“A Trump victory suggests that it is unlikely that significant new taxes will be imposed on the wealthy. This is quite a different result than what most estate planning conversations seem to have focused on. Had the Democrats swept, everyone anticipated substantial tax increases along the lines of a Senator Warren tax proposal. That seems assured not to occur now, nor for the next four years.

But planning should continue. Practitioners should always have and should always focus on holistic planning that addresses a wide range of issues. For plans done from that perspective the pivot to the change in the post-election world should be less sharp. For those who encouraged SLAT plans to use exemption without a broader based plan clients are more likely to be reluctant to proceed. But educating the clients about income tax benefits, asset protection advantages, etc. may salvage the plan. Consider nuanced changes to planning for clients that are fence-sitting.”

Martin M. Shenkman, Jonathan Blattmachr and Robert Keebler provide members with commentary that examines three questions in the aftermath of the presidential election: 1) What does all this mean for estate planning, 2) What should practitioners tell clients to consider now, and, 3) How is that advice different than the typical pre-2026 planning that has been the focus of so many planning conversations? Members who wish to learn more about this topic should consider watching Marty and Bob’s LISI webinar

titled “Post-Election: The New World of Estate Planning” on Tuesday November 19, 2024 from 4:00 PM - 5:00 PM. Click this link to learn more or to register: Marty/Bob

Martin M. Shenkman is an attorney in private practice in New Jersey and New York who concentrates on estate and closely held business planning, tax planning, and estate administration. He is the author of dozens of books and hundreds of articles and has won many professional awards.

Jonathan G. Blattmachr is director of estate planning for Peak Trust Company (formerly Alaska Trust Company), a director at Pioneer Wealth Partners LLC, a boutique wealth management firm, and co-developer with Michael L. Graham, Esq., of Dallas, Texas of Wealth Transfer Planning, a software system for lawyers, published by Interactive Legal LLC (www.interactivelegal.com).

Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished) is a partner with Keebler & Associates, LLP and is a 2007 recipient of the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planners & Councils.  He has been named by Forbes as one of the 2024 America’s Top 200 CPAs, by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States and one of the Top 40 Tax Advisors to Know During a Recession. Mr. Keebler has been a speaker at national estate planning and tax seminars for over 30 years including the AICPA’s: Estate Planning, High Income, Advanced Financial Planning Conferences, ABA Conferences, NAPEC Conferences, The Notre Dame Estate Planning Conference and the Heckerling Estate Planning Institute.

Now, here is Marty, Jonathan and Bob’s commentary:

COMMENT:

What President Trump’s Victory Means to Estate Planning

A Trump victory suggests that it is unlikely that significant new taxes will be imposed on the wealthy. This is quite a different result than what most estate planning conversations seem to have focused on. Had the Democrats swept, everyone anticipated substantial tax increases along the lines of a Senator Warren tax proposal. That seems assured not to occur now, nor for the next four years.

Practitioners must consider many questions:

·       What does all this mean to estate planning?

·       What should practitioners tell clients to consider now?

·       How is that advice different than the typical pre-2026 planning that has been the focus of so many planning conversations?

Ultra-Wealthy Clients

For the ultra-wealthy the elimination of bonus exemption in 2026, or not, is not a critical aspect of planning. Planning probably should continue as before. That planning should be flexible and with a long-term view. Robust, dynastic trusts in trust friendly jurisdictions, with large wealth transfers will remain common.

For the ultra-wealthy it seems unlikely that GRATs, discounts, note sales, and other techniques commonly used will be adversely affected during a Trump administration. This all means that there is less time pressure to complete planning than had there been a Democrat victory. Nonetheless, it would seem imprudent to stop planning because future administrations will pick up the baton of the Widen, Warren, Sanders proposals of the past.

The remainder of this article will focus primarily on clients that may not be characterized as ultra-high net worth.

Congress and Tax Changes: What Might Happen?

At the time of this writing President Trump will return to the White House, the Republicans have a majority in the House and may also secure a majority in the Senate which they are close to achieving.

Some practitioners might assume that a Republican sweep will result in the extension of the bonus estate tax exemption amount. While that is certainly a possibility (which would have been unlikely with a different election result), it is not assured.

There is a political tradeoff the Republicans will have to grapple with. There are many demands for economic resources, and it should not be assumed how those resources will be allocated. For example, there are obvious political benefits from giving taxpayers/voters income tax reductions. Those can be realized immediately by voters. In contrast resources allocated to estate tax reductions may only provide a future tax benefit which may not generate as much voter appreciation as income tax reductions.  Thus, Republicans may not determine that it is worthwhile putting political capital towards maintaining the estate tax bonus exemption at the current level. There is another dynamic to all of this. The reduction in the estate tax is already in the law so leaving the reduction in exemption to take hold does not require current political action.

Another unknown is tariffs. Candidate Trump stated that he would enact tariffs. What might happen with tariff proposals? Might those be presented as covering the costs of extending all 2017 tax breaks and funding the newly promised tax breaks on Social Security, tips and overtime? If so, that might increase the likelihood of the extension of the bonus estate tax exemption.

