August 2018 Issue
By John Peace and Cal McCastlain | Dover Dixon Horne PLLC
The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, impacts everyone. All business owners should analyze how the new law impacts their cash flow and growth strategies. And everyone should review their estate plans for opportunities to simplify their estate plans and focus on their current estate planning needs.
Introduction. While the new tax law has extensive and complicated income tax planning opportunities, the estate tax planning provisions are simple by comparison. Simply put, the estate tax exemption is increased to $11.2 million for each individual ($22.4 million for a married couple). That means the estate plan for most people can be much simpler. To be clear, we strongly recommend that everyone at least have a Will. But the significant relief from estate taxes should not cause complacency as to other serious estate planning subjects. For example, there are still valid reasons to have a revocable living trust to avoid the cost and complexity of probate. An estate plan is about more than estate taxes. Your estate plan should address how you want your assets managed, by whom, and, ultimately, who receives benefits. The larger your estate, the more significant these issues.
Asset Management. Asset management is not only about the ultimate disposition of your assets. It also involves management during your lifetime. If managing your assets is a challenge for you, or if you have simply reached the point where you no longer wish to manage them, you should consider how you want your assets to be managed, and by whom. Possible management situations range from appointing a power of attorney to establishing a trust with successor trustees identified. Which situation is best depends on each person and the situation.
Transfer of Assets During Lifetime. Even if estate taxes are not a concern, there may be good reasons and opportunities to consider transferring assets to beneficiaries during your lifetime. Those transfers can be gifts outright to the beneficiary or transfers in trust. Other options include sales with seller financing and transfers that are part gift-part sale.
Transfer of Assets After Death. You may provide for the ultimate disposition of your assets through a Will or a Trust. As stated earlier, we recommend that everyone have a Will. Whether and to what extent you may use a trust depends on your situation. While a Will must be probated, there are many ways to minimize probate, or effectively eliminate it. These methods include lifetime transfers to a trust for your benefit (revocable or irrevocable), ownership of property as joint tenants with right of survivorship and accounts with pay-on-death beneficiaries.
Beneficiaries’ Situations. Careful consideration should be given to each beneficiary’s known and expected situations. Beneficiaries are not all the same, and the differences of each beneficiary should be taken into account. Consider each beneficiary’s age at the expected time they are to receive a gift or bequest, their financial maturity, their legal and marital exposures and any issues particular to the beneficiary. Trusts are good mechanisms through which these issues can be addressed, and at the same time “equalize” the amount of transfers among a class of beneficiaries.
Benefitting Multiple Generations. If you want assets managed for the benefit of multiple generations, a Trust quickly comes to mind. The terms and conditions of a multi-generation Trust can be as varied as the individuals establishing them. All such trusts must start with a timely discussion about the grantor’s goals and intentions.
Flexibility/Revocability. Because the estate tax exemption is now $11.2 million for each individual ($22.4 million for a married couple), most estate plans will be able to accomplish their goals through Wills and Revocable Trusts. The ability to amend or revoke the Will or Revocable Trust enables everyone to make a comprehensive estate plan under known circumstances, and then amend the documents as desired to reflect a change of mind or life changes such as death, divorce, disability or legal risks.
Existing Irrevocable Trusts. Continue to carefully manage any existing irrevocable trusts. Existing irrevocable trusts were likely set up to achieve estate tax savings. Even with the higher estate tax exemptions, those existing irrevocable trusts may still serve a purpose and, in most cases, hold valuable assets such as life insurance policies or appreciated capital assets. These existing irrevocable trusts should be reviewed for their purpose and assets and taken into account for the overall estate plan. If appropriate, the Arkansas Trust Code now allows irrevocable trusts to be modified or even terminated if the grantors and beneficiaries all agree.
Estate & Gift Taxes. Unless renewed by Congress, the new estate & gift tax exemption ($11.2 million per person) expires in 2026 and reverts back to the 2017 level of $5.4 million per person. Persons in the taxable estate range should consider taking advantage of the new higher estate & gift tax exemption in the event the new higher exemption is not extended. Remember the year-end rush of gifting in 2012. The 2026 expiration gives us more planning time to use the higher estate & gift tax exemption, and we expect there will be some IRS guidance in this area. In any event, your gifting strategies should account for the possibility of the $11.2 million estate & gift tax exemption expiring in 2026.