Tax Law Changes and Estate Planning

We at RBF&A hope you have had a great holiday season with your family and friends. Having two three day weekends in a row certainly has helped by giving us that extra time to enjoy our families, friends and our special interests. We work for a reason and this is it!
It would be hard to live in America and not know that our tax code has undergone a major change. I am including in this newsletter a summary of the major changes prepared by U.S. Trust. Tax Bulletin 2017-9
I have been pondering the implications of the increase of the federal estate tax exemption. Your estate plan probably contains a large section containing three trusts designed to take advantage of the federal and state estate tax exemptions. Not many people can read, much less understand this highly technical stuff. Now that the Federal estate tax exemption has been raised to $22 million for a married couple (half that for a single filer), the question is whether all that obscure language should be taken out of your estate plan, if you are not fortunate enough to have an estate worth $22 million.
That is not an easy question to answer. Doesn’t it make sense to remove unnecessary language which could complicate things and create unintended consequences? But the state estate tax exemption remains at $1 million so many folks still need the special language designed to take advantage of that exemption. And the state estate tax requires the applicant to use federal tax forms and calculations to take advantage of that exemption. So does eliminating the Federal language, which to some extent controls the State calculation, negatively impact the state exemption we have been provided? The federal limit ends in eight years, so does it make sense to leave things the way they are in case the federal exemption reverts to the current or even lower limit? (Remember, not to long ago it was $3.5 million per person.)
It has only been one week since the new law was passed and the “mavens” have yet to fully analyze all of the many implications and permutations of the possible solutions and strategies going forward. But the following quote from the US Trust Tax Bulletin copied below begins to answer the problem:
“Testamentary planning. It is common for wills and other testamentary documents (such as revocable trusts) to contain dispositions which reference the estate (and GST) exemptions which are in effect at death. These so-called “formula” provisions would automatically adjust for changes in the exemption amounts. While this may achieve a beneficial tax result, the temporary doubling of the exemptions may also cause unintended consequences to the dispositive plan. For example, a common plan is to leave the estate exemption to a bypass trust, and the balance for the surviving spouse, either outright or in a marital trust. For a hypothetical $10 million estate, if death occurs in 2017 that would result in roughly half to the bypass trust and half to the spouse. However, if death occurs in 2018 to 2025, that would result in the entire estate being left to the bypass trust. Complications could further arise for individuals living in certain states which impose their own estate tax. Wills and other testamentary documents should be reviewed to make certain they accurately reflect the testator’s wishes. As always, documents should be drafted with flexible provisions that can be adjusted for future changes.”
It has already occurred to us that leaving the trust provisions as written might result in unnecessary capital gains taxes. We will be studying the implications of this change for our Massachusetts estate planning clients.
There are many important other reasons to include in your 2018 Resolutions a review of your estate plan. Significant changes in our lives warrant frequent reviews of our estate plans - purchase or sale of a business, remarriage, divorce, the passing of a person who was to receive a bequest and especially, the unavailability or inappropriateness of your selection of a person previously selected as trustee, administrator, health care proxy or attorney-in-fact under a Power of Attorney, and to state the obvious, feelings may have changed about the distributions that will be made when you and your spouse pass.
Most people put their estate planning documents on a shelf where they gather dust while their lives change in important ways. The 2017 tax law change is just the most obvious reason to revisit your estate plan. Life moves on. An estate plan that has gathered too much dust can create problems for your family that you would want very much to avoid.
As always, we are eager to assist.
Happy and Healthy New Year to you and yours!
Bob Feingold