Congressional Rules May Affect Retention of the Bonus Exemption and Other Changes

Apart from the considerations noted above, Congressional rules may also impact what tax changes, the Republicans may be able to enact. The following is just a brief overview of some of these considerations. These may be used to help better understand the uncertainty concerning the estate tax.

Democrat Senators can stop a proposed bill if the Republicans don’t have at least 60 votes by using a filibuster. If they do so the Republicans can break a filibuster by taking away options to speak in Senate with 60 votes. But the Republicans do not have that many votes despite controlling the Senate. In the House it takes a simple majority of votes to break a filibuster.

In the Senate there are two exceptions to the above rule: One is for judicial appointments, the other is for budget reconciliation where a simple majority can rule.

In Congress, Reconciliation is a legislative process that allows for the expedited consideration of tax and other fiscal bills. It was enacted as part of the Congressional Budget and Impoundment Control Act of 1974. It is a way to quickly pass legislation that meets budget targets. Reconciliation can be quick because there are limits on the amendments that can be added and the time during which the bill can be debated. A reconciliation bill can pass the Senate with a simple majority of 51 votes, instead of the 60-vote supermajority required by the Senate's filibuster rules. With 52 Senate seats that would be something the Republicans can do with no Democrat support.

The Byrd Rule is a Senate procedural rule that requires that any bill that reduces taxes must be eliminated within ten years, unless at least 60 Senators vote otherwise. That is why the bonus estate tax exemption was enacted in 2017 as part of the Tax Cut and Jobs Act sunsets in 2026. Republicans do not have that level of control without Democrat support. So, if they pass tax legislation on their own it will also have to sunset in 10 years similar to the 2017 law. The purpose of the Byrd Rule is to prevent the Reconciliation process described above from permitting the enactment of policy changes that aren't related to the budget. The Byrd Rule permits Senators to stop a provision that is extraneous to a bill's main purpose of making budget changes.  The Byrd Rule limits the House's ability to insist on certain provisions when compromising with the Senate.

Thus, there are hurdles, even with a Republican sweep, to what might be enacted.

Planning to Address Likely New Client Concerns

Most clients, other than ultra-high net worth clients, will feel less worried about the impact of estate taxes following the Trump victory. Even if informed of some of the considerations discussed above, the estate tax is just not likely to be the motivator for action that had been up until the election. One approach practitioners should take is to educate clients about possible non-estate tax benefits of pursuing estate planning. Those are discussed later in this article. Another approach is to offer clients different approaches to estate tax planning.

The typical estate planning discussion for quite a while has been along the lines of: “The bonus exemption will be eliminated in 2026 so you should plan now to use that extra exemption before it is lost.” That type of approach may no longer motivate clients. The post-Trump victory estate planning atmosphere is different. 

The attitude of many clients in this new post-election environment may be illustrated by the following: “If the bonus exemption is going to be cut, I want to use it. But if not, I don’t want to make a large gift.” Apart from the fact that such a perspective may be wrong, as it ignores income tax planning (e.g., funding a non-grantor trust in a no-tax state), asset protection planning, basis step-up planning, etc., there are several solutions practitioners may offer to this type of client. These might include a standby plan, QTIP’able trust plan, a trust disclaimer plan, and perhaps recission. More robust use lifetime limited powers of appointment (“LPOAs”) to infuse flexibility to modify a plan, including an irrevocable trust, if the laws change in unanticipated ways, or even if the client has remorse after the planning is complete, may also be useful.  These are new adaptations of older planning strategies that practitioners might keep front and center in their post-election toolkit. Each of these will be discussed briefly below.

Standby Trust Plan

For those who practiced in 2012, before the scheduled reduction in the estate tax exemption from $5 million inflation adjusted to a mere $1 million inflation adjusted in 2013 (which wasn’t allowed to happen) planning as it became later in the 2012 year because difficult and then impossible. Many practitioners stopped taking on new clients as early as September of 2012. As it grew later in 2012, it become difficult to get appraisals. Initially some appraisal firms would agreed to provide a valuation number before the end of the year, but the report would only come in 2013. Later still it became impossible to even retain an appraiser. Simply put, clients that waited too long had planning done on a rushed basis, which was never ideal. Other clients had to retain general practice attorneys to do sophisticated estate planning as there were no estate planners with the bandwidth to do planning. The lessons of all this should be considered in responding to the client who feels that they only want to make a large gift if the bonus exemption is really going to be allowed to sunset. That lesson is simple, don’t wait to the last minute. But what planning option might be offered to a client who feels that way? Perhaps the standby trust plan will feel comfortable to them.

Set up whatever type of irrevocable trust that fits the plan as if the exemption will in fact be reduced. Fund that trust with nominal dollars to create an account. For example, set up a brokerage account now to be certain all bank or investment firm requirements are met and that the account is fully operative. Perhaps make a small transfer to ensure everything is operational. The trust is thus in “standby” mode. If it appears that the Republicans can’t or won’t prevent the sunset the client has a trust ready to ACAT securities to at the last minute. The client can make plans now, obtain brokerage paperwork and requirements, so that they can then fund such a trust in late December 2025 without the need to involve their professional advisers (who may be too busy) as the foundation is established well in advance. If the Republicans extend the bonus exemption and the client doesn’t want to proceed with the plan (a mistake certainly from an asset protection perspective) the modest initial gift can be paid out to a trust beneficiary and the plan closed down.

