Not that it is all bad; it is just that Estate Planners like certainty, and these times are anything but certain.
The possible federal estate tax and gift tax changes are causing extreme angst. The language needs to be feathered out, but the first draft wipes out the estate tax for estates of decedents dying after the date the law is enacted. The GST tax is also gone. The gift tax is retained with a lower top rate of 35%. Basis adjustments (moving the value of a property to the fair market value as of the decedent’s date of death) still applies.
What will that do to all of those carefully crafted trusts? It could have unexpected consequences – for example, the classic formula clause in a credit shelter trust leaves the maximum amount possible without incurring estate taxes to a sub-trust. If the estate tax is wiped out, then that becomes a bequest of the entire estate. Oops.
Then there is the proposed Retirement Enhancement and Savings Act of 2016. The main purpose of the bill is to enhance Section 401(k) retirement plans, but it includes a provision requiring that distributions out of an IRA or other qualified plan be made within 5 years to non-spouse beneficiaries.
That would have huge tax consequences, resulting in a lot more of the inherited retirement assets being eaten up by taxes.
While we are talking change, the fiduciary rules for financial advisers and the rules forbidding nursing home contracts from containing a mandatory arbitration clause have been put on hold. There is also serious talk about changing how the Federal government contributes to Medicaid, from a percentage to a block grant. That means each state would receive a lump sum, and then decide how it should be allocated.
What should you do in light of all of this uncertainty?
First, do not use this as an excuse to wait to do Estate Planning. It is important to have the basic documents in place. If things change, then you can change your documents.
Second, take a look at your prior planning. You may want to undo it. If you have a bypass trust in place, then you may want to eliminate it or, at the very least, change the funding formula. Consider adding an independent person (called a Trust Protector) who can make changes to the trust when the law changes.
Third, be careful about making those lifetime gifts of your low basis assets. And if you are making gifts, make sure you are using a good CPA to file your gift tax returns.
Fourth, if you are dealing with a financial advisor or nursing home, buyer beware. Read your contracts and remember that, at least for now, you are on your own.
Finally, Medicaid. It is going to change, and not for the better. Sigh.
Hammerle Finley Law Firm. Give us a call. We can help.
Want to receive our monthly email newsletter or book one of our attorneys for a speaking engagement? Email LegalTalkTexas@Hammerle.com and let us know how we can help.
The information contained in this article is general information only and does not constitute legal advice.