| trusts in the age oF trump


Forbes - - CONTENTS - By asH­lea eBel­ing

De­cem­ber’s tax over­haul is spawn­ing new ideas for trans­fer­ring big bucks and min­i­miz­ing taxes. Pro­cras­ti­na­tors, be­ware: Your cur­rent es­tate plan may now be booby-trapped.

The fed­eral tax over­haul just dou­bled the amount of wealth you can pass to heirs es­tate­tax-free—with­out us­ing any trusts or plan­ning gim­micks. Yet rather than look­ing for a new spe­cialty, top trust lawyers are pos­i­tively giddy about the op­por­tu­ni­ties cre­ated by the law Pres­i­dent Trump signed three days be­fore Christ­mas.

The let­ter of the law al­lows slightly more than $11 mil­lion per per­son to be passed to kids or other non­char­i­ta­ble heirs free of fed­eral gift or es­tate tax. But by em­ploy­ing ag­gres­sive tech­niques, New Jersey es­tate lawyer Martin Shenkman fig­ures, a cou­ple could use their com­bined $22 mil­lion tax ex­emp­tion to trans­fer more than a quar­ter-bil­lion of as­sets into an ir­rev­o­ca­ble dy­nasty trust, where that wealth can con­tinue to grow and pass, es­tate-tax-free, to an un­lim­ited num­ber of fu­ture gen­er­a­tions. “This is phe­nom­e­nal. The numbers are be­yond com­pre­hen­sion,” says Shenkman. Is this legally risky? Less so than it used to be. In Oc­to­ber, Trump’s Trea­sury with­drew pro­posed Obama-era reg­u­la­tions crack­ing down on cer­tain of these ag­gres­sive tech­niques, which, when done right, have been up­held by the courts.

Adding to the plan­ners’ ex­cite­ment: The new tax law, with its com­plex­ity, hasty draft­ing and last-minute give­aways, cre­ates new op­por­tu­ni­ties to use trusts and gift­ing to re­duce in­come taxes, too.

Plus, there’s all the less-cut­ting-edge— but, if it’s your fam­ily, high-pri­or­ity—le­gal work the tax changes will gen­er­ate. Af­flu­ent folks should have old trust plans re­viewed for booby traps as soon as pos­si­ble, be­cause they may need to redo or scrap them. Ditto those living in 15 states (see map, p. 100) that im­pose es­tate and/or in­her­i­tance taxes at much lower lev­els of wealth than the feds.

One all-too-com­mon trap: a will that es­tab­lishes a trust linked to an out­dated fed­eral and/or state ex­emp­tion amount. Say a New Yorker has as­sets in his own name of $11 mil­lion. His cur­rent will, the one he had drawn up in 2011, when the fed­eral es­tate-tax ex­emp­tion was raised to $5 mil­lion, leaves the “ex­emp­tion amount” in a trust for his kids from his first mar­riage and the rest to his cur­rent wife. But if he drops dead now, the kids’ trust would get ev­ery­thing and his wife zip. And since New York ex­empts only $5.25 mil­lion from its own es­tate tax, ac­ci­den­tally leav­ing the full $11 mil­lion to the kids will in­cur a $1,226,800 state es­tate-tax bill. (Amounts left to a cit­i­zen spouse are ex­empt from both fed­eral and state es­tate taxes.)

“The good news is that these un­in­tended con­se­quences can be fixed,” says Don­ald Ham­burg, a New York City es­tate lawyer.

The fix can be as sim­ple as amend­ing your will. In some cases—par­tic­u­larly if there are no sec­ond mar­riages, mi­nor

heirs or state es­tate taxes to worry about— the best fix will be to do away with trusts al­to­gether. That’s be­cause of the “porta­bil­ity” of ex­emp­tions be­tween spouses in­tro­duced in 2011. Be­fore that change, the wills of af­flu­ent cou­ples typ­i­cally cre­ated what’s known as a “credit shel­ter” or “by­pass” trust. When the first spouse (as­sume it’s the hus­band) died, an amount equal to his es­tate­tax ex­emp­tion went into a trust for his wife and kids. She would have ac­cess to trust in­come and, if need be, prin­ci­pal. But his ex­emp­tion wouldn’t go to waste. And when she later died, the trust as­sets wouldn’t be part of her es­tate. Now, with porta­bil­ity, any un­used por­tion of the hus­band’s ex­emp­tion passes to his widow, so long as the ex­ecu­tor of the hus­band’s es­tate files a tax re­turn elect­ing porta­bil­ity.