If the client is likely to fund the trust with entity interests, counsel should complete the assignment documents now (e.g., membership interest assignments for LLC interests, stock powers and assignments for corporate entity interests, etc.). The documentation can remain unsigned. If the client opts to proceed, they can sign the documentation as late as New Year’s eve and have the transfer effective before the January 1, 2026, reduction in the exemption. Again, this permits the client to complete planning as close to the deadline as possible because it has been “teed up” in advance. Consider suggesting in such instances that the client has the transfer documentation notarized to give it more credibility if it is questioned by the IRS.

Also, if entity interests might be transferred near the deadline it will be impossible to obtain appraisals to plan the quantum of those interests. Consider using Wandry (103 TCM 1472 (2002) or King (545 F.2d 700 (10^th Cir. 1976)) type provisions in the transfer documents for quick transfers as late-date transfers will not be likely to have appraisals completed. In a Wandry transfer a specified dollar value of entity interests, not a percentage is transferred. In a King approach a sale may be consummated and the face value of the note the trust gives back to the client/seller will adjust if there is a gift tax value as finally determined that is greater than the initial estimated value.

Consider in this type of planning whether a two-tier adjustment mechanism may be useful since an appraisal will be unlikely. Using this type of approach, the first-tier adjustment is made when the independent qualified appraisal is obtained (probably well into 2026), and the second adjustment, if any, would be made after a valuation is established on a gift tax audit as finally determined.

The standby trust plan could also be prepared simpler and at lower cost than a more typical robust trust plan for a wealthy client.  Consider creating the trust in the client’s home state rather than one of the trust-friendly jurisdictions. That will lower the cost (no need for co-counsel, or an institutional trustee in that state). Perhaps, a family member or friend could be named as trustee. Give a trust protector the power to change trustees, situs and governing law.  If the bonus exemption is permitted to sunset and the client funds the trust then the trust protector can “pull the trigger” and move the trust to a better jurisdiction, name an institutional trustee and if advisable the trust can be decanted into a more robust trust. The point is that a client who is on the fence about whether they want to make a gift to use their exemption can have a simpler less costly trust created as a standby to secure the exemption and then make a bigger commitment if the use their exemption and then know that the plan will in fact be maintained long-term.

The most important point of the standby trust plan is to offer an option to clients who would otherwise “wait and see,” who will likely find that they will be shut out of planning as advisers will be inundated if this becomes a late 2025 development.

QTIP’able Trust Plan

The QTIP’able trust plan is another approach to offer married clients who are not certain whether they want to make a large gift to secure some of the bonus exemption. A large gift, perhaps up to the exemption amount of $13,990,000 in 2025 would be made to an inter-vivos trust that meets the requirements to qualify by election as a qualified terminable interest property trust (“QTIP”) under Section 2523(fg). There may be other clients, even larger ones, who are unsure about completing a different type of large wealth transfer. This is an approach that gives the client the benefit of hindsight to determine whether they will in fact commit to a plan.

Create a QTIP’able trust in 2025 (for his or her US citizen spouse). The trust should not be funded in 2024 as that would restrict the time frame for the decision process. If the QTIP trust is created in 2025 the taxpayer would have until October 15, 2026, to determine whether to elect QTIP treatment on the gift tax return. This gives an extended period of time by which it would be anticipated that the status of the bonus exemption would be known. If the client in fact wishes to use their exemption, the gift tax return would not reflect a marital or QTIP election to cover the trust. Specifically, the trust would not be covered by the QTIP election available on form 709. You must file a gift tax return to make the QTIP election, there is no other means to qualify (merely having a trust that meets the QTIP requirements alone is insufficient). The election is made by listing the QTIP on Schedule A and deducting its value from Schedule A, Part 4, line 4. The taxpayer is presumed to have made the election for all qualified property that is listed and deducted on Schedule A. Taxpayers may not make the election on a late-filed Form 709. This is important. Practitioners that create these types of trusts should assure that the client and one of their advisers (whoever will assume responsibility to file the Form 709) has calendared the requirement to file.

If QTIP is not elected, then the client’s bonus and regular gift (and presumably GST) exemptions would be used as the transfer would not be protected by the marital deduction. This is why the trust is referred to as “QTIP’able” as it meets the requirements for a QTIP marital deduction so it is QTIP’able. But it is not intended at the outset to assuredly be a QTIP as the decision as to the election is deferred. If in fact the bonus exemption is extended, and if the client decides then not to have the gift treated as a gift using exemption, the QTIP election would be made on the Form 709.

The trust must meet the requirements (other than the gift tax reporting which is independent of the trust document) qualify for the marital deduction:

·       The QTIP’able trust must be irrevocable.

·       The beneficiary spouse must be a US citizen.

·       The beneficiary spouse must be given “qualifying income interest for life.” All the trust’s net (accounting) income must be paid at least annually (or more frequently, e.g., quarterly) to the beneficiary spouse. Alternatively, the beneficiary spouse can be given the right to withdraw all the trust’s net income annually.

