Dan­ger­ous Gen­er­al­iza­tions

The dras­tic changes un­der the new tax law are shak­ing up the sta­tus quo of es­tate plan­ning. Here’s how plan­ners need to change their ap­proach.

Financial Planning - - CONTENT - By Martin M. Shenkman

The changes un­der the new tax law are shak­ing up es­tate plan­ning. Here’s how to al­ter your ap­proach.


Now that the sta­tus quo of tax plan­ning has been up­ended by the en­act­ment of the tax over­haul, wills, trusts and port­fo­lios are all due for a once-over and ad­vi­sors are brac­ing to make sense of some of the most sweep­ing tax changes in decades.

For one, they saw home­own­ers in high-tax states rush­ing to pre­pay 2018 prop­erty tax bills be­fore state and lo­cal tax de­duc­tions were capped at $10,000. It is just one ex­am­ple of myr­iad of ways, of­ten un­ex­pected, that the new laws will change the sta­tus quo of tax plan­ning. What­ever plan­ners used to do rou­tinely must be re-ex­am­ined. Gen­er­al­iza­tions will prove to be dan­ger­ous.

The big Kahuna on the es­tate tax front is that ex­emp­tions have been dou­bled to about $11.2 mil­lion per per­son (“about” be­cause there is un­cer­tainty sur­round­ing the in­fla­tion ad­just­ment and round­ing un­til the IRS sets the fig­ure). For a cou­ple, it is $22.4 mil­lion, at least un­til 2026, when it re­verts to $5 mil­lion per per­son, in­fla­tion ad­justed.

Many tax ex­perts, how­ever, sus­pect that Repub­li­cans went too far push­ing through tax leg­is­la­tion with so much tilt to­ward the wealthy that if the po­lit­i­cal dy­nam­ics shift suf­fi­ciently in 2020, the pen­du­lum could swing in the op­po­site di­rec­tion.

Plan­ners will now need to re-ex­am­ine clients’ ex­ist­ing es­tate plan­ning: wills, re­vo­ca­ble trusts, in­surance plans and more fol­low­ing ap­proval of the tax over­haul.


It’s im­por­tant now to re-ex­am­ine clients’ ex­ist­ing es­tate plan­ning: wills, re­vo­ca­ble trusts, in­surance plans, and more. While many clients will as­sume that “Gee, the ex­emp­tion for a mar­ried cou­ple is over $22 mil­lion, I don’t need to worry about es­tate plan­ning,” that would be dan­ger­ous.

The big­gest chal­lenge plan­ners will face is get­ting clients to un­der­stand that a large ex­emp­tion does not solve es­tateplan­ning is­sues. Clients might avoid dis­cussing es­tate plans with their CPAS and at­tor­neys. Fool­ishly, many will feel that they do not need to pay “hun­dreds of dol­lars per hour for ad­vice I don’t need be­cause the ex­emp­tions are so high.”

It will be left to the ad­vi­sor to ed­u­cate clients about the need to re­visit all of their ex­ist­ing plan­ning, much of which may be wrong, de­pend­ing on each client’s cir­cum­stances.


Plan­ners know the drill but clients do not want to hear it. That 20-year-old, five-pager just won’t suf­fice. “But if there is no tax is­sue why do I need a com­pli­cated will?”

Es­tate plan­ning was never just about taxes. Clients love sim­ple and with the es­tate tax ir­rel­e­vant in their minds, they will want short, sim­ple wills. But those wills do not in­clude flex­i­ble trusts to pro­tect sur­viv­ing spouses and chil­dren from cred­i­tors and preda­tors.

Wills do not in­clude pro­tec­tions for later life and ag­ing that a ro­bust re­vo­ca­ble trust does. Clients must know that real plan­ning is needed.


One of the most dan­ger­ous prob­lems with old wills and re­vo­ca­ble trusts is the for­mula used to fund be­quests

that have been twisted by the new high ex­emp­tions.

