An article I read not long ago claimed the wealthy have been “panicking” for six months, harrying their estate planners ahead of dread changes to the tax rules.
I might call this prudence, but whatever the call, in the right circumstances, letting loose the bonds of cool-witted reason makes excellent sense. It isn’t panic, it’s action.
Those concerned about preserving and passing on wealth might believe this is just such a time. In even the best case, the estate planning benefits of the Tax Cuts and Jobs Act are due to sunset on December 31, 2025. If your planning is based on that far-off day, your blood pressure needs a bit of a spike. Our next vice president, Kamala Harris, in a debate with Mike Pence, said: “On day one, Joe Biden will repeal that tax bill – he’ll get rid of it.” Well, that’s clear enough.
It’s time to make hay, to warm hammers and anvils – pick your image. There likely aren’t years, but months to exploit the fine tools currently in hand.
The good news, maybe: proposals are one thing, but new tax laws should take time to enact. The Republican Senate may dig in its heels, but I wonder whether they won’t give in on the TCJA repeal. The planned victims are the wealthiest citizens – unpopular now, at least in public discourse. A bloody struggle over a few points on a tax rate is unlikely in the first 100 days, I think.
So, if you haven’t done it yet, it’s time to get planning. If your portfolio is laden with appreciated assets, or you’re worried about crossing the estate tax exemption limit, you should pay attention, as the step-up in basis will likely fall soon – and as said, Mr. Biden and Co. don’t like TCJA’s high exclusions. We have a number of helpful tools to suggest.
First up, we like Spousal Lifetime Access Trusts. SLATS are irrevocable trusts created by one spouse for the benefit of the other, and they work well for wealthy married couples. When the establishing spouse dies, the trust distributes payments to the survivor. SLAT assets are excluded from the founder’s estate, protecting them from estate taxes, whatever the rate may be. SLATs provide bankruptcy and litigation protection for the included assets while both spouses are alive, and if carefully structured, trust assets can be loaned to the beneficiary spouse, though they must be repaid.
Intentionally Defective Grantor Trusts – there’s a name a slacker-writer can defend – allow the grantor to segregate assets from future estate taxes. IDGTs can be used to provide for spouses, but are frequently created to benefit children or grandchildren. The structure’s ‘defect’ is built in and works like this: the grantor pays income taxes each year on trust earnings, which removes them from gift-tax liability. IDGT assets appreciate, the grantor pays income tax, and when the payout day comes, beneficiaries receive trust proceeds without estate-tax reductions. Pretty clever for a defect.
Second, we draw your attention to the estate planning benefits of the 529 savings plan, often ignored. There are two types of 529s: savings and prepaid-tuition. The former is funded by after-tax money, and so pays out tax-free. The proceeds can only be used to pay lawfully defined education expenses: originally just for college, but in recent years expanded to cover K-12 and apprenticeship programs. The prepaid tuition variant essentially locks down the current cost of education at a predesignated college or university – useful for some but lacking flexibility.
Whatever the choice, the 529 works for estate planning by allowing contributors to use up their annual gift allowances, now $15,000 per year/individual. This amount can be contributed to a 529 up to five times, totaling $75,000, or double that amount for spouses. That’s a lot of cash to take off the estate balance. The beneficiaries must use the funds for education costs, which may seem a limitation. However, continuing education is key today: new technologies, business techniques and nascent industries take hard study to access. In the right circumstances, largesse of this kind might be warmly welcomed by heirs.
One last feature of the 529s: they offer a clawback option. The purchaser can access the funds, which in extreme cases may save the day. Keep in mind that the 529 program is administered at the state level, so rules will vary.
When I received this assignment, my supervisor asked for a prediction: what will happen over the next four years? “Everything that will happen?” “Sure – describe how the changes will affect insurance, estate planning, finance – all that stuff.” Rebecca has great faith in Nostra-Thomas – or she knows how the Fool can speak without hindrance. I decline missions impossible, but if you want to hear foolish, let’s jump to the comments section.
I rely on hard studies – academic or those funded by monied institutions. Their data is solid, though I ignore their fusty old conclusions, and try to relate information memorably, via something that may have been said by my father about carving of turkeys (“Use the biggest knife in the house – a cutlass if you’ve got one”) or fertilizing tomatoes (nitrogen something). Commentary cesspits never accompany such works, but sometimes, I indulge in the simpler.
Hoi-polloi commentary on Biden’s win is mixed: some predict a New Age, others, Armageddon. One keyboard tapper suggested they won’t tax the poor and can’t tax the rich – the latter too well defended by lawyers to take down. Despite the promises, the tapper tapped on, the middle class will soon get, and forgive my sharing his demotic, screwed.
This fellow – he seems to be betting the odds. I’m not so sure. As I said at the start, the wealthy are easy targets today, and they may have to pay. Not just yet, though. Let your next tapping be an email of orders: your estate planner’s ready to march.