Winter 2017-18|volume 11|Issue 2

    Your Finances

    Flexibility in Future Planning: The Uncertainty of Estate Planning
    William Taylor

    William Taylor

    Tax reform and the repeal of the federal estate tax has been one of President Trump’s cornerstone promises. Currently, however, there is no detailed plan from the White House, which is usually necessary to start the process. Add to this, that unless the Republicans can get some Democrats on board to achieve a super-majority, any tax reforms that do get passed are likely only to be temporary. Without a supermajority, which is necessary to break a filibuster, the only way tax reform can be passed is through reconciliation. However, any rule that is passed under reconciliation and increases the deficit must sunset after ten years. So how do you plan for the future in an era of uncertain legislation?

    First, the primary focus of your estate plan, whether there is an estate tax or not, should be about carrying out your wishes. Estate plans should continue to protect the same personal and financial objectives they always have sought out to: poor financial decisions by beneficiaries, a divorcing spouse, and creditor claims. Additionally, your estate plan should also provide for your surviving spouse, children, or other beneficiaries to help maintain their standard of living after you are gone.

    Second, estate plans should be reviewed regularly and drafted with flexibility in mind. By incorporating flexibility into your estate plan, your plan can adapt to changing laws or circumstances in a beneficiary’s life. For example, flexibility can be accomplished by having your estate take full advantage of the estate and/or generation skipping tax exemptions that are in effect. If the estate tax is not in effect, you will still want to ensure that your assets pass as you intended and do not potentially disinherit your surviving spouse. This may require giving the trustee the power to amend the trust, benefit multiple beneficiaries, divide the trust into multiple trusts, or if necessary, terminate the trust.

    Third, “wait and see” is not an option. While it may seem impossible to predict what, if any, tax reform Congress will pass, I would not recommend waiting until Congress actually passes some form of tax reform. If you do nothing, you run the risk that your existing estate plan may not operate as planned. Worse yet, you may not be competent to make changes if Congress does pass a tax reform package.

    Fourth, does life insurance still make sense? Life insurance has two principal purposes. The primary purpose of life insurance is to help ensure a financial security for beneficiaries. The second purpose has some tax advantages when it comes to estate planning. If the estate tax is still in existence, life insurance can help replace assets that are consumed to pay any estate tax that is due. Additionally, if Congress repeals the estate tax along with the step-up in basis assets currently received at death and replaces the step-up with a full or partial carryover basis rule, life insurance proceeds will not be subject to the carryover basis rule.

    Therefore, flexibility is key when it comes to the topic of tax reform and estate tax. The only constant is change. The modern version of the estate tax came into existence in 1916. To date, it has approximately 50 significant changes. Any potential changes that occur in 2017 may be undone in 2021. As such, it is important to ensure your estate plan has the leading flexibility to see that your wishes are carried out rather than waiting for a period of certainty in the tax law that may never arrive.

    William Taylor is an Advanced Estate Planning and Business Planning Manager. Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Fragasso Financial Advisors, a registered investment advisor and separate entity from LPL Financial.