to reimburse the settlor for income taxes paid on the income earned by the trust.
· Loan provision to permit a person in a non-fiduciary capacity to direct the trustee to make a loan to the settlor.
· Adding a charitable beneficiary as a beneficiary of the trust.
· Personal use assets can be held by the trust and a spouse beneficiary can be given access to these assets. For example, a SLAT could own an interest in a vacation home.
Other Considerations Should Encourage Continued Planning
Planning always should have been and should be broad and holistic, not just focused on reducing estate taxes. For most people, asset protection is just as important as before the election no matter what tax law changes might occur. Even if the estate tax is repealed, planning to protect wealth should continue. Assess how planning that is more focused on asset protection may differ from planning contemplated before the election. For example, you might accept greater risk of estate tax inclusion, for greater access and then be comfortable shifting more wealth into protective structures.
Income Tax Benefits of Estate Trust Planning
A non-estate tax benefit of estate planning can include income tax benefits. This might include reducing current or future income or estate taxes. State income tax planning using non-grantor trusts located in low or no tax states may provide state income tax savings. Income tax basis planning with general powers of appointment (“GPOAs”) should continue when appropriate. A classic simple example of this is providing a senior family member whose has exemption above their assets a formula GPOA to secure a step up in the income tax basis of their assets in the event of death.
Conclusion
Estate taxes are certainly less a worry with a Trump administration then before we knew the results of the election. Planning should continue. Asset protection and income tax planning will remain important goals regardless of what happens to the estate tax. But plan in ways that are comfortable to you. Plan in ways that build in options and flexibility to deal with the uncertainty.
By Martin Shenkman
Nov 10, 2024
