The Tax Cuts and Jobs Act (“TCJA”), was signed into law by President Trump in December 2017 and took effect on January 1, 2018, has generated quite a buzz in the estate planning community. Convincing clients that careful planning is still needed is not an easy task with an estate tax exemption for all estates under $11.2 million ($22.4 million for married individuals).
So, why are we still telling our clients that carefully planning for the transfer of their assets is still equally important despite an era of lowered transfer tax concerns? To start, it’s important to note that when it comes to the TCJA changes, most changes applicable to estate, gift, and Generation Skipping Taxes (GST) “sunset” or go away January 1, 2026; and pre-2018 laws go back into effect. Most changes that apply to individual incomes taxes also go away in 2026. There is a plan by the Republicans to reverse the sunset and to make it permanent. However, we can also expect some sort of Tax Reform 2.0 from the Democrats depending on the outcome of the upcoming elections.
Another critical reason why it is important to carefully plan is that contests by heirs and other interested parties in estate proceedings are at an all-time high. Some common contests reasons include: undue influence by friend or family, lack of testamentary capacity, fraud, and forgery. The list goes on. While proving that undue influence or fraud occurred can be a difficult or an almost impossible task, it still means that an executor will need to hire an attorney to defend a contest action. Millions of estate dollars are spent every year simply on contest litigation. Careful planning includes “contest-proofing” documents so that interested parties are discouraged from taking hostile steps.
The TCJA, however, did not address how to protect beneficiaries from themselves. Despite the new tax laws, beneficiaries are still spending unwisely, sometimes to the point of losing their inheritance to creditors, business partners, ex-spouses, and the like. No tax law can help these issues but careful planning can. A plan that is long-term and accounts for spendthrift beneficiaries, incapacitated beneficiaries, and the beneficiary’s own death or divorce is necessary to protect these estates. Ultimately, beneficiaries may not be perfect, but a plan can be created to protect them from their own vices.
Do you know someone who had a terrible experience probating an estate? Surprisingly, the new tax laws also do not help clients avoid probate. Clients that want to facilitate and streamline the transfer of assets to their beneficiaries must take action while living. Some other benefits of planning to avoid probate are that: 1) no will or document is filed in court as a public record that anyone can search, 2) there is a seamless transfer of authority and assets upon death, and 3) some planning to avoid probate may also avoid a formal guardianship if a person loses capacity. Who wouldn’t want all these benefits?
Does your client own a business? The TCJA may help clients avoid taxes due after a business owner’s death, but how do you deal with other partners? Who will buy out the deceased owner’s family member? What is the agreed value of the business? Is it all in writing? Or will business partners and the family of a deceased owner negotiate terms after the owner’s death? We’ve seen the good, and the ugly when it comes to these situations. The good always comes as a result of careful buy-sell planning that specifies that answers to the questions above and provides a smoother transition at a difficult time. Change is good but not always permanent. The sunset provision guarantees that Congress will revisit this at some point in the next eight years. These are some of the issues and planning opportunities I will be covering in my session at the Personal Financial Planning and Medicare Workshop two day conference October 29-30. Register here. Now more than ever, it is essential for clients to use professional advisors to guide them in identifying tax-efficient planning opportunities that may impact them. I hope to see you there!
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About the author:
Thais Amaral Tellawi founded Amaral Tellawi Law, in Houston, Texas, a boutique family-owned law firm representing domestic and international individuals, families, and the owners of privately-held and family-owned companies in the areas of estate planning, business, and real estate. Learn more here.