Americans have been living through a “golden age” of estate planning, but it’s coming to an end, says one consultant to ultra-high-net-worth families and family offices.

That means financial advisors and other estate planning professionals must seize the opportunities for their clients now, says David Wells, founder of Nashville, Tenn.-based Family Capital Strategy. According to Wells, clients have recently been able to move assets to their heirs without aggressive tax avoidance strategies.

During this unique period, the lifetime gift and estate tax exemption has resided at $11.7 million for individuals and at $23.4 million for couples, which means estate planning has primarily been a concern for the wealthiest, Wells says.

However, with new tax policies being debated in Congress, including a potential rollback of those estate tax exemptions, tax-aware estate planning could become more relevant for a large portion of the average advisor’s clientele, while family offices and advisors serving the extremely wealthy will have to change many of the assumptions that their clients’ plans rely on.

“The solution will typically come from aggressive use of trust structures,” Wells says. “When a family chooses to use trust instruments for future instruments, there will be a certain amount of consequences that comes from that.”

He says two other proposed changes will push more families into using trusts and other structures to soften the tax bite. The first is a proposed increase in the capital gains tax rate for high earners to bring it more in line with their income tax bracket, which means they lose the advantage of deriving income from investments rather than a salary. The second is the elimination of a step-up in cost basis for their assets when they die.

Other potential changes, like the elimination or curtailment of valuation discounting within an estate, will be important but have less impact, Wells says.

As a result, many families, with their estate planners in tow, have rushed to change their plans over the past seven months, he says. These changes have included the creation of trusts as well as giving strategies to take assets out of the grantor generations’ estates and take advantage of today’s high tax exemption.

Wells says a massive amount of assets are being transferred today while the grantor generation is still alive.

“If you talk to estate planners, the past few quarters have been massive,” he says. “They’ve been crushed with work trying to get the real wild card question answered: Does this stuff happen in 2021, and if so, is it retroactive back the full year? Or does it get passed sometime in the third quarter and enacted in 2021? It’s a jump ball.

“I am more of the view that something will be passed this year but become effective in 2022. This is the best time to do all of this kind of work, but the question remains: How do we serve the needs and demands of the current generation without saddling future generations with inheritances and legal structures that will end up being detrimental to their own lives?”

Wells believes many estate planning decisions are being made too quickly without laying out a long-term framework for family wealth to guide heirs’ decisions.

Most people will never have to manage an inheritance, notes Wells, while others have been preparing for one their entire lives. By putting money in a trust, families will inevitably change how their beneficiaries relate to their wealth—and into the middle of that is dropped a trustee.

“A trust is a sensitive instrument,” Wells says. “It’s a legal document with a human relationship attached to it. There is a written document, but human beings sit alongside that.”

Three Steps
He thinks of estate planning in three steps, with the first step being that the grantor generation has to decide what their wealth’s purpose is, whether they want to continue family ownership of any currently operating businesses, how much wealth is enough and to what extent they want to give to causes and communities.

The second step is to decide what it means to treat beneficiaries fairly. Does it mean treating every beneficiary or inheritor equally, or does treating people fairly mean dividing up assets in some way other than equally?

“Three kids dividing the wealth three ways is one way to set numbers, but is that the right thing?” Wells asks. “What about one child who is an art teacher versus another that is a heart surgeon—both are serving important roles but have radically different earnings potential. How do you answer the question about what you’re trying to give to them?”

The third step is communication, he says, because it’s hard to execute an estate plan successfully unless all of the relevant stakeholders are aware of the plan.

But discussions about money and finances are still taboo in many families, so heirs and beneficiaries are left in the dark about why certain decisions are being made about the wealth and their inheritance.

“In too many families, the first time beneficiaries hear about finances is when the trust goes live,” Wells says. “Is that really how the grantors want the message of all of their efforts to be communicated?”

The most important thing families can do right now, according to Wells, is protect assets from estate taxes altogether, but the process must be carefully thought out, especially when establishing generation-skipping or “dynasty” trusts that can keep a family’s assets out of the estate tax regime for decades—or even centuries.

“The families setting up estates that allow long-duration vehicles and dynasty trusts as well as gifting to avoid estate taxes are really hitting the home runs today,” he says.