Tax Law Uncertainty Should Not Delay Your Estate Planning

October 20, 2017

Sacramento Business Journal

As published in the Sacramento Business Journal

Although many Americans have found reasons to avoid estate planning, tax uncertainty should not be one of them. President Trump wants tax reform, including repeal of the estate tax.  We will see how Congress responds. Estate planning should continue despite this tax law uncertainty. Estate planners must consider taxes because a tax-efficient estate plan can help preserve wealth as it flows to the next generations. Yet some of the most important reasons for estate planning have nothing to do with taxes.

Federal law includes wealth transfer taxes with a top rate of 40%: gift, estate and generation-skipping transfer taxes. These taxes seldom apply, however, due to generous exemptions.

The “unified” or combined gift and estate tax exemption is $5,490,000 and will rise with inflation. Relatively recent tax law changes now allow spouses to transfer their combined gift and estate tax exemption to each other through their estates. Any exemption they use with lifetime gifts reduces the estate tax exemption available later in an estate. A similar exemption applies to generation-skipping transfers, such as transfers to grandchildren. Federal estate tax repeal would be irrelevant to the vast majority of Americans due to these large exemptions. Income tax reform could be much more important in estate planning.

Even if there were no taxes, estate planning would still be important. There are so many questions that have little if anything to do with taxes: Who will receive my property? Should they receive it outright so they may do what they want with it, or should I tie it up in a trust with restrictions on how much they may receive over time? If I use a trust, who will be the trustee, how long will the trust last, where will the property ultimately pass, and how must (or may) the trustee distribute trust income and assets during the trust term? What beneficiary designations should I use for my retirement plans and life insurance? If I become unable to make financial decisions or health care decisions, who will make them for me? These are just examples. For those with minor children, guardian nomination in a will may be the most important part of the plan.

One of the thorniest parts of estate planning for spouses involves deciding what to do with assets at the first death. Many couples use the “sweetheart” approach under which all assets pass without restrictions to the survivor. Other couples transfer some or all of the deceased spouse’s share to an irrevocable trust for the survivor. They fear the survivor might for some reason deviate from the joint plan by, for example, transferring the assets to another spouse in the event of a remarriage. Choosing the best approach for a couple involves many non-tax considerations.

We face considerable tax law uncertainty. But good estate planning involves many non-tax decisions and should move forward despite that uncertainty.