Estate Planning During an Election Year: Will It Be 2012 All Over Again?

2020 might be a very busy year for estate planning attorneys because the current laws that give people a big tax break on what they can leave to their family and friends when they die could change soon. The laws are set to expire in 2025, but some people think they might change even sooner, especially if a new president is elected in 2020. This means that people who have a lot of money and property might want to think about how to take advantage of the current tax breaks before they go away. It’s like a use it or lose it situation, just like in 2012. This article revisits estate planning techniques to take advantage of tax exemptions. These techniques include dynasty trusts, spousal lifetime access trusts, inter vivos QTIP trusts, self-settled domestic asset protection trusts, and general power of appointment trusts. Portability, which allows a spouse to transfer any unused gift and estate tax exemptions to the surviving spouse, has limitations and may not be the best option in our current tax environment. For example, it does not apply to the GST tax exemption and the ported exemption cannot be used if the surviving spouse remarries. The current tax laws make it important for estate planners to help clients use their tax exemptions wisely. One option is to create a trust and transfer assets to it, using up the client’s tax exemptions. This can be a good way to pass on wealth to future generations without paying a lot of taxes. For married clients, this can be a good way for both spouses to use their exemptions. If both spouses have enough money, they can each create their own trust for their children and grandchildren. They can still control the money in each other’s trust. If most of their money is owned together, they can create one trust for their children and grandchildren, but neither of them can control it after one of them dies. If most of the money is owned by one spouse, that spouse can create a trust and put in enough money for both of them. Then, both spouses can share the trust and still control the money after one of them dies. A dynasty trust is best for people who are not married or do not need access to the gifted funds. With a dynasty trust, the client or their spouse cannot access the funds directly. However, if a married couple wants to keep access to the gifted funds, they can use a Spousal Lifetime Access Trust (SLAT). With a SLAT, both spouses create a trust for each other and their children, and each gifts assets up to their remaining exemption amounts. This way, they can still access the assets as long as they are both alive and married, but they will lose access to 50% of the assets if one spouse dies or they get divorced. If a married couple has a lot of money and wants to make sure they don’t have to pay a lot of taxes on it, they can use a special kind of trust called a SLAT. This allows them to transfer assets between spouses without having to pay gift taxes. However, they have to be careful how they set up the trust so the IRS doesn’t try to undo it. Another option is to use an inter vivos QTIP trust, which lets the wealthy spouse keep control of the money while still taking advantage of tax exemptions. An inter vivos QTIP trust is a special kind of trust set up by one wealthy spouse for the benefit of the other spouse. It allows the wealthy spouse to give assets to the trust, which doesn’t count as a gift for tax purposes. When the other spouse dies, the assets in the trust will be included in their estate for tax purposes. This helps the wealthy spouse to protect some of their assets from being taxed. It also allows the other spouse to pass on their own tax exemption to the assets in the trust when they die. To make sure that the full amount of a deceased spouse’s gift and GST tax exemptions are used, the other spouse can use a nonqualified disclaimer in connection with a trust set up while both spouses are alive. A nonqualified disclaimer means that the person giving up the property is treated as making a gift and can use their gift and GST tax exemptions on the property being disclaimed. This allows the other spouse to use their exemptions while the exemptions are still high, and the property being disclaimed will pass according to the trust’s terms. In simpler terms, an inter vivos QTIP trust is a type of trust that is created while the person who set it up is still alive. When one spouse dies, the assets in the trust go to another trust for the benefit of the wealthy spouse, and any extra assets go to a trust for the benefit of the wealthy spouse. If the other spouse decides not to take the assets from the trust, they will be treated as if they had passed away, and the assets will be distributed according to the trust. If the wealthy spouse puts $11,560,000 into the trust and the other spouse decides not to take the assets from the trust, they will be treated as if they had given $11,560,000 as a gift, but they won’t have to pay taxes on it. In simple terms, using a nonqualified disclaimer allows a wealthy spouse to use the other spouse’s tax exemptions to create a trust for their own benefit and their descendants. Normally, assets in a trust created by an individual for themselves are exposed to their creditors and included in their estate when they die. But in some states, special rules apply to trusts created by a spouse for the benefit of the other spouse, so they aren’t included in the estate of the wealthy spouse when they die. The Florida law is unclear on whether a trust set up after a “deemed” death following a disclaimer would be protected. To be safe, it’s best to set up the trust in a state with strong asset protection laws, like Alaska or Nevada. This will ensure that the assets in the trust are safe from creditors and won’t be included in the wealthy spouse’s estate. Option 4: A Domestic Asset Protection Trust is another option for clients who are not married or want to keep access to all the gifted assets. This trust, created in a state with domestic asset protection trust laws, allows individuals to create a trust for their own benefit without the assets being subject to creditors’ claims or included in their estate. Transfers to the trust can be structured as completed gifts for tax purposes. This means that a client can create a trust for their children and be named as a beneficiary, while still keeping enough assets outside the trust for their current lifestyle. Transfers to the trust will be taxable gifts, and a gift tax return will need to be filed to report the gift. By allocating generation-skipping transfer tax exemption to the transfer, the assets in the trust can pass from generation to generation without transfer tax. If a client gives $200,000 to a trust every year, they might end up with more gift tax exemption than GST tax exemption. This could be a problem when the trust is passed on to the client’s children. To fix this, the client could create two trusts – one for $9.56 million with GST tax exemption, and one for $2 million without GST tax exemption. If the client’s family members don’t have enough assets to use their exemptions, the client could use their exemptions instead. To protect your assets for your kids and grandkids, you can create a trust and give your parent the power to decide who gets the money if they have debts. This power would end each year, and the part of the trust that’s worth the same as your parent’s gift tax exemption would be protected from taxes. This allows you to put a lot of money into the trust without paying extra taxes. A client can create a trust and put $2 million into it for their children. They would have to report this gift and its taxes. By giving their parent the power to decide what happens to the money, they can avoid some taxes. Even if they have used up all their tax exemption, they can still save money by paying gift tax now instead of estate tax later. When you give a gift, the tax rate is lower than when you pass away and pay estate tax. It’s like getting a discount on taxes if you give away your money now. An estate planner may need to help someone who doesn’t own a lot of property but is set to inherit money from a trust. They can help this person use their tax exemptions before they expire. It’s important to start talking about this now with clients because the exemptions might go back to being lower in the future. Each person’s situation is different, so it’s important to carefully think about what’s best for them.
The exemption amounts for 2020 are $11,580,000. In 2018, the amount was $5.6 million. There are ways to make the most of these exemptions, like using discounts. It’s expected that the IRS will make rules to limit this in the future.
Overall, it’s important to start planning now to make the most of these exemptions before they go away. Nathan R. Brown is a lawyer who helps people with their estate planning and taxes at a law firm in Boca Raton. He can help you figure out the best way to pass on your assets to your family while minimizing taxes. This article was written by a lawyer from the Tax Law Section. It talks about the principles of duty and service to the public that lawyers should follow. It also mentions improving how the law is carried out and advancing the study of law.

Source: https://www.floridabar.org/the-florida-bar-journal/estate-planning-during-an-election-year-will-it-be-2012-all-over-again/