·       The beneficiary spouse’s rights during his or her lifetime cannot be terminated or reduced.

·       The spouse’s right to income cannot be subject to any contingencies (e.g., terminating on remarriage).

·       No one other than the beneficiary spouse can be a beneficiary of the QTIP trust.

·       The beneficiary spouse must have a right to demand that the trustee convert non–income producing assets into income-producing assets.

Disclaimer in Trust Plan

The most “direct” way to have a transaction ignored for gift tax purposes is by a qualified disclaimer, defined in Code. Sec. 2518.  But the provision is limited to wealth transfer (e.g., gift and estate) for tax purposes, not income tax purposes.

Another approach might be used to facilitate a client consummating a plan to use their bonus exemption to a revocable trust now but creating a possibility of the plan being unwound at a future date. If the client makes a completed gift to a trust with this mechanism, there may be the ability to use hindsight to unwind the plan. So, for a client who appreciates the importance of planning and using bonus exemption, but who feels hesitancy because of the election outcome (e.g., the possible repeal of the estate tax) this may provide a viable approach to consider. The disclaimer plan is possibly just a simple as adding a disclaimer provision to a typical spousal lifetime access trust (SLAT) instrument, or whatever other trust plan document is used. So, it is potentially adaptable to many of the plans that would otherwise be pursued and can reasonably be integrated into a trust plan that is in process but which is being reconsidered in light of the election results.

Evaluate adding a disclaimer provision into the trust the trust document that, if triggered, would unravel gifts to the trust. Name a person who as the primary beneficiary of the trust would be granted the power to disclaim trust assets on behalf of the entire trust thereby unwinding gifts made to the trust. This is not the typical disclaimer in which a person disclaims so that they are treated as if they predeceased the transfer. Rather, this disclaimant is given the express power to disclaim on behalf of all beneficiaries, i.e. the entire trust. Further, as a result of this disclaimer being exercised the assets would not remain in the trust for the other beneficiaries, rather the assets would be effectively rejected by the trust and return to the settlor/donor as if no transfer had ever been made.

As with so many advanced estate planning techniques there is disagreement amongst some as to whether this technique is effective, and even if effective what approach to use in implementing the mechanism. One of the questions raised is whether you can merely designate a beneficiary to serve as a “primary” beneficiary to be vested with this power to disclaim on behalf of all beneficiaries. It is not clear why, if the trust instrument provides for that, that such a provision would not be respected. But if that is a concern, the draftsperson could create an initial sub-trust for which that person named as “primary” beneficiary, is the only named beneficiary so that the person holding power is the sole beneficiary, not just designated as the “primary,” beneficiary. Limited powers of appointment might be incorporated so that in at a future time the assets could through that be shifted to a different trust.

Rescission

While the above approaches offer options to clients who are uncertain about the planning actions they wish to take in light of the election results. But what of a client who completed planning recently, perhaps because their advisers encouraged them to complete planning before year end in case there was a Democrat victory that might be followed by a quick 2025 enactment of the recent Elizabeth Warren estate tax proposal (see the American Housing and Economic Mobility bill), or something similar. What might such clients do if they now have planning regrets over what was done?

The trust instrument and transfer documents should be reviewed to determine if there is anything that might be done. For example, the trust instrument might include lifetime special or limited powers of appointment that permit modifications that would make the client more comfortable.

The tax concept of “rescission” may provide another approach, but it is limited and must be reviewed as an option immediately. Rescission is the concept of treating a transaction, such as a gift to an irrevocable trust, as void ab initio. Rescission may have been first discussed in the United States Court of Appeals decision of Penn v. Robertson, 115 F.2d 167 (4th Cir. 1940). In 1980 with Rev. Rul. 80-58 that the IRS provided formal steps to be taken to rescission for income tax purposes. Rev. Rul. 80-58, 1980-1 C.B. 181. The ruling stated that a rescission process must:

·       Take the actions that would restore the parties to the relative positions that they would have occupied had no contract been made.

·       The actions must be taken within the same tax year in which the transaction initially took place.

For a rescission to be effective it does not appear that the consent of all parties involved to have an effective rescission. The Penn case involved a rescission due to action taken by a third party, and Rev. Rul. 80-58 involved a situation where the parties agreed that, if certain events did not occur, the transaction would be rescinded.

Further, Rev. Rul. 80-58 states, “The annual accounting period principle requires the determination of income at the close of the taxable year without regard to subsequent events.”

Specifically, Rev. Rul. 80-58 comments, “A rescission may be effected by mutual agreement of the parties, by one of the parties declaring a rescission of the contract without the consent of the other if sufficient grounds exist, or by applying to the court for a decree of rescission.”

An issue to consider is whether a rescission provision in a document renders the transfer incomplete for gift tax purposes.  Treas. Reg. 25.2511-2(b) …. A gift is … incomplete if and to the extent that a reserved power gives the donor the power [without the consent of an adverse party] to name new beneficiaries or to change the interests of the beneficiaries as between themselves….” Perhaps, there is “no harm” in providing that the parties can rescind a transaction, including for wealth transfer tax purposes, but might the provision render the transfer at the time it is made incomplete? Allowing only one party (e.g., the donor) to rescind the transaction might render the gift incomplete. Although arguably, that the donee would be adverse to that, the fact that the donee agreed to allow the donor to rescind might be held to render the donee non-adverse.

