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Legacy Matters

March 29, 2018

Why High Net Worth Families Need to Review Estate Plans Now: Unintended Consequences of the Tax Reform

Our high net worth (HNW) clients with assets in the $10M to $25M range, and those with children or family members in that range, are asking how the Tax Reform Act could affect estate plans for their families.
 
This is an important question to ask your attorney – and the sooner you ask the better. Many estate plans created during times with lower exemptions provide for formula funding of trusts in a way that, at the new higher exemption levels, may result in unintentionally larger or smaller funding than originally intended. 
 
Possible Unintended Consequences to HNW Families from Tax Act’s Higher Exemptions

Most estate plans created in years with lower exemptions funded trusts using formulas tied to the exemption amount in effect at death, rather than basing funding allocations on dollar amounts or percentages. This was done to accommodate continued growth of the family’s wealth over the years and slight changes in the tax laws without requiring a new estate plan each year. With fairly steady exemption levels for the past few years, this has been an efficient way to ensure funds are allocated in a tax-advantaged manner.
 
However, the significant recent change in exemption levels may mean your assets will not be allocated as originally intended.  For example:
 
Possible existing estate plan: “Exempt” or “credit shelter” trusts for children and grandchildren funded in an amount equal to the exemption amount effective at the time of death
Estate Plan Original Intent
Trust includes only a fraction of the decedent’s assets with the rest of the assets passing to a marital trust for the benefit of the surviving spouse.
High Exemption Result of Plan
Negative - You may end up significantly overfunding the “exempt” trusts for children and/or grandchildren, leaving less than sufficient assets for the surviving spouse.
Possible existing estate plan: Trust is funded for grandchildren equal to remaining GST tax exemption, with the remaining assets passing to trusts for children
Estate Plan Original Intent
Trust funded for your grandchildren with most assets passing to trusts for your children. 
High Exemption Result of Plan
Negative - To use up the GST exemption, the grandchildren’s trusts may be funded to such an extent that it leaves children’s trusts underfunded or not funded at all.
Possible existing estate plan:  A portion of child’s inheritance is to be placed in trust while the other portion is to pass outright
Estate Plan Original Intent
Some inheritance placed in trust while remainder passes outright to children.
High Exemption Result of Plan
Positive - The entire share passes to children in trust, providing creditor protection and tax benefits, and little or no taxable remainder passes outright.

What Should HNW Families Do Now in Response to Higher Gift and GST Exemptions?

Because of the potential repercussions of the higher exemptions, families with wealth in the $10M to $25M range should review estate plans with their attorneys to make sure assets will be allocated according to their wishes and to make sure they are taking advantage of all the tax benefits currently allowed.
 
For related information, see our previous blog, “Gift Strategies to Help High Net Worth Families Benefit from Tax Reform.” Don’t hesitate to contact your Warner attorney or myself to review your estate plan or for assistance with the other changes from the new tax act that can affect your wealth and business decisions this year.

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