Tax reform creates uncertainty for estate, wealth planning

Passage of federal tax reform spelled numerous changes for wealthy Americans, but more often that not, those changes have led to unanswered questions.

Taxpayers and their lawyers have been forced to learn new nuances to estate, investment and other tax-related planning procedures as they try to determine how the new legislation will impact them.

Estate planning and tax attorneys agree that from a wealth management perspective, the most significant consequence of the Tax Cuts and Jobs Act comes through changes made to the federal estate/gift tax. But as they try to understand the breadth of those consequences, attorneys say only one thing about the tax bill is certain: it is rife with uncertainty.

Bird-Pollan

Taxing the very, very rich

For now, one thing is clear — very few people will have to pay an estate/gift tax under the federal legislation. Previous law taxed estates more than $5.6 million for individuals and $11.2 million for couples, but the new law doubles both those amounts.

In practice, that means far fewer people will now have to worry about paying an estate tax, said Jennifer Bird-Pollan, an associate professor at the University of Kentucky College of Law. She described the change as a transition from the “very wealthy” to only the “extremely wealthy” having to pay the tax.

Riffle

In Indiana, the doubling of the estate tax threshold will likely mean fewer Hoosier attorneys will have to deal with estate tax matters, said Tim Riffle, chair of the tax section of Barnes & Thornburg’s Corporate Department. Only those attorneys in very affluent parts of the country, such as Manhattan’s Upper East Side or Chicago’s North Shore, will be frequently asked to help clients navigate the estate tax world, he said.

However, Rick Kissel, a partner at Taft Stettinius & Hollister, LLP, noted Indiana executives at publicly traded and closely held companies, and even those who own large family farms, could find themselves passing the estate/gift tax threshold. Even so, the number of Hoosiers subject to estate tax will be minute, he said.

Kissel

“It really is a tax on the rich,” Kissel said. “It’s not on the middle class, it’s not on the upper middle class. It’s not even the top 1 percent.”

Shift in perspective

For everyone else, tax reform likely changed the way taxpayers think about planning for their futures, Greg Shelley said. Under the previous law, wealthy Americans often focused on minimizing their estate tax obligations, the Bose McKinney & Evans partner said. Now, the focus has shifted to minimizing income tax obligations.

For example, under the old tax system, wealthy couples often put portions of their estate up to the estate tax threshold in a credit shelter trust. When one spouse died, the trust would pass to the surviving spouse, and then to the couple’s children or other beneficiaries upon the second spouse’s death.

Shelley

The benefit of a credit shelter trust was that it could pass from beneficiary to beneficiary without ever being included in the decedent’s estate, Shelley said. Thus, couples with very large estates could use credit shelter trusts to gift their assets up to the estate tax threshold without paying the applicable tax, he said.

But under the new tax law, the benefit of a credit shelter trust might be weakened considering the higher value limit, Shelley said. That means wealthy families must reassess their estate plans to determine if the advantages of a credit shelter trust still outweigh income tax considerations.

Subject to change

That perspective change might not be permanent, though, considering the temporary nature of the Tax Cuts and Jobs Act. Various aspects automatically repeal at different times, with the changes to the estate/gift tax set to revert on Jan. 1, 2026.

That means that in addition to changing the structure of estate plans, clients also must consider the possibility of a claw-back provision, Kissel said.

Right now, wealthy Americans are proceeding under the assumption that if they were to die tomorrow, their estates will not be taxed unless they reach the doubly-high threshold, Kissel said. But if someone lives beyond 2026, there’s a possibility that the threshold could revert to pre-2018 levels, complicating the estate plans they had in place, he said.

For younger clients who, from an age perspective, are likely to live past 2026, the Taft partner said his estate planning advice will include discussions about the potential for a claw-black. Older clients, however, might proceed with the assumption that their estate will be gifted prior to 2026, eliminating any need for claw-back considerations.

Age considerations aside, the unpredictability of life and the federal government makes it difficult for attorneys like Kissel to give definitive advice to their clients.

“Nobody knows how that is going to work,” he said.

Other considerations

Less than three months since the passage of the Tax Cuts and Jobs Act, clients are already asking for advice on how to adjust their wealth and estate planning strategies, the attorneys said. When those questions arise, Shelley said the best thing he can do is inform his clients about where the law stands now while also cautioning them about provisions that are still uncertain.

The estate/gift tax, for example, is subject to uncertainty beyond the possibility of claw-back provisions. The federal legislation calls for the IRS to issue regulations on what will happen after Jan. 1, 2026, Kissel said, but those regulations have yet to be promulgated. Thus, clients and attorneys are left in a holding pattern as they await further federal guidance.

There are other nuances of the tax bill that impact wealthy Americans, such as new investment opportunities that developed by means of the corporate tax cut from 35 percent to 21 percent, Riffle said. Corporations now able to pay larger dividends to shareholders, giving the wealthy an opportunity to get even wealthier, he said.

“It’s simply a function of the fact that corporations are paying fewer taxes, so the chances of your portfolio going up in value are better,” he said.

But each provision of the federal reform is clouded by the fact that a shift in political power could alter the future of American tax law, Bird-Pollan said. Whether it’s a switch in Congressional party power during upcoming elections or the election of a new president in 2020, a substantial political change could lead to additional legislation that either reverts tax laws back to the old ways, or further changes the tax system, she said.

Talk of such a power shift has already begun, Kissel said, further complicating the work of estate and wealth planning attorneys.

“It’s an almost mind-numbingly complex bill,” he said. “It very clearly is going to require some pretty extensive technical amendments. There are some provisions that are just not resolved yet.”•