The Tax Cuts and Jobs Act became law on December 22, 2017. As a result, people may find themselves wondering if a trust modification is beneficial. With these recent changes, opportunities now present themselves to modifying trusts in a way to further protect grantors and beneficiaries. But without a skilled and knowledgeable estate planning lawyer Memphis, TN relies on to navigate the complex trust modification process, there are risks that could negatively impact grantors and beneficiaries.
Estate Tax Exemption
When determining which trusts provide the best protection for grantors and beneficiaries, there are many things to consider. One of those is the estate tax exemption which has doubled to $11.2 million per person. This means that an individual no longer has to pay estate tax on the first $11.2 million dollars of their estate. This creates greater wealth transfer to beneficiaries and reduces the number of estates subject to the estate tax to about 2000.
Many people may think this means trusts are no longer necessary. This is not the case. Trusts such as Irrevocable Life Insurance Trusts and Special Needs Trusts are a necessary component of reducing tax liability for both grantors and beneficiaries. But why should a grantor review and revise their trust? Because tax laws change and as those laws change, the trust may no longer address the needs of the grantor or the beneficiaries. This creates an opportunity for people to take advantage of the current environment and make trust changes to benefit them.
Gifts to Trusts
Most people are aware gifts can be made to individuals but they can also be made to trusts. An individual can make a gift to a trust which removes those assets from their estate and also protects the assets from creditors while preserving the assets for beneficiaries.
By making gifts now, individuals are able to lock in the current rate. This means that an individual can gift to beneficiaries on a tax free basis double the amount they could in the year 2026.
For example, an individual wants to gift $8 million to a child and does so today completely tax free. Assuming the estate tax exemption scales back as scheduled to approximately $5.6 million in 2026, the individual was able to gift an extra $2.4 million tax-free to their beneficiary. In order for this to work, the gift must be a larger amount than what the estate tax exemption will scale back to in 2026 and it must be in a trust.
Capital Gains Tax
No one likes tax, especially a tax on earnings. Capital gains tax is such a tax levied on profit. This is a tax that comes into play more now than it did before and it might be worth modifying a trust to put assets back into an estate.
Here’s why: beneficiaries can be subject to capital gains taxes on appreciated assets. If the asset amount in trust does not put the estate over the estate tax exemption amount, the estate would not be subject to estate taxes and the beneficiaries would not be subject to capital gains taxes. It’s possible that modifying a trust to remove certain assets could result in tax savings under the new law.
Generation Skipping Tax
Generation-skipping tax should be avoided at all costs. This tax levies an extra 40% tax on grandchildren, or other generation skipping beneficiaries, and becomes a drain on wealth transfer. This tax is imposed on gifts, transfers, and distributions. It may also be imposed when a gift tax has already been levied. By setting up a proper trust plan, a grantor can make certain they and their beneficiaries are protected from this harsh tax.
Even with a large exemption, trusts are required to provide beneficiaries the protection desired. Simple wills do not provide this protection for beneficiaries nor do they provide adequate protection for later-life care for the grantor. Trusts have the ability to provide the grantor access to the transferred assets and have control over the assets all the while ensuring reduced tax implications to their beneficiaries.
The worst type of estate plan to have is no plan at all. While the estate tax exemption has never gone down, it has also never been this high. Taking action now ensures you reap the benefits of the current climate while preserving and protecting your assets. It is always smart to review and revise your trust structure as your life conditions change. Using changing tax laws to your benefit is also smart. But be sure to weigh the benefits of shielding those assets from taxation against the savings.
Using the services of skilled and knowledgeable attorneys is the best way to make certain you, your assets, and your beneficiaries are protected.
Thank you to our friends and contributors at Patterson Bray for their insight into estate planning and trusts.