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Death and uncertain taxes


Tax laws may change and complicate estate planning. However, this planning remains important and should not be delayed by a federal tax debate in Congress.

First, many tax experts argue that any appeal of estate taxes will come with a sunset provision where taxes will return in force in a decade. These taxes may even be re-imposed. If the generation-skipping tax is repealed, it may be impossible to move assets outside the transfer tax system. This may block the permanent shifting of assets outside the tax system until the estate tax rules are later reinstated

Irrevocable trusts are also an important part of trust planning and have non-tax benefits. These include asset and divorce protection and a management structure addressing any potential future disability. As a precaution, however, several steps may be prudent. First, flexible trusts should be used to respond to changing and uncertain tax laws.

Obtaining a trust protector may also add trust plan flexibility. These individuals are usually not a beneficiary or trustee, but someone who acts independently and may replace a trustee, change the place where the trust is administered and exercise other powers.

Making a spouse a trust beneficiary can constitute an indirect benefit to the spouse receiving trust distributions. If a client is not married, this trust can add a right for a future spouse to become a beneficiary. However, there may be personal, legal or tax reasons that should be considered before these trusts are considered.

A loan provision may also give a person who is not a fiduciary the power to loan trust assets. This may provide another avenue for a person to access trust assets while making them inaccessible to creditors or causing tax inclusion.

Finally, most or all trusts should be established as grantor trusts that are taxable to the grantor. Currently, a settlor may trade assets from personal income for assets that are equally valued. This takes assets that are highly-appreciated from an irrevocable trust, so that they become part of the trust when the grantor dies. This could lower capital gains taxes.

Consulting a lawyer may help assure that trust planning is legal and provides maximum benefits. This may be particularly important in the event that tax laws change.

Source: Financial Planning, "Estate planning when tax laws are uncertain," Martin Shenkman, March 2, 2017

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