The end of favorable estate plan provisions of the 2017 Tax Cuts and Jobs Act may still be more than two years away, but advisors say that gives clients barely enough time to make sure their trusts are in order.
“We advise clients who require estate tax planning to begin the process now,” said Susan Ciupak, Scottsdale, Ariz.-based vice president and senior trust officer with Arden Trust Company.
The federal estate tax exemption, now $12.92 million per person, plummets on Jan. 1, 2026, to about half that (the figure is indexed for inflation) unless Congress makes changes before that time.
“Make lifetime gifts either outright or in trust to use the increased exemption before you lose it,” said Pamela Dennett, partner for private client services with Eisner Advisory Group in Dallas
Trust structures can help avoid potential pitfalls, such as estate tax liabilities, loss of control over assets, a long probate process and family conflict, said Matthew R. Marini, associate director of financial planning at Coastal Bridge Advisors in Westport, Conn.
Trusts can also make sense when used for more familiar methods of whittling a taxable estate. “Gifts in trust provide additional benefits, including estate tax minimization for future generations and asset protection,” said Neil V. Carbone, partner and trusts and estate litigation expert at the law firm Farrell Fritz, P.C. in Uniondale, New York.
Options include spousal lifetime access trusts (SLATs), which involve a transfer of assets to a trust of which the transferor’s spouse is a lifetime beneficiary and the transferor’s descendants are the successor beneficiaries, he said.
“Because the spouse is a beneficiary, distributions to the spouse could also indirectly benefit the transferor spouse,” Carbone said. “The trust could be set up as a ‘grantor trust’ for income tax purposes, which would require the transferor to pay the taxes on trust’s income, avoiding depletion of trust assets while also further depleting the transferor’s own assets.
“The trust can also contain provisions to protect against the possibility of divorce,” he added. “If both spouses create SLATs, care should be taken to avoid application of the ‘reciprocal trust doctrine,’ where a court may treat each spouse as the donor of the trust for his or her benefit.”
House trusts, another recently popular option, involves transferring a house into a trust for the benefit of descendants and then renting the house from the trustees.
“The rental payments will add to the trust but will not be considered gifts as they’re set at fair market value,” Carbone said. “If the trust is a grantor trust for income tax purposes, the rent payments will not be taxable income.”
Clients should weigh the benefits of including a trust against leaving assets outright to their surviving spouse, advisors say.
“Relying on portability through an estate tax return can be uncertain,” Ciupak said. “Funding a credit shelter trust/bypass trust will ensure the utilization of the deceased spouse’s estate tax exemption. Clients should consider if it would be beneficial for them to purchase life insurance now and establish an irrevocable life insurance trust to cover estate taxes.”
Planning mistakes can include making gifts that have a mortality risk to use up the increased exclusion amount. “With certain types of trusts, the transferor has to survive the estate tax inclusion period (ETIP) for the gifted assets to be excluded from the transferor’s estate,” Carbone said. Examples of trusts subject to an ETIP are qualified personal residence trusts and grantor retained annuity trusts.
“Often, clients perceive that once they’ve established a living trust, the work is done,” said Simone Devenny, western managing director for Gratus Capital in Atlanta. “Changing laws and circumstances—decreased exemption, growth of assets, change in family situations due to death, divorce and dynamics—dictate revisiting the plan at least every two to three years.”
“Overplanning can mean creating advanced trust mechanisms without properly determining if you need the gifted funds to live on later in [your] life,” said Emily C. Smith, director of financial planning with Williams Jones Wealth Management in New York. “Underplanning may lead to having a large taxable estate.”