If the latter interpretation is correct, dynastic or legacy planning may become even more popular for wealthier individuals. With dynastic or legacy planning, assets are held in trust for children and grandchildren. The children and grandchildren are given income on a mandatory or discretionary basis and principal at the discretion of the trustee. The trustee could be the child or grandchild or another person or entity. This type of planning would be ideal for wealthy investors who have a large portfolio of appreciated securities or real estate, as the descendants could live off the income and the capital gains tax would be deferred until the time that the asset is actually sold. In theory, the tax could be deferred forever (or at least as long as a trust is allowed to exist under the law of the state where the trust is being administered). Many states have eliminated or weakened the Rule Against Perpetuities to allow trusts to last for hundreds of years, or even forever. States with laws allowing trusts to last for extended periods of time may attract more business in such an environment.
If the former interpretation is true, estate planning attorneys may be looking for ways to get lower tax basis assets out of the estate of the taxpayer during life (perhaps on a tax-deferred or tax-free basis), leaving assets with higher tax basis at death. This would minimize the effect of the capital gains tax to be paid at the death of the taxpayer.
Many Democrats and some Republicans are arguing for the retention of the estate tax as a means of lessening the concentration of wealth in a few individuals as well as providing some funding for rebuilding the infrastructure of America and other social issues.
Thus, the repeal of the estate tax may not be as simple as many have speculated.
If the estate tax is repealed, the Proposed Treasury Regulations for Internal Revenue Code § 2704 discussed in our Fax Alert a few months ago (dealing with advanced estate planning strategies to discount gifts of businesses and other entities) would likely not become Final Regulations, at least in their current form. Many advanced estate planning strategies would remain viable under the new regime, while other estate planning strategies would likely fall out of favor and might end up getting unraveled.
There are many reasons besides potential estate tax or capital gains tax savings to leave assets in trust for children and grandchildren. These include situations where a child has disabilities and cannot receive an inheritance without losing government assistance. Instead, the child could receive the assets in a special needs trust. Another example would be a child with an addiction to drugs, alcohol, gambling, or shopping, who needs a trust where access to the money in the trust is controlled by someone other than the child. A third example would be a child who has proven unable to manage his or her financial affairs. Again, in this example, a third party needs to serve as trustee.
There are also trusts for minors where the assets would remain in trust until the minor attains a specified age. Finally, the parents may want to use trusts for children that contain incentives for the children to behave in a certain manner. Such a trust could provide a stipend or reward if the child maintains a certain grade point average in college, assistance for a down payment on a house if the child can otherwise qualify for a loan through a standard lender, or other distributions.
The attorneys at our firm are experienced in estate tax planning and the drafting of trusts that continue beyond the life of the parents. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information regarding estate tax, as well as income tax, gift tax, and generation skipping tax, and all types of estate planning strategies and tools. You can receive more information about a complimentary review of your clients’ estate plans by calling our office.