Do You Still Need An Estate Plan If There Is No Estate Tax?

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Lindsay Garland is a regular contributor to Forbes. This article was originally published on Forbes on March 23, 2017.

One of the pieces of Donald Trump’s campaign platform that attracted a lot of attention was his pledge to repeal the federal estate tax. Or, as he calls it, “the death tax.” Now that he is President Trump, what does it mean to us if he does in fact repeal the estate tax, which currently stands at 40%? Does this represent a phenomenal opportunity for this generation to pass an enormous amount of tax-free wealth to their beneficiaries? Would this change also mean that all the estate planning attorneys out there need to find a new line work?

As a way to answer questions like these, I reached out to Natanya Holland Allan, one of the partners in the law firm Cochran Allan, which is based in Tysons Corner, Virginia.

It’s worth noting at the start that the estate tax laws in place for this year were established four years ago. They include an exemption for individuals up to $5.49 million and $10.98 million for a couple for 2017. There is also no tax collected when one spouse dies and leaves everything to their spouse.

In other words, a repeal of the estate tax would really only impact those clients with a net worth north of $11 million. That’s why Natanya told me that most of her moderately wealthy clients have already rounded the corner from thinking about taxes to focusing on better estate planning instead. “They are more interested in finding ways to preserve and protect their assets for their beneficiaries than worrying about taxes,” she told me.

This is a key point, because regardless of whether there is a federal estate tax or not, you will always need the basics when it comes to estate planning. That includes establishing financial and medical powers of attorneys to make decisions if you cannot. Eliminating the tax also doesn’t help address who will receive your assets, retirement benefits, or even proceeds from a life insurance policy upon your death. Perhaps more importantly, you may also need to decide the question of guardianship of who will care for your children upon your death – particularly if any of them have special needs.

There is also the issue of timing when your heirs can even access any assets you choose to pass to them. “You never want large sums of money to go into the hands of someone who is newly an adult,” Natanya told me. For this very reason, I’ve seen many of the clients I have worked with choose to offer partial access to an estate when beneficiaries are in their thirties, while gaining full access when they reach their forties.

But to put in those kinds of controls, or to establish a trust managed by a trustee to help your beneficiaries, you need the help of an estate attorney who can help you put together a proper plan and the documentation to support it that will help minimize the need for a court or a judge to get involved in settling the estate. “Establishing trusts remains a sophisticated part of the estate planning process regardless of what happens to the estate tax,” Natanya told me.

That said, it’s also likely that if the 40% federal estate tax is repealed, the government will need to find another way to close that revenue gap in their budget. One of the proposals that President Trump has discussed would be to put new capital gains taxes in place on inherited assets. Let’s consider an example where you bought IBM stock 40 years ago and passed that along to your heirs. With today’s rules in place, the cost basis for that stock would be set at the time of death. But under the Trump proposal, the cost basis would be whatever the stock was originally purchased for. In other words, your heirs would be looking at a tax burden which could be equal to or more than the current 40% tax.

Again, it will pay to lean on a skilled advisor to help you stay current with whichever direction the law takes.

Another angle to consider is that while there may likely be some change in the federal estate tax, 18 states and D.C. have their own estate tax laws and thresholds that may be even lower than those set by the federal government to take into account.

An estate attorney can set up a trust to navigate these laws and help you establish an estate plan that will help your heirs avoid paying unnecessary taxes while also putting in place any of the controls on those assets you might want in place.

So what’s the big takeaway here? Having a good estate plan makes good financial sense regardless of what happens with the estate tax. Believe me, your heirs will thank you in spades.

Lindsay Garland, CIMA®, CES™

Lindsay Garland, CIMA®, CES™

Lindsay is a passionate advocate for clients and this quality transcends every aspect of her role as a Vice President and a Client Advisor for Glassman Wealth. For the past decade, she has advised high-net worth families and foundations, constantly fine-tuning their investment and financial plans to take advantage of ever-changing opportunities.
Lindsay Garland, CIMA®, CES™
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