Estate & Income Tax Planning in the New Environment

Gabriel Katzner - August 27, 2018 - Estate Planning

Estate tax planning and income tax planning are rapidly evolving, and if you haven’t updated your estate planning documents in a few years, there’s a strong chance your outdated paperwork may no longer be valid or, at best, not work as income and/or estate tax advantageously as it should. Also, in December 2017, Congress passed the “2017 Tax Act”, which dramatically changed the way many of us can, and should, handle ALL of our tax planning (not just estate tax planning but income tax planning as well).

Income tax planning and estate tax planning are now intertwined more heavily than they ever have been in the past, and many old wills and trusts are unlikely to be optimally structured in this new tax environment. In fact, these older documents may be costing you and your family, both during life and in death, a lot of money. In this new arena, focusing on just estate taxes (or thinking you don’t have to address your estate plan because you don’t have an estate tax problem), can lead to a financial mess.

The best solution to any estate tax planning or income tax planning concern involves working with a professional highly experienced in these nuanced areas of the law as these issues can quickly become very complicated. But in the meantime, the tips below should prove helpful to you by outlining several key issues you need to pay attention to.

Messy Families and Tidy Estate Planning

Families are often full of love and bound by personal ties, but almost all family tapestries are woven with a few threads of conflict and dysfunction (or more than a few). Proper estate tax planning means dealing with dysfunction and, as far as possible, facing it head-on with realism and open eyes.  Whether the tax laws are new or old, you’ll reduce the potential for estate spats with smart proactive planning. But this may mean confronting and addressing family demons. Since you’re not going to be around when these issues implode, you can decide to ignore them…but is that really the outcome that you want knowing what will come post your death?

Realism and Tough Conversations

Though it’s not an easy thing to talk about, especially during a conversation about estate  planning, suicide is the 10th leading cause of death in the U.S., and 1 in 5 adults have experienced or are currently living with a mental illness. Estate planning is rarely a sterile legal process, and human nature and human issues need to be addressed and work their way into almost every detail. Unless you address your deeply personal challenges—and those of your loved ones—you won’t be fully able help or protect yourself or those you care about most. As a society, we struggle to talk about depression and mental health issues, the debilitating consequences of aging and chronic disease, family dysfunction, ability and disability, and so much more. But if you find a way to address these tough issues, you’ll make an estate plan your estate plan. Many of us choose different religions and life styles, marry, go through ugly divorces, spend wisely or irresponsibly, deal with cognitive issues and health problems, and experience the imperfect fraying fabric of our human natures and human lives. Our planning process should be just as human as we are, as well as compassionate and realistic.

“Real” Estate Planning

Sometimes facing the financial, physical, cognitive, or other limitations placed on yourself or your heirs means creating a trust structure tailored to address your specific concern, for example, bipolar disorder, gambling, or drinking. The first question many people ask of an estate planner is “What will this cost?” Estimating the cost for a sterile, straightforward plan is easy, but a more nuanced plan means a more nuanced cost estimate. At the same time, why buy and sign documents that aren’t tailored to your specific needs?

The first question should really be “Can you help?”  And the answer to that question should be “Yes, we are experienced in the areas in which you need guidance and we want to work as part of your team of trusted advisors, financial and legal.” Furthermore, your advisor can provide better service if you take a proactive role in the process – something we welcome.

Modern Estate Planning: An Evolving Process

Modern estate planning should proactively and boldly address a wide array of personal, financial, income tax, estate tax, asset protection and other goals. If your planning or documents are outdated, they may not properly take these goals into account.  Some of these may be relatively new concepts in the estate planning arena, and your older plan may need an update. (Most plans need updates anyway to keep up with changing tax laws—see below.)

Planning by Wealth Level

Sometimes wealth level makes no difference in your approach to the estate planning process…but sometimes your position on the wealth spectrum can steer you toward some decisions and away from others.

Ultra-High Net Worth (UHNW) and Estate Planning

As far as ultra-high net worth individuals are concerned, the tax environment (few restrictions on valuation discounts, high exemptions, etc.) may not ever get much more generous than it currently is. So instead of assuming even looser restrictions in the future, it’s probably reasonable to fear the unknown. The 2020 election and future congressional actions might shift the winds and bring things back in balance, and when that happens, you may as well be ready. Structure and possibly transfer your wealth as needed before the process becomes more costly and difficult. None of us have a crystal ball, and you can’t move vast amounts of money without tax and legal risks, most of which are hard to weigh but need to be addressed. But if you’re like many UHNW individuals, you recognize that the greatest risk comes from doing nothing and waiting for the tax rules to change yet again.

Lower Wealth Folks Also Need Updated Plans

Lower wealth folks should also recognize that the new tax law renders many existing plans outdated or even useless. Update your documents (reexamine old trusts and formula clauses in your plan). Exemptions may be high, but you’ll still need to take another look.

For example, you might have an old insurance trust holding insurance bought to pay an estate tax you owed when the exemption was $1M not $11.18M. But ending a trust and cashing in a policy may be a hasty move. Your policy could add weight to your stock portfolio or be exchanged into a product that better meets your needs. And that old trust might be merged into a better one that can help you accomplish your goals. If you do decide to close an old trust, doing it yourself might prove to be far more costly in the long run than obtaining professional guidance.

Estate Planning for the Moderately Wealthy

Due to the new high exemptions, the “moderately wealthy” population now covers a wide spectrum from let’s say $5M to $40M.  Those who fall into this range may significantly benefit from both the income tax and inheritance benefits of smart estate planning, estate tax planning and income tax planning. New types of trusts might save significant income taxes, but planning can still be complicated, and it’s a good idea to use your high exemptions before they sunset in 2026. Because of the new exemptions, the amount that can be transferred without a tax is high ($11.18M per person in 2018). You may choose to transfer assets to trusts that still benefit you, even if those benefits are indirect.

You might also benefit from the many income tax savings offered by non-grantor trusts, or those that pay their own tax bills (in contrast to grantor trusts, for which you pay the tax on trust income).

Those of moderate wealth may need to balance three conflicting planning objectives:

  1. move assets out of an estate to take advantage of the high exemption;
  2. retain access to those assets (they may be significant),
  3. make that trust a non-grantor trust for income tax purposes.

Estate planning experts in 2018 may introduce some new terms and acronyms to your vocabulary, for example: SALTy-SLATs (or SLANTs), also known as non-grantor variations of the spousal lifetime access trust, and un-INGs (a completed gift variant of the traditional intentionally non-grantor trust). But you may still want to hold onto your SLATs (grantor spousal lifetime access trusts), or DAPTs (domestic asset protection trusts). New acronyms are fun, but smart estate planning is both fun AND practical. Talk to our team today to see how estate planning, estate tax planning, and income tax planning can benefit you in this new environment.

You can use the link below to schedule a call with Mr. Katzner, or just call us at 855.528.9837, to learn more about how best to plan today to protect those most important to you:




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