Effective planning goes beyond the recent estate tax reform

A client recently asked me if I was disappointed by the tax reform bill passed by Congress in late December 2017. He wondered, tongue in cheek, if I was worried I would run out of work soon. The legislation temporarily doubled the federal gift and estate tax exemption from $5 million to $10 million. Once adjusted for inflation, this puts the federal gift and estate tax exemption for 2018 at $11.18 million. In comparison, the 2017 exemption was just $5.49 million. The increased exemption is set to go back to $5 million after December 31, 2025, assuming Congress takes no further action. The federal gift and estate tax rate remains unchanged at 40%. Generally speaking, this means someone who passes away in 2018 can give away $11.18 million of assets, either during her lifetime, upon her death, or a combination of both, before a tax is owed.

I often remind my clients that I am here to help keep their estate plan current no matter which way the wind is blowing in Washington as it relates to the estate tax. You may remember that back in 2000 the exemption amount was only $675,000, and the tax rate was 55%. The exemption amount has been steadily climbing since then and received a very large boost heading into 2018.

Never one to shy away from making a lawyer joke, my client presumed that I would be disheartened because my pool of potential clients in need of estate tax planning work shrank given the higher exemption amount. I reminded him of two principles in the estate planning world: (1) an effective estate plan is never solely about taxes, but rather is centered on preserving family harmony and values; and (2) no matter the value of your assets, failing to plan is planning to fail.

An advantage of the tax reform is it gives many clients the opportunity to re-think their estate plan without the threat of an estate tax looming in the background. This, I pointed out to my client, is exactly the situation in which he now finds himself. The tax reform gives him the freedom to revisit the estate tax planning we completed in prior years and develop a new path forward; a path focused on his family and values and not the values and priorities of the IRS. For example, he could utilize the larger, temporary exemption amount by making strategic lifetime gifts to his family members. Or perhaps terminate a cumbersome irrevocable trust that is no longer necessary to achieve an estate tax savings. Or unravel a complex sale of assets to family members.

A disadvantage of the tax reform is it may remove the incentive for some families to plan. Avoiding the estate tax is a powerful motivator for someone to finally schedule an appointment with their attorney. And while western North Dakota certainly still has its share of residents who need federal estate tax planning, what about those who will never need that type of planning? A common phrase heard in my conference room is: “I don’t have an ‘estate,’ so why do I need a plan?”

Here the second principle is a helpful reminder that an effective estate plan should save your loved ones time, money, and stress after you are gone, regardless of the amount of assets you own. For some, the first step is as simple as purchasing a pre-paid burial plan so the family is not left arguing over who will pay the funeral bill in the event all other assets are used to pay for long-term care. For others, it is entering into a personal service contract to pay the adult child who provides home care to them during their later years, ensuring the child receives some financial recognition for her caregiving role while preserving the parents’ ability to qualify for Medicaid if needed to pay for future nursing home costs. For still others it is using a trust, option agreement, or right of first refusal to keep the ownership of farmland or a beloved lake cabin within the family. Or perhaps it is as simple as platting out a few acres to gift to your son who built a house on land you own, avoiding the confusion and conflict that would inevitably follow if that acreage was instead inherited by all your children.

Thinking strategically about how and when you will transfer assets to the next generation is at the core of developing an effective estate plan. This will always be true regardless of which way the wind blows in Washington.

This article does not constitute legal advice. Each individual should consult his or her own attorney.