Sample Language: If, during the calendar year in which this Agreement has been signed, legislation is passed in which the Internal Revenue Code is modified which has the effect of causing the [transaction] herein to be considered a recognition event for federal income tax purposes, the Parties agree to take the following actions immediately, and within the same tax year as the Transaction was completed (and if the parties to the transaction have different tax years, the earlier of such years): (a) the Note given by [buyer] to [seller] is thereupon voided, and (b) the assignment and transfer documents [list actual name and date] are deemed null and void, and (c) any down payment provided by the buyer to the seller [delete for gift] shall be due and payable to the buyer by the seller from the date of the initial transfer bearing interest at the short term applicable federal rate from the date of the initial transfer until repaid in the current tax year. To avoid any doubt, the Parties intend for this provision to effectuate a rescission of the Agreement pursuant to Rev. Rul. 80-58, 1980-1 C.B. 181 and agree to take any actions reasonable and necessary to conform the actions taken under this provision if triggered to complete the rescission, with the same effect as though the transaction had never occurred.”

It should be noted that these are rescissions for income tax purposes.  But many think the result

should be the same for gift tax purposes.

Greater Use of Lifetime Limited Powers of Appointment

Limited powers of appointment (“LPOAs”) to infuse flexibility to modify a plan, including an irrevocable trust, if the laws change in unanticipated ways, or even if the client has remorse after the planning is complete, may also be useful. 

Reduced Estate Tax Worries Might Warrant Increasing Access to Trust Assets

The election results will change the calculus of how much access a client engaging in planning wants to a trust. If clients are less worried about estate tax issues they may choose to have more access. Often, increasing points of access to assets in an irrevocable trust adds greater estate tax risk. For example, a DAPT is likely viewed as subject to greater risk of estate tax inclusion than would be a SLAT. Some clients may in the new environment weigh increased access as more important than the incremental estate tax inclusion risk it may bring.

If in fact increased access is more important to provide a client with comfort to proceed with planning, practitioners should reconsider the type of planning with more access perhaps:

DAPTs – Domestic Asset Protection Trusts in which the client/settlor is a beneficiary.

Hybrid DAPTs – A trust that is not initially a DAPT but one to which the client/settlor can be added back as a beneficiary.

SPATs – Special Power of Appointment Trust is a trust that is not a trust to which the settlor can ever be a beneficiary, but one to which a person, in a non-fiduciary capacity, can direct the trustee to make a payment to the client/settlor can be added back as a beneficiary.

instead of SLATs.

Consider more access instead of less and incorporate some or all of the following:

TA tax reimbursement clause which gives the trustee the right, but not the obligation, to reimburse the settlor for income taxes paid on the income earned by the trust.

A loan provision to permit a person in a non-fiduciary capacity to direct the trustee to make a loan to the settlor.

Adding a charitable beneficiary as a beneficiary of the trust.

Personal use assets can be held by the trust and a spouse beneficiary can be given access to these assets. For example, a SLAT could own an interest in a vacation home. And if the grantor’s spouse/beneficiary uses the vacation home, the grantor presumably can as part of the spouse’s family. Bear in mind if that is to be done with a home in another state, a limited liability company (“LLC”) should be formed in the state where the SLAT is governed and administered. That LLC should be authorized to do business in the state where the vacation home is located. That LLC would own the vacation home property and in turn, the trust could own some or all of the interests in the LLC.  Watch out for Section 2036 and consider that if a home is transferred into the trust if rent should be paid. Spouse of the beneficiary can use home. See Estate of Allen D. Gutchess v. Comm. Docket No. 4926-63. 1966-08-9.

Other Considerations Should Encourage Continued Planning

Practitioners should always focused on broader holistic planning, not just estate taxes. If a SLAT plan was motivated by upstream basis step up planning and asset protection, as well as the use of bonus estate tax exemption, the plan perhaps modified somewhat, might still make sense to continue in the new environment. Clients that want to forgo planning because of the election results should be reminded of the other non-estate tax benefits of the planning.

For most, but not all clients, asset protection is just as important as before the election and tax law changes are not the only benefit, so planning should continue. Assess how planning that is more focused on asset protection may differ from planning contemplated before the election. For example, clients might accept greater risk of estate tax inclusion, for greater access and then be comfortable shifting more wealth into protective structures.

Income Tax Benefits of Estate Trust Planning

A non-estate tax benefit of estate planning can include income tax benefits. This might include adding flexible beneficiaries to a trust that would include S corporations, charitable remainder trusts, charitable lead trusts, etc. that are for the benefit of the same beneficiaries. That may provide income tax planning opportunities when the trust is or becomes a non-grantor trust. State income tax planning using non-grantor trusts located in low or no tax states may provide state income tax savings. Income tax basis planning with general powers of appointment (“GPOAs”) should continue when appropriate. A classic simple example of this is providing a senior family member whose has exemption above their assets a formula GPOA to secure a step up in the income tax basis of their assets in the event of death.

