Higher estate tax exemption should be key area of focus for planners, expert says

The increased estate tax exemption is leading to the need for specialized skill sets among financial planners, Robert Keebler, a partner at Keebler & Associates, said at the Schwab IMPACT 2018 conference in Washington, D.C., on Monday.

The estate tax exemption is above $11 million per individual, but that is scheduled to sunset at the end of 2025 and revert to the 2017 level, around $5.6 million. That means about about 1,700 taxable estates will be filed in the US this year, amounting to 34 per state, or less than one per county, Keebler said.

That creates a need for smaller specialty practices in estate planning as “the role of financial planner in taking the lead on these projects is changing at warp-factor speed,” he said.

Keebler outlined five crucial areas of estate planners' skill sets: 199A planning, “decanting,” asset protection planning, IRA planning, and avoiding low-basis traps.

Section 199A of the 2017 Tax Cuts and Jobs Act provides a deduction of as much as 20% for qualified business income. That amounts to an effective tax rate of 29.6%, and it also applies to states and trusts, Keebler said. Eligible taxpayers include S Corporations, solo proprietorships, sole owners of rental real estate and owners of partnerships, he said.

Clients who need to get their income below $315,000 to get the full 20% exemption should consider options such as charitable giving, tax-free bonds, life insurance and annuities, and real estate investments, Keebler said.

Decanting, meanwhile, is changing a trust by “pouring” its assets into another trust, which is often likely to be done for federal tax purposes, Keebler said. It should be done to a trust that give the beneficiary, often a surviving spouse, a general power of appointment, he said. The goal is to get a step-up in the basis for the trust's assets at the beneficiary's death, but clients need to be aware of potential tax consequences, he added.

Clients in states that do not allow the practice, however, should look to decant in states such as Delaware or Nevada, where it is permitted, he said.

Delaware and Nevada also let residents put assets into domestic asset protection trusts, where they do not have to worry about creditors' claims, Keebler said. Such trusts let settlors give away assets and remove future appreciation from their estates while retaining the benefit of assets if needed, he said, although it's unclear whether such trusts are effective for people in states without enabling legislation.

Paying IRAs to trusts is something that can be done, but planners “need to do the right drafting,” Keebler said. Lawyers should draft the beneficiary forms to avoid a “world of risk” that planners face if they take on the task, he said.

The money in such a trust can be taken out over the life expectancy of the oldest beneficiary, so multiple trusts might be necessary if a significant age difference exists between beneficiaries, he said.

Keebler also emphasized the need to avoid low-basis “traps” in case the higher estate tax exemption ends. Planners need to make sure couples' CPAs are filing the estate tax return so that the clients maintain portability between spouses, because the failure to do so can lead to lawsuits, he said. In the meantime, wealthy clients can give away their exemption through tax-free gifts to dynasty trusts and other methods, he said.

He also described generation-skipping-transfer planning as the “cornerstone” of estate plans to shield property from creditors, and he noted that grantor retained annuity trusts are currently “red-hot.”