In recent years, the Internal Revenue Code (IRC) has endured some drastic changes resulting from legislative action that have altered the strategies estate planning professionals have recommended to clients. And while the near-constant drumbeat of proposed legislative actions that would further alter the estate planning landscape has led some planners to try to 'get ahead' of those changes by suggesting action in anticipation of those bills becoming laws, doing so can come with risks… especially when those proposals never come to fruition. To account for the multitude of legislative proposals that arise from a constantly changing political environment, advisors can ensure that clients' estate plans contain flexible provisions to avoid potentially disastrous and costly results, while still preparing them for possible changes that might impact their estate plans.
Given how frequently the tax code changes, advisors can add value for clients by ensuring their estate plans are aligned with current law to meet the clients’ objectives, and not with past rules that may no longer apply to them. For instance, prior to the 2017 Tax Cuts and Jobs Act (TCJA), "A/B trusts" had become ubiquitous for spousal estate tax planning. However, the passage of TCJA resulted in the estate gift tax exemption nearly doubling (from $5.6M to $11.2M for individuals), which changed the perspective of estate planners on A/B trusts as they became less relevant for those whose net worth did not warrant such planning strategies, especially when accounting for the portability of the estate tax exemption between spouses. Instead, "Disclaimer Trusts" suddenly made more sense for many clients as they gave surviving spouses the flexibility to choose how much to fund their credit shelter trusts. And now, with the TCJA’s pending sunset provisions expected in 2026, gifting strategies are especially appealing for some individuals with large estates, looking to take advantage of the high exemption while they can.
Contrary to what their name might suggest, flexibility can even be built into irrevocable trusts. For instance, in some states, naming a "Trust Protector" is an option that allows a 3rd party to oversee the trust's activities, resolve disputes, or amend trust provisions if the beneficiaries’ circumstances or legislative changes make the trust run in contrast to the grantor’s original intent. This role offers a potential 'do-over' option for trusts that were validly created but rendered obsolete due to unforeseen legislative or personal circumstances. Some states also allow decanting provisions as another method of providing some flexibility in an irrevocable trust, which permits assets to be 'poured' into a new irrevocable trust if the original is no longer suitable.
Ultimately, the key point is that the effectiveness and suitability of any potential estate planning solution will depend on the unique circumstances of the client and their individual planning goals and needs. Even more important than the specific potential solutions, though, is a mindset that focuses on flexibility to adapt to a constantly changing political landscape. Which means that advisors can add significant value for clients by ensuring that their estate plans meet their current needs but are also designed to withstand unexpected changes – both to ever-changing estate tax laws and to the clients' own personal circumstances!
Read More...
Welcome back to the 326th episode of the Financial Advisor Success Podcast!
