A. As the exclusion increases, our client base will shrink if we focus on complex strategies designed for clients who have net taxable estates.
(i) Nationwide, fewer than 5% of estates are subject to the estate tax. (The percentage of taxable estates is undoubtedly even less in Utah).
(ii) Just to maintain the same client base, we must "get back to basics" by refocusing on cot-effective strategies which are effective and necessary for non-taxable estates. This increased focus on fundamental estate planning techniques will also help our clients who still have taxable estates.
B. In this presentation, I have used the phrase "complex estate planning" to refer to techniques which are primarily designed to avoid the estate tax, including annual gifting programs from family limited partnerships, family limited liability companies and irrevocable life insurance trusts.
C. First Simplification Strategy - Always calculate the net estate. It is important to calculate a client's net estate to determine if an estate tax is potentially due. Many of our highly leveraged clients have huge gross estate empires but much smaller (nontaxable) net estates. An estate plan which incorporates tax-focused gifting strategies is inappropriate for those with large gross estates and small net estates.
D. Second - Calculate the effects of joint ownership & beneficiary designations.
(i) Clients should have a comprehensive estimate of the amount of property which will pass to each recipient, including (a) property which will pass as a matter of contract outside of wills and trusts, and (b) property which will pass as a matter of contract into a trust.
(ii) A three-part memory device often helps my clients understand how these two contractual transfer mechanisms coordinate with the wills and trusts I draft:
Joint ownership frequently trumps
(Non-trust) beneficiary designations which frequently trump
Wills and trusts
(iii) Example: A husband and wife's joint bank account names their son as the Pay-On-Death beneficiary after the deaths of both joint owners. An appendix to their family trust lists the bank account as an asset which is owned by the trust. Spouse 1 dies.
Result: Spouse 2 gets the entire account, not the son. Upon the death of Spouse 2, the son gets the account, not the trust.
E. Rules of thumb for simplifying estate planning, based on the client's net estate:
(i) For couples with net combined estates of less than $1.0 million, consider omitting the very common marital-and-bypass trust scheme.
The advantage of this strategy - If the exclusion never goes below $1.0 million, the surviving spouse will avoid having to learn and follow the distribution rules of a bypass trust.
The disadvantage of this strategy - If the exclusion goes below $1.0 million, the couple may have to split their estates and create marital and bypass trusts. In the meantime, they have avoided having to discuss and understand the bypass trust as a tax-avoidance strategy.
(ii) For individuals with net estates of less than $1 million, or couples with net combined estates of less than $2 million, consider omitting a tax-focused gifting scheme from estate plan documents. (The client's age and earning potential are very important, here).
The advantage of this strategy - If the exclusion never goes below $1.0 million, the client(s) will avoid paying to create a gifting scheme that is probably not needed to save estate taxes.
The disadvantage of this strategy - If the exclusion does go below $1.0 million, the clients will then need to play catch up and will lose forever the previous, foregone annual exclusions.
(iii) For individuals with net estates of less than $1.5 million, or couples with net combined estates of less than $3 million, discuss whether to suspend annual gifts from the existing plan until Congress does something permanent with the exclusion.
The advantage of this strategy - If the exclusion never returns below $1.5 million, the client will avoid the hassle and expense of making additional completed gifts.
The disadvantage of this strategy - If the exclusion does return below $1.5 million, the clients will then need to play catch up and will lose forever the previous, foregone annual exclusions.
4. Methods of Accomplishing "Real" (Non-Tax) Client Objectives in Light of an Increasing Exclusion
A. Simplified charitable giving
(i) Coordinate a partial (i.e., 5%) beneficiary designation in favor of a 501(c)(3) charity from the client's 401(k), IRA or brokerage account. This is a prospective gift which is revocable until the client's death.
(ii) Simple trust remainders (not necessarily CRTs or private foundations).
B. The Family Incentive Trust.
(i) Education incentive trusts. Repeal of the Rule Against Perpetuities in certain states, coupled with an increasing estate tax and GSTT exclusion make long-term dynasty trusts a possibility. In today's very complex society, however, a multi-generation dynasty of trust beneficiaries is only possible if the trust beneficiaries are thoroughly educated and engaged in society.
(ii) Other incentive trusts. Most wealthy, self-made clients don't like the idea of creating a jobless class of beneficiaries any more than Warren Buffet (see page Mr. Buffet's quote on page 6, question 4). Family Incentive Trusts are designed to reduce this possibility.
(iii) Problems to be overcome with Family Incentive Trusts. Is it possible for a trustee exercise a parent's judgment in making discretionary distributions? Is it sufficient to leave detailed incentive trust provisions in the document?
Only those at the top of the Utah demographic pyramid need "complex" (tax reduction) estate plans