Ancillary Income Tax Planning

Income tax planning should continue and receive more emphasis for many clients and even, to the extent appropriate, feasible by estate planners. There are many planning areas that overlap, to varying degrees, the skills that estate planners have. Practitioners, to the extent they are currently comfortable, or can gain the knowledge to become comfortable, should explore some or many of these ancillary income tax planning areas with clients as appropriate. Expanding the scope of planning services offered may make estate planners remain more relevant despite what some clients perceive as a waning angst over estate taxation post-election. Planning issues might include:

IRA planning. When should trusts be named as beneficiaries, and which types of trusts? Should Roth conversions be considered? That might be used to lower income and estate taxes. Required minimum distributions (“RMD”) planning can reduce income tax burdens.

 

Roth IRAs have a number of advantages over traditional IRAs:

·       Lower overall taxable income long-term;

·       Tax-free, rather than tax-deferred growth;

·       No required minimum distributions (RMDs) at age 73;

·       Tax-free withdrawals for beneficiaries after the death of the owner;

·       More effective funding of the bypass trust; and

·       Wealth transfer advantages of a Roth IRA compared to a traditional IRA.

 

Whether a Roth conversion will be favorable for a particular taxpayer, however, depends on the facts of the case. Although a Roth conversion might make sense more often than not, a detailed quantitative analysis is required to determine whether it provides an overall economic benefit in a particular case. This analysis begins with a comparison of the taxpayer’s marginal income tax rate at the time of the conversion and the taxpayer’s expected marginal income tax rate when distributions are received. If the tax rate at the time of the conversion is lower, the taxpayer will achieve a better economic result by converting. If the tax rate is expected to be far higher than when distributions are received, the taxpayer will generally be better off not converting. If the tax rate at the time of conversion is expected to be slightly to moderately higher than at the time of distribution, a Roth IRA conversion might still be advisable because of special factors that favor a Roth IRA.

Perhaps the most important of these factors is that if a taxpayer can pay the Roth conversion tax with outside funds he or she can, in effect, pack more value into the IRA.

Example 1. Wilma is a single taxpayer in a 40% combined federal and state income tax bracket in 2025. She has $1,000,000 in a traditional IRA and $400,000 of liquid assets in a side fund, which may be used to pay the taxes from a Roth IRA conversion if Wilma chooses to do one. Assume that the assets in the IRA will increase in value by 300% by the time Wilma retires in 30 years, but the side fund will grow by only 200% because it is subject to tax. At the end of the 30-year period, Wilma will receive a distribution of the full amount in the IRA and will be in the same 40% marginal income tax bracket. The charts below compare the terminal wealth from a traditional IRA and a Roth IRA.

A.   No Conversion—Leave assets in Traditional IRA

 

Beginning Balance	$ 1,000,000
Conversion Tax	$ 0
Value after Conversion Tax	$ 1,000,000
Value after 30 Years (4 x $1,000,000)	$ 4,000,000
Tax on Distribution (0.4 x. $ 4,000,000)	$ (1,600,000)
Amount after Distribution Tax	$ 2,400,000
+ Value of Side Fund (3 x $ 400,000)	$ 1,200,000
Total Terminal Wealth	$ 3,600,000

 

B.   Roth IRA Conversion – Don’t use side fund to pay conversion tax

 

Beginning Balance	$ 1,000,000
Conversion Tax	$ 400,000
Value after Conversion Tax	$ 600,000
Value after 30 Years (4 x $600,000)	$ 2,400,000
Tax on Distribution	$ 0
Amount after Distribution Tax	$ 2,400,000
+ Value of Side Fund (3 x $400,000)	$ 1,200,000
Total Terminal Wealth	$ 3,600,000

 

C.   Roth IRA Conversion – Use side fund to pay conversion tax

 

Beginning Balance	$ 1,000,000
Conversion Tax (use side fund)	$ 400,000
Value after Conversion Tax	$ 1,000,000
Value after 30 Years (4 x $1,000,000)	$ 4,000,000
Tax on Distribution	$ 0
Amount after Distribution Tax	$ 4,000,000
+ Value of Side Fund (eliminated to pay tax)	$ 0
Total Terminal Wealth	$ 4,000,000

 

The $400,000 difference is due to the fact that the $400,000 side fund was, in effect, added to the value of the IRA rather than continuing to grow at its taxable rate. Thus, the difference is ($400,000 x 4) - ($400,000 x 3) = $400,000.

There are many other factors that might favor a Roth IRA conversion:

·       A taxpayer has special favorable tax attributes, including charitable deduction carry-forwards, investment tax credits, net operating losses, high basis non-deductible traditional IRA, etc., that may help offset the taxable conversion amount.

·       Suspension of the minimum distribution rules provides a considerable advantage to the Roth IRA holder if the holder doesn’t need the payments for support and can accumulate them for transfer to their heirs.

·       Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.

·       Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lowering the effect of higher estate tax rates.

·       Federal tax brackets are more favorable for married couples filing joint returns than for single individuals; therefore, possibly lowering the conversion tax if the taxpayer is married. Also, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free.

·       Post-death distributions to beneficiaries are tax-free which is especially important after the Secure Act Ten-Year.