If a client signed a will or re­vo­ca­ble trust in 2003 when the es­tate tax ex­emp­tion was just $1 mil­lion, the fund­ing might have worked like this: “I give the max­i­mum amount to a credit shel­ter trust that won’t cre­ate an es­tate tax and the rest to my hus­band.” The credit shel­ter trust might have been for the ben­e­fit of chil­dren from a prior mar­riage, or even chil­dren and a spouse.

If the es­tate was $4 mil­lion, that meant $3 mil­lion out­right to the hus­band and the rest to share (or to oth­ers). Now, the en­tire es­tate will go to those oth­ers, or to a trust to be shared with oth­ers, and noth­ing out­right to the spouse.

Even if the client’s es­tate was $10 mil­lion, the above pat­tern might have worked ac­cept­ably — the hus­band would have re­ceived nearly $5 mil­lion out­right — un­til the end of 2017, but in 2018 it could be dis­as­trous. Many peo­ple have never up­dated their wills as the laws have changed. The huge in­crease in the ex­emp­tion makes it crit­i­cal to eval­u­ate how the dol­lars flow.


Bad formulas can ap­pear in ben­e­fit­ing grand­chil­dren as well. An old will writ­ten when the gen­er­a­tion-skip­ping trans­fers tax ex­emp­tion was $1 mil­lion might have planned to set aside that amount for grand­chil­dren and the bal­ance for chil­dren.

“I be­queath the max­i­mum amount that is not sub­ject to gen­er­a­tion-skip­ping trans­fer tax to the trust for my grand­chil­dren. The re­main­der of my es­tate shall be di­vided equally among my chil­dren and dis­trib­uted out­right to them.”

On a $5 mil­lion es­tate with two chil­dren, that might have meant a trust of $1 mil­lion for the grand­chil­dren and $2 mil­lion per child. Now the chil­dren get noth­ing.

Congress has tin­kered end­lessly with the es­tate tax. Ad­dress­ing the many what ifs will make a client’s doc­u­ments more com­pli­cated and costly, but any­thing less is risky.

Ev­ery ir­rev­o­ca­ble trust should be re­viewed. Many old life in­surance trusts were in­tended to pay an es­tate tax when the ex­emp­tion was $1 mil­lion. Does that plan still make sense? Clients should be guided to a more rea­soned eval­u­a­tion of what new pur­poses the old trust might now serve, or how the old plan can be mod­i­fied.


A physi­cian client might have an old in­surance trust for which the spouse and chil­dren are ben­e­fi­cia­ries. Even if that pol­icy will no longer be needed to pay an es­tate tax be­cause of the high ex­emp­tions, what if the ex­emp­tions are re­duced to the $2.5 mil­lion, 2009 level pro­posed by the Obama ad­min­is­tra­tion? Un­likely, but pos­si­ble.

What if the in­surance pol­icy is a good one and pro­vides a great as­set pro­tec­tion tool? Even if the es­tate tax is no longer rel­e­vant, the plan might work for other pur­poses.

It is usu­ally sur­pris­ing how lit­tle clients re­mem­ber about what old trusts pro­vide. More than 20 states have laws that per­mit merg­ing an old trust into a new trust (called de­cant­ing), which can fa­cil­i­tate up­dat­ing administrative and dis­tri­bu­tion pro­vi­sions to help re­pur­pose the old trust.

It will be left to the plan­ner to ed­u­cate clients about the need to re­visit all of their ex­ist­ing plan­ning, much of which may be wrong.


Plan­ners should re­view durable pow­ers of at­tor­ney, as well. Many have pro­vi­sions giv­ing agents the right to make gifts. Are those rel­e­vant un­der cur­rent law or dan­ger­ous spig­ots for el­der fi­nan­cial abuse? Many wealthy clients who should take ad­van­tage of the new high ex­emp­tions be­fore they sun­set or are leg­isla­tively changed will be un­com­fort­able do­ing so.

For them, per­haps a back­stop is to rec­om­mend they have their es­tate-plan­ning at­tor­ney up­date their pow­ers to in­clude a broad gift pro­vi­sion. That way, if they be­come in­ca­pac­i­tated be­fore the law changes un­fa­vor­ably, the agent can use some of the new ex­emp­tions be­fore they dis­ap­pear.

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