Just when it seemed the estate-planning landscape had settled, enter Donald Trump as the incoming president.
As in most areas of public policy, the president-elect's plans for tax reform are still largely unknown. His victory will likely be good news for wealthy Americans worried about their estates and the taxes their heirs may have to pay on them. However, there is still enough uncertainty about Trump's ideas and his ability to execute them that estate planning pros are proceeding with caution.
"[President-elect Trump] has not gone into much detail about his tax plans," said Adrienne Penta, a senior vice president with high-end investment advisory firm Brown Brothers Harriman. "It is always easier to talk about sweeping tax reform than to do it.
"It's still uncertain whether we'll have estate-tax repeal and what it will mean for people."
That being the case, Penta is advising her high-net-worth clients not to undo estate-planning strategies they may have in place and wait to see how tax reform plays out. "Now is not the time to make drastic changes to estate plans," she said.
Trump, however, has vowed to do away with the "death tax." The issue has become a red herring in terms of revenue to the federal Treasury. The American Taxpayer Relief Act passed in early 2013 extended the indexed $5 million individual exemption ($10 million for couples). It now stands at $5.45 million and affects only a tiny percentage of Americans, generating about $20 billion in revenue to the government last year.
"Estate-tax repeal is now a political issue, not a revenue one," said Michael Cyrs, an estate and wealth transfer advisor with Savant Capital Management. He said that federal revenues from the tax have dropped roughly $50 billion to $70 billion since the 2001 Tax Act began raising the exemption and lowering the tax rate.
While federal estate-tax repeal seems likely, Trump has also indicated he will institute a tax on capital gains in estates, though he would set an exemption of at least $10 million to protect small businesses and farm owners. Currently, assets get a step up in cost basis to market value when transferred to heirs of an estate.
It's unclear whether the tax would apply to unrealized gains or only when the assets are sold. Either way, it could prove to be a nettlesome issue for Americans inheriting large amounts of assets. "If the estate tax is replaced by a capital gains tax, it could be even more complex to administer and to produce the documentation on cost basis," said Penta of Brown Brothers Harriman.
There is also still the matter of state taxes on estates — as high as 20 percent, in the case of Washington State. The motivation for estate planning, however, now has much less to do with tax avoidance and much more to do with controlling how wealth is transferred to heirs and/or charities. "Taxes used to drive everything in estate planning," said Cyrs with Savant Capital Management. "Now the bigger issues are asset protection, avoiding court involvement and developing a distribution plan for children."
That means Americans won't have to spend as much on complicated tax-saving trust vehicles, but they still have to take care of fundamental estate-planning issues relevant to everyone regardless of their wealth.
"People still have to plan for all the other things, like becoming incompetent, protection from creditors and succession planning for business owners," said Jonathan Blattmachr, a senior advisor with Pioneer Wealth Partners. "Those things have to be planned for."
Three essential items for every American to address are:
- Guardianship for young children if you die prematurely.
- Powers of attorney for both financial and health-care decision-making, should you become incompetent or otherwise unable to make either type of decision.
- Living wills that articulate your desires regarding medical treatment if you become unable to give consent.
Another key decision is whether to use a simple will or to create a trust to administer your estate. The demand for complex (and expensive) trust structures to avoid taxes has fallen off a cliff in the last three years. However, the control that simple trusts provide remains very attractive to many people.
Blattmachr believes every family should use trusts to transfer assets. "I may be the most pro-trust lawyer in the country," he said. "Trusts are the greatest asset-protection and management tool in the U.S."
For one thing, families can avoid the courts becoming involved with estate settlement, as is the case with wills. Family members can and do dispute wills, and the resulting conflict and stress can be traumatic. "The courts have become slower and more inefficient," said Cyrs at Savant Capital Management. "People want a private and confidential process. Trusts are a gift to your family."
They also enable people to distribute assets to family members in a more controlled manner. With roughly half of all marriages still ending in divorce, and surviving spouses often remarrying, trusts enable people to have their wishes regarding their assets respected after they die.
What's more, many wealthy parents have decided that large transfers of wealth to their children — particularly at a young age — can have very bad consequences. "There's been a sea change in the way people view wealth transfer," said Cyrs. "A lot of people are saying they don't want to give large sums to their children."
The cost to set up a simple trust is no more than a will and the cost of the probate process, while the benefit to your family could be priceless, he said. "Money, as we know, is the root of all evil," Cyrs said. "A trust can make things a lot easier for your family."
— By Andrew Osterland, special to CNBC.com