Why not cre­ate a trust any­way? One big rea­son: avoid­ing cap­i­tal gains tax. When some­one dies, the as­sets in his or her es­tate (in­clud­ing real es­tate, col­lectibles and stocks and mu­tual funds that aren’t held in a re­tire­ment ac­count) get a step-up in ba­sis to their cur­rent value, mean­ing heirs can sell im­me­di­ately with­out ow­ing cap­i­tal gains tax. If the hus­band’s as­sets are left di­rectly to his wife, they get one step-up at his death and an­other at hers. By con­trast, as­sets in a tra­di­tional credit shel­ter trust won’t get that sec­ond step-up at her death. (If you al­ready have one of these trusts, there’s a pos­si­ble work­around: As­sets that have ap­pre­ci­ated since the hus­band’s death can be dis­trib­uted—in lieu of cash—to the widow. If she holds them un­til her own death, they’ll get an­other step-up.)

But with a big­ger $11 mil­lion ex­emp­tion to play with, the lawyers are con­coct­ing new tech­niques that avoid cap­i­tal gains tax but re­quire—you guessed it—trusts. Con­sider the “mother-in-law trust”: You give your mother-in-law or other older rel­a­tive a gen­eral power of appointment (a form of con­trol) over an ir­rev­o­ca­ble trust for your spouse and de­scen­dants and fund that trust with low-ba­sis as­sets. When your mother-in-law dies, the as­sets in the trust get a step-up. True, the trust is now in­clud­able in your mother-in-law’s es­tate. But since she wasn’t rich enough to use her whole $11 mil­lion ex­emp­tion, you’ve ex­pro­pri­ated the ex­cess for a good cause: avoid­ing cap­i­tal gains tax.

But why stop with cap­i­tal gains? Trust lawyers are now busy con­coct­ing ways to ex­ploit the law’s new tax break for “qual­i­fied busi­ness in­come” (QBI). While there are var­i­ous re­stric­tions on claim­ing the break at higher in­come lev­els, the pro­vi­sion al­lows sin­gles with to­tal in­come of less than $157,500 (and cou­ples be­low $315,000) to avoid in­come taxes on 20% of their prof­its from a sole pro­pri­etor­ship (re­ported on Sched­ule C), from farm­ing, or from a passthrough, such as a part­ner­ship or S cor­po­ra­tion. At the last minute, tax writ­ers gave the 20% ex­clu­sion to trusts with in­come of less than $157,500 too.

Here’s the ploy cooked up by Las Ve­gas es­tate lawyer Steve Oshins. One of his clients is start­ing a mar­ket­ing busi­ness and fig­ures to earn about $1.6 mil­lion a year from it. Oshins sug­gested he set up eight sep­a­rate non­grantor trusts for his three kids and five grand­kids and give each trust 10% of the new busi­ness. Af­ter the en­tre­pre­neur takes a rea­son­able salary for him­self (cru­cial to keep the IRS off your back), each trust should be left with about $150,000 a year in passthrough profit. Each of the eight trusts can shield 20% of that—or $30,000—from fed­eral in­come tax, avoid­ing tax on a to­tal of $240,000. Note that the busi­ness­man likely wouldn’t be able to shel­ter any in­come if he re­ported it all on his own tax re­turn, since above the in­come cut­off, cer­tain ser­vice pro­fes­sion­als—ac­coun­tants, lawyers, bro­kers, mar­ket­ing gu­rus—can’t claim the QBI break at all. Ex­pected fed­eral in­come tax sav­ings from this Rube Gold­berg con­trap­tion? Nearly $89,000 a year.

And then there are the machi­na­tions of leg­endary trust lawyer Jonathan Blattmachr, now at Peak Trust Co., which sets up Ne­vada and Alaska trusts for as­set pro­tec­tion and tax pur­poses. He’s schem­ing to use trusts to get around the new law’s $10,000 cap on de­duc­tions for state and lo­cal taxes (which, like the dou­bled es­tate ex­emp­tion, tech­ni­cally ex­pires at the end of 2025). Blattmachr fig­ures that by putting his $1.8 mil­lion Gar­den City, New York, home into an LLC, and then putting the LLC shares plus an ad­di­tional $130,000 of mar­ketable se­cu­ri­ties into four non­grantor Alaska trusts, he can ef­fec­tively get a full de­duc­tion for the $40,000 in an­nual prop­erty taxes on his home. “Congress can’t con­tem­plate what cre­ative es­tate plan­ners will come up with,” says a de­lighted Oshins.

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