Why Families Will Plan With Or Without The Death Tax

By Patricia M. Soldano

Cymric Family Office Services

Costa Mesa, CA

Families will continue to plan for the passage of assets from one generation to another in a prudent, practical manner whether or not they have to account for gift and estate taxes.

When many wealthier families plan their estate, the most common complaint is "Why am I setting up a complicated structure of trusts, partnerships, limited liability companies, and corporations that need to be maintained for many years, that I don’t want and that do not assist me in achieving the objectives of my family in the passing on of my assets and family values." The answer from family advisors, be they family office managers, attorneys, accountants, financial planners, insurance agents, trust officers, or others, almost uniformly is that the complex planning is necessary to minimize the otherwise horrific impact of the gift, estate and generation-skipping taxes (the "death taxes"). This focus in planning on avoiding transfer taxes will change if the death tax is repealed because families will then actually plan to achieve their objectives of passing assets from one generation to another in a prudent, practical manner. Death tax minimization will no longer be a concern (of course, planning will still be necessary to minimize income taxes) but planning will still be important. Families will put assets in trusts, corporations, limited liability companies, or partnerships only if that is the best vehicle to operate within. Families will spend more time discussing their estate plan objectives with their family members and be more prepared to carry on the wishes of the family because they will have added flexibility without the restrictions of the tax law. Parents will be able to distribute or gift their assets, equally or not, outright or in trust to each of their children without regard for the gift or estate tax rules. Family members and advisors will worry more about more important issues such as 1) planning for disabled family members; 2) protecting assets from creditors; 3) distributing different assets to family members; 4) the succession of family businesses; and 5) charitable planning.

Providing for Minor and Disabled Family Members

Families will continue to appoint agents to make decisions for them when they are unable to do so. Family members need to have durable powers of attorney for health care and property in each state that they reside and family advisors will help with understanding the law in each state. Advisors will continue to assist family members in planning for the guardianship of their children and help to make sure that the necessary provisions are made to provide the financial assets that allow for adequate care of each child with guidance on how funds are paid and who makes the decision. Deciding who is the guardian of the children and who is the guardian of the assets can be a difficult process in which family members often desire assistance. Advisors can give them guidance using the experience they have working with other families. Special needs family members will continue to present the unique estate planning challenge of providing for that family member, but not allowing the state, if the family member is in a state-supported program or facility, to seize the assets.

Gifts to Family Members

Giving to children and grandchildren will be easier without the death tax but will require more thought and structure. No longer will there be the limits of the $10,000 annual exclusion or the current $675,000 applicable exemption amount about which to worry. But parents and grandparents will still need to make decisions about giving property outright or in trust – and if in trust, the terms of the trust. One concern is the need to protect assets from creditors. Everyone is aware of the increasing amount of litigation and the increasing size of judgments. Spendthrift trusts will protect beneficiaries from such judgments and will also provide protection in the event of the divorce of a beneficiary.

Another decision is the possible use of incentive provisions. The core of the concept is the use of trust property to encourage certain behavior or achievement by the trust beneficiaries or to reward beneficiaries for reaching certain benchmark goals. Crafting the appropriate incentive provisions will require, as now, the close advice of the family’s advisors.

Planning for the Distribution of Tangible Items

The division after death of tangible items is one of the most stressful and difficult exercises that a family will go through. Most of the conflict arises because of the personal attachment of more than one family member to a particular item and not the financial value of the property. Conflicts over tangible items can create breaks in a family beyond repair. An advisor can assist the family member in identifying those specific items of family significance and help the family develop a plan for the distribution of those assets in an orderly manner.

Marital Agreements

Divorce, unfortunately, is commonplace. Planning vehicles, such as pre and post nuptial agreements, can help to set the financial ground rules for new relationships and ease the uncertainty and confusion of new spouses. They have always been important, especially in second or later marriage situations and where large amounts of money are involved, and will continue to be so with or without the death tax.

Revocable Trusts

Revocable trusts will still be drafted and used to avoid probate (which can, in some states, be time consuming, costly, and tedious), provide privacy as to an individual’s dispositive scheme, and provide for the management of an individual’s assets in the event of incapacity.

Succession of Family Businesses

Family businesses are usually faced with a succession problem when a family member decides to leave the business or a family member dies. This problem is often solved through a buy-sell agreement. The need for buy-sell agreements will continue even if the death tax gets repealed. Advisors can help craft buy-sell agreements so that an arrangement is reached in advance as to how to value the business and set the terms of the sale or purchase. They can also assist in the purchase of key man life insurance in the event a partner in the business dies. They can assist in determining whether the business or individual should own the life insurance.

Charitable Giving will Expand

Families will have more funds to give to charitable organizations since they will not be burdened with a 55 percent tax and will be able to use less complicated structures to do so. They will continue to use foundations since that gives them a less professional structure, longevity of their giving objectives, and many times, anonymity. In fact, the number of foundations should increase since more money will be available for charitable gifts.

In planning for the elimination of the death tax, families should not assume that it will happen until it becomes law and they should stay current with their estate plans based on the present law. As is well known, the current proposals call for a ten-year phased-in repeal. In anticipation of repeal of the entire death tax, it might be useful to make sure that any trust that is formed can be terminated or amended to take account of possible changes. This can often be done through the use of a trust protector. Gifting early is still one of the best forms of estate planning and it should be continued. One caveat is to avoid gifts that incur actual taxes. Flexibility should be provided in insurance policies so that, if the death tax is eliminated, the policies can be wholly or partially cashed in, since less insurance will then be needed. It will be important to keep information on the cost basis since the present repeal proposals call for a return to the carryover basis. This will require a capital gain tax to be based on the original basis of the asset at the sale or disposition of the asset.

Families want to pass on the values that they inherited or developed as well as the businesses and assets that they established or enhanced. They will do that with or without the death tax. But it will be much more satisfying and rewarding for estate planners and family members without the complication of the death tax law. They will focus more time and energy on positive planning as opposed to negative planning and the end product will be a happier family and a happier estate planner.