Why Legacy Planning Post Tax Reform?

The recent enactment of the Reconciliation Act of 2017 (The Act) has led many individuals to believe with the higher federal gift, estate and generation skipping transfer tax exemptions, that they no longer need to have an estate plan.  This could not be farther from the truth.  Individuals well below the new exemptions must have legacy and life insurance plans to ensure their families financial security.

Now more than ever, families need to meet with their advisors to review:

  1. Whether their existing plans still function as originally intended.
  2. Review their current planning needs.
  3. Discuss whether their preferred structure for distributions, should be either outright or in trust.
  4. Discuss options incorporating flexibility into their legacy plans.

Planning does not always center around estate taxes. As a matter of fact, the following represents key areas to ensure a family’s financial security, while minimizing conflict among family members by addressing the following issues:

  1. Estate Distribution/Administration: The need to ensure the desired distribution to ones beneficiaries and avoid any misunderstandings among family members is key to avoiding state intestacy laws which could result in undesirable distributions.
  2. Incapacity: In order to ensure the families access to financial assets and the ability to manage an incapacitated individual’s health care, one must look to the following:
  3. Financial powers of attorney, health care powers, advanced directives, and living wills.
  4. Proper authorizations: naming the individuals who can access the incapacitated individual’s medical and health information.
  5. Fiduciary appointments: In order to minimize any kind of conflict or confusion, as to who will handle the estate administration and other matters, it is important to appoint various fiduciaries. These might include:
  6. Personal Representatives and Executors to handle the Estate Administration.
  7. Guardians for minor children.
  8. Trustees to administer trusts created by various family members.
  9. Future changes: Since the tax act estate tax changes are due to expire in 2026. It is absolutely imperative that your plan remains flexible during the interim so as not to miss any opportunities or be exposed to future taxes.

Your current plan which was put in place under a previous estate tax regime may not suffice, especially if the Bypass Trust used a formula leaving the federal tax exemption to said Trusts. The purpose of this was to benefit the surviving spouse and their descendants with the balance of the estate going into either a Marital or Survivors Trust. In addition, the Bypass Trust may have been used to preserve the assets and any appreciation from future taxation upon the surviving spouse’s death. It is quite possible that the Tax Act may have altered the economics of the formula approach, possibly leaving far more assets than was intended to the Bypass Trust. This potential change may be critical in blended family second marriages.

In addition, formula based Bypass Trusts may result in additional estate tax at the passing of the first spouse if the state imposes a separate estate tax with exemptions smaller than the new federal exemption.

Individuals with estates under the new estate exemption thresholds may wish to simply default to leaving their assets outright to the surviving spouse or beneficiaries for simplicity sake. However, trying to simplify ones estate may come at a cost. Although, leaving assets outright may be simple to administer, you lose the ability of centralized professional financial management.

Outright distributions will provide a step up in basis at death and the beneficiaries will have immediate access or control over the assets. On the other hand, Trusts will help beneficiaries learn how to manage large sums of money, provide protection from creditors and marital claims along with confidentiality, provide the ability to control the flow of not only information but also the assets to young beneficiaries, deliver ease of transferring and avoiding fractional ownership, and provide for business succession and governance over shared family assets. Additionally, trusts will preserve assets from future state and/or federal estate taxes and the ability to retain the generation skipping tax exemption. Trusts can incorporate flexibility by allowing beneficiaries to appoint trust assets, provide independent trustees broad distribution powers and a trust protector who can modify select trust provisions.

It is possible to make many of these decisions at the time of death, however, based on the family’s circumstances and tax laws existing at that time, this flexibility may come at a steep cost and would require additional planning after the death of the first spouse. Some of these planning ideas would include spousal disclaimers, powers to the executive allowing them to make a Qtip election and portability. All of these have their own incumbent costs and time schedules, and pit falls.

With the change in the tax law and the higher temporary exemption amount, many believe the need for life insurance may not be as critical as it was in the past. However, life insurance addresses a wide variety of needs which includes estate liquidity and family security. Non-taxable estates will still have expenses such as outstanding medical costs and family support, etc. In addition, equalizing assets amongst beneficiaries is far more easily accomplished and facilitated with the use of life insurance than fractional interests or selling of valuable assets. Lastly, blended families can easily provide for children from prior marriages while leaving other assets to the surviving spouse, enabling the surviving spouse to maintain his or her lifestyle.

With all of the above in mind, any existing life insurance coverage should be reviewed in order to make sure it is still solvent and efficient.

As you see from above it is important to meet with your advisors in order to review the new tax law changes that have occurred and how they may affect your legacy plan. The failure to connect with your advisors and review your current planning may result in unintended and possibly adverse consequences for your families.