The truth is none of us know the future. Significant uncertainty abounds as to the outcomes of US tax legislation proposals. Estate and gift tax exemptions may get cut in half or not, and whatever happens will likely affect all deaths and transfers of wealth after December 31, 2021. Whatever the outcome, there are still ways to legally reduce your estate and income taxes as part of asset protection in your estate planning.

Creating a strategic estate plan will take time and a great estate planning attorney who understands you, your business interests, and your family relationships. Do not overlook the importance of synergy among your family members in creating an effective estate tax strategy. Your children can be a strategic ally when passing assets before death, thus eliminating tax consequences to your overall estate.

It is crucial to create a tax plan and estate plan together as they heavily influence each other. If you have a separate tax advisor, they need to coordinate with your estate planning attorney to avoid duplication of work effort and create a seamless strategy.

One of the most significant possible changes to tax legislation is a special income tax surcharge that will impact many existing trusts. Proposals currently target higher-income taxpayers with an additional five percent tax on income over ten million dollars, with an additional three percent tax on those above twenty-five million dollars. If these surcharge taxes take effect, it will change how many people structure their trusts like a credit shelter or create a family trust on the death of the first spouse.

It appears grantor trusts will remain taxable to the settlor; however, non-grantor trusts (complex trusts) generally pay their own taxes and will require close monitoring for regulation changes. A non-grantor trust pays taxes on all earned income; however, it receives a deduction for beneficiaries’ income (distributed net income). The cautionary tale is to stay tuned and act quickly on any legal changes.

Creating more than one scenario for your estate to remain flexible to tax law changes is key to implementing changes quickly. Bear in mind some of these proposals cite the date of enactment as the effective date for the rule; other proposals may be retroactive to the date they were brought forward to legislators. Options of action can include several provisions in your trust documents permitting you to change or modify the trusts. Some of these provisions can include:

There are other tactics to employ, but it is evident that the complex law governing trusts and the potential for changes need to be in the hands of a competent estate planning attorney.

You likely have worked hard throughout your lifetime to build generational wealth for your family. Proper estate planning is the way to ensure your assets will not see a dramatic reduction due to taxes. The time to plan and implement your legal strategies is now. Some of these proposals may become law. Proactively getting out in front of the changes is in your best interest. Contact us today to