·       Tax rates are expected to increase in the near future.

·       The 3.8% NIIT – Roth IRA distributions are not included in net investment income or MAGI.

·       The 199A Deduction – Roth IRA distributions will not increase taxable income for 199A and a conversion could actually increase the deduction in certain circumstances.

 

Roth conversions to take advantage of these factors fall into four categories:

·       Strategic conversions: Taking advantage of a client’s long-term wealth transfer objectives.

·       Tactical conversions: Taking advantage of short-term client-specific income tax attributes that are set to expire (i.e., low tax rates, tax credits, charitable contribution carryovers, current year ordinary losses, net operating loss carryovers, AMT, etc.).

·       Opportunistic conversions: Taking advantage of short-term stock market volatility, sector rotation and rotation in asset classes.

·       Hedging conversions: Taking advantage of projected future events that will result in the client being subject to higher tax rates within the near future.

 

Analysis of Roth IRA Conversions

If a taxpayer’s income is currently lower than it is expected to be in later years, the taxpayer might want to do a Roth conversion to “smooth out” income. The conversion can be done in stages so that the tax payable on the conversion does not push the taxpayer into a higher tax bracket or increase MAGI and NIIT in the year of conversion. Taxpayers can limit annual conversions to the amount that fills up their current marginal tax bracket. It should be noted, however, that there may be times when it does make sense to convert more and go into the higher tax brackets.

Finally, listed below are four steps to planning for a Roth IRA conversion:

1.    Develop a ten to fifteen-year projection of income and deductions and compare these projections to the various taxes.

2.    Develop an analysis to determine the client’s “permanent tax bracket.” Analysis will test whether any “intra-bracket” conversions increase the 3.8% NIIT, the AMT, or impact the Section 199A limitations.

3.    Develop a series of “bracket-crossing conversions” analyses. Each analysis must be measured autonomously standing on its own and take into account the various taxes.

4.    Repeat the above taking into account changes in value and the opportunity to re-characterize.

 

Charitable remainder trusts (“CRTs”) can be used for income tax planning benefits and meeting client charitable goals.

An inter vivos charitable remainder trust (CRT) is an irrevocable trust created by a donor during the donor’s life with a lead annuity or unitrust interest and a charitable remainder interest. The lead interest can be for life or a term of years (not to exceed twenty). The donor generally retains the lead interest and any property left in the trust at the end of its term passes to charity. The donor receives gift tax and income tax charitable deductions for the present value of the remainder interest. Assuming that the donor retains the lead interest, it is not subject to gift tax because the donor still owns it. The present value of the remainder interest must be at least 10% of the value of the assets transferred to the trust.

CRTs can be extremely useful for a taxpayer who has a large capital gain that pushes income for a tax year up into higher tax brackets and/or subjects the taxpayer to the net investment income tax (NIIT). Because CRTs are tax-exempt entities, they can sell assets without recognizing gain. Instead, the gain realized by the trust is taxed to the grantor, but only as the annuity or unitrust payments are received, allowing the gain to be spread out over many years, possibly subjecting it to lower tax brackets.

The character of these payments is determined under the “tier” rules of IRC § 664. The payments are first treated as ordinary income, to the extent the trust has realized current or accumulated ordinary income, then as capital gains, to the extent the trust has current or accumulated capital gains, then as other income (e.g., tax-exempt income), and finally as tax-free return of trust corpus. This enables taxpayers to spread gain recognition over a number of years as shown in the following examples.

Example 1. Cindy, a single taxpayer age 51, has salary and interest income of $150,000 net of deductions in 2025 Cindy sells Blackacre, vacant land with a basis of $100,000, for $800,000, recognizing a long-term capital gain of $700,000. The gain is taxed as follows:

First $50,000 @ 15% (15% rate, no NIIT)	$7,500
Next $318,900 @ 18.8% (15% rate, 3.8% NIIT)	$59,953
Last $331,100 @ 23.8% (20% rate, 3.8% NIIT)	$78,802
Total Tax Paid on Gain	$146,255

 

This leaves Cindy with $653,745 after tax.

Example 2. Now suppose that instead of selling the land herself, Cindy contributes it to a 20-year CRAT in November 2023 when the Section 7520 rate is 5.6%. She sets the value of the charity’s remainder interest at the minimum 10% value allowed under the Tax Code, $80,000 ($800,000 x 10%), and retains the right to receive an annuity of $60,750 per year.

N	I	PV	PMT	FV
20 years	5.6%[i]	$720,000 (800,000 - 80,000)	$60,750 (TVM)	$0

 

The CRAT subsequently sells the land and realizes a gain of $700,000 but none of the gain is recognized because the trust is tax-exempt. Assume that the trust assets are all invested in tax-exempt bonds so that the capital gain from Blackacre is the only taxable income flowing out to Cindy. The annuity payments to Cindy are taxable to her until the last of the $700,000 of capital gain realized on the sale of Blackacre has been distributed in Year 12. Because Cindy’s income stays below her $200,000 applicable threshold amount for the NIIT and the $518,900 threshold amount for the 20% capital gains bracket, all payments are taxed at only 15%, making the total tax payable on the sale of Blackacre $105,000 (.15 x $700,000). Note that this is $41,255 less than the tax paid in the previous example ($146,255 - $105,000). The tax is not only lower, but there is also substantial tax deferral.

