Gideon Rothschild, Esq., partner, now retired, with the New York City law firm Moses & Singer LLP. He is a past chair of the Real Property Trust & Estate Law Section of the American Bar Association. MosesSinger.com/gideon-rothschild
In my last post I discussed the need to revisit your estate plan given the increased estate exemption under the new federal tax law…and how it might cause unintended consequences for people whose wills contain formula clauses.
But that’s not the only way your estate plan might have become instantly outmoded because of the tax law…
Reduced need for life insurance. Many people have purchased life insurance to either offset estate tax liability or to provide liquidity to pay estate tax where the estate may be illiquid. Those are good goals—if you need to have them. But under today’s estate tax exemptions, if, say, a married couple that has planned well has up to about $22 million at the time the second of them dies, there may be no estate tax due at all. And expensive life insurance bought to ameliorate estate tax might be, going forward, largely a waste of money.
Now, there is a wrinkle to complicate that straightforward analysis: Because of the sunset of the higher exemption amount after 2025 that is built into the new law, the need for life insurance may still be relevant. Therefore, you must evaluate whether you wish to continue to pay premiums or, perhaps, redeploy the future cost into other investment vehicles.
When evaluating whether to terminate a policy, there are several courses of action to consider in addition to simply surrendering the policy (which may result in taxable income on the cash value received upon surrender). Another option is to sell the policy (known as a life settlement) to a company that pools such policies as investments. A third option is to convert the policy into a fully paid-up policy with a lower death benefit. In all such cases, you should seek the advice of a competent financial planner.
Appreciated assets in a trust. If you have gifted appreciated assets to a trust to shield them from estate tax, you should consider the potential loss of a step-up in basis for these assets if they remain in the trust at your death.
One strategy to consider is for the grantor of the trust to swap the trust assets for cash (or other high-basis assets). If the trust is a “grantor trust,” the transfer by the trust to the grantor does not have any income tax consequence. This will place the low-basis assets in the grantor’s estate, thus obtaining the step up in basis at his death without additional estate tax exposure. This strategy is particularly critical for people whose taxable estates are less than the increased exemption amount (indexed for inflation) of $11.18 million (or twice that if married) because their heirs will not get a step-up in basis in the trust’s assets (resulting in capital gains tax on their sale) while not gaining any estate tax savings.
Limited deductibility of state income tax. For my readers in high-tax states who have made gifts to grantor trusts established in their own states—I suggest you talk to your advisors about the possibility of converting such trusts into non-grantor trusts and moving them to other states, thus avoiding state income tax. The ability to do this depends on several factors including the grantor’s state of residence (California has all but foreclosed this option), the residence of the trustee and the location (“situs” in estate-planner lingo) of the assets. A New York grantor, for example, can move his situs to Delaware (or another state which does not tax non-resident trust income) and avoid New York State (and City) income tax on capital gains provided the trust has no New York source income. This can result in a savings of more than 13%. Similar savings can be obtained with non-grantor trusts where the grantor is deceased by moving the situs to another state. Depending on the situation, this may be accomplished as easily as replacing the trustee resident in the high tax state with a trustee in another state that does not tax the trust’s income.
I’ll continue to unravel the new tax law as it relates to your estate…along with many more estate topics…in future posts.
For more information, check out Gideon Rothschild’s website.