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Why You Should Review Your Estate Plan Now

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Even though most advisers recommend that estate plans should be reviewed every few years, my experience is that most clients do not follow this advice. Some may believe that as long as there has been no change in their personal circumstances (such as divorce, death, marriage, etc.), there may be no need to. That may be so, especially if they do not have a taxable estate. However, given the frequent changes in tax laws, both federal and state, now may be the right time to conduct such a review. Furthermore, since some of the Democratic presidential candidates have proposed increasing the tax on wealthy individuals and their estates, the opportunity to save on, or even avoid, estate tax may fade.

Although the current federal estate, gift and generation-skipping tax exemption is $11.4 million, it is scheduled to sunset back to approximately half as much in 2026, and if the Democrats gain control, the probability of an earlier reduction and other limitations on estate tax–saving strategies becomes very real. For example, some of the proposals being floated include not only a reduction of the estate exemption to $3.5 million and a gift exemption of only $1 million but also an increase in the estate and gift tax rate to a high marginal rate of 77% (compared with 40% currently). One such proposal is from Bernie Sanders. It is titled “For the 99.8 Percent Act” (Senate Bill S. 309).

Although some readers might be inclined to wait until after the election before taking significant steps, there may be just a small window of opportunity in which to implement time-sensitive changes. Thus, a review now to consider how some of these changes might impact your estate planning would enable you to establish an action plan.

For those fortunate enough to have more than the current exemption amount, consideration should be given to making lifetime gifts to reduce their estate in the event that the exemption is reduced prior to 2026. Even those who have less than $11 million (or $22 million if married) might consider the impact that a reduced exemption will have on their estates.

There are several techniques to make transfers while still having access to the assets in the future. One such plan, generally useful for married couples, is commonly referred to as a SLAT (spousal lifetime access trust), whereby the donor spouse transfers assets to a trust for the benefit of his/her spouse. The spouse can then receive the income and principal during her lifetime, thereby enabling indirect access for the benefit of the donor while they are married. By making a gift now of up to $11.4 million, one could retain the possible use of the current gift-tax–free exemption even if a new law were to reduce it in the future. In addition to removing the increased amount from the estate, any future appreciation would also be protected from estate tax. For those who are unmarried, a trust established in one of 16 states that permits asset-protection trusts (commonly referred to as DAPT states)—in which the grantor is a permissible beneficiary—might provide adequate security, asset protection and tax savings while still being accessible to the grantor if needed.

Other provisions of the proposed legislation include the elimination of “zeroed out” GRATs (grantor retained annuity trusts), which would require a minimum 25% remainder interest—meaning a future interest in the assets—as a taxable gift and a minimum 10-year term, thus eliminating short-term GRATs. The bill would also limit generation-skipping exempt trusts—which allow the estate to skip a generation to avoid the estate tax—to a maximum term of 50 years, whereas under current law a trust can last transfer-tax free in perpetuity if established in certain states. Other proposed changes include elimination of “Crummey” gifts and grantor-trust limitations.

These possible changes will likely cause many taxpayers to take steps now to review their plans and avail themselves of the myriad opportunities before they disappear or get cut back. Failing to act in a timely manner may result in a plan that fails. Talk to your estate planner today.

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