 

Charitable lead trusts (“CLTs”) can be structured as grantor trusts so that the client may realize income tax benefits.

 

Inter Vivos Charitable Lead Annuity Trust (CLAT)

An inter vivos charitable lead annuity trust (CLAT) is a split-interest trust created by a donor during the donor’s life that pays an annuity to charity for a term of years or for the life of the donor or another individual. At the end of the term, any assets remaining in the trust pass to non-charitable remaindermen, generally the donor’s children.

 

Gift Tax Benefits

 

Income Tax Benefits

There are two kinds of CLATs for income tax purposes, grantor CLATs and non-grantor CLATs. With a grantor CLAT, the donor receives an income tax charitable deduction for the full present value of the lead interest at the time the trust is created. The donor then pays the trust’s tax liability each year under the grantor trust rules.

A grantor CLAT increases the basic gift tax benefit of an inter vivos CLAT in two ways. First, payment of the CLAT’s income tax produces an additional tax-free transfer to heirs. Second, the upfront deduction may be worth more than the later tax cost. The donor receives the deduction when the trust is created, but the tax on the trust’s income is deferred. Moreover, the upfront deduction may offset ordinary income now, while the income the donor is taxed on later may be capital gains taxed at a lower rate. However, grantor CLATs are not helpful for reducing the 3.8% net investment income tax (NIIT) because all trust income is added to the donor’s other income on his or her Form 1040.

With a non-grantor CLAT, the donor receives no income tax deduction when the trust is created. However, since the CLAT is a taxable entity, it receives an income tax charitable deduction under IRC § 642(c) as annuity payments are made to the charitable lead beneficiary. Thus, in effect, the CLAT is subject to income tax only on income in excess of the annuity payment amount.

Non-grantor CLATs can be used to reduce the 3.8% NIIT. Outright gifts to charity and transfers to charitable remainder trusts do not reduce the NIIT because they produce below-the-line deductions under IRC § 170 that do not reduce the donor’s modified adjusted gross income (MAGI) or net investment income (NII). By contrast, non-grantor CLATs produce charitable deductions that can indirectly benefit the donor. When a CLAT makes its annual annuity or unitrust payments to the charitable lead beneficiary, the NII of the CLAT is reduced by the share of the § 642(c) deduction allocable to the NII distributed to the charity; thus, reducing the amount of NIIT on the CLAT. Consider the following comparison.

Individual IRC § 170 Deduction

Wage Income	$260,000
Interest Income	$100,000
Dividend Income	$50,000
MAGI	$410,000
Less: Threshold Exemption	($250,000)
Subtotal	$160,000
Lesser of Excess over Threshold or NII	$150,000
NII Tax at 3.8%	$5,700

Trust – IRC § 642 Deduction

Interest Income	$100,000
Dividend Income	$50,000
MAGI	$150,000
Less: Charitable Deduction	($150,000)
AGI	$0
NII Tax at 3.8%	$0

*Does not reflect the charitable limitations

Because the deduction leaves more in the trust to pass to the non-charitable remaindermen, it indirectly provides the donor with a charitable deduction against the NIIT.

Will the state and local income tax (“SALT”) deduction be reinstated? What planning can be done in that event? Should you delay realization transactions until 2025 or 2026 to obtain a SLAT deduction?

Review Existing Planning

Assess existing client planning and documents. What can or should be done to revise or modify the planning considering the evolving political environment? Does a plan you are currently working on, or one that you previously created, still make sense considering the new environment? If a trust plan is in process, consider modifications based on the planning ideas suggested in this webinar. For existing trusts, if the client is unhappy with the changing environment, evaluate whether powers of appointment, decanting, non-judicial modifications or trust protector actions may effectuate modifications that make the trust plan more comfortable for the client. Be certain that the client understands that tax laws might well change again with the next administration (which could begin in 2009), so a long-term flexible view may be wiser

than abandoning planning or making a sharp pivot.

Communicate with Clients

Practitioners should communicate the possible impact of the election to clients and planning via email blasts, newsletters, or other means. Harsh estate tax changes are unlikely to happen for at least four years.  The bonus exemption may or may not be eliminated. But, none of the above means ignore planning. Planning needs to be re-evaluated.  Asset protection, income tax planning, future estate tax worries all should be planned for.

Conclusion

Planning should continue.  Practitioners should always have and should always focus on holistic planning that addresses a wide range of issues. For plans done from that perspective the pivot to the change in the post-election world should be less sharp. For those who encouraged SLAT plans to use exemption without a broader based plan clients are more likely to be reluctant to proceed. But educating the clients about income tax benefits, asset protection advantages, etc. may salvage the plan. Consider nuanced changes to planning for clients that are fence-sitting.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Martin M. Shenkman

Jonathan Blattmachr

Robert Keebler

LISI Estate Planning Newsletter #3159 (November 18, 2024) at see more information about the offering. You may also contact your local council office / board member to find out whether they are offering the service as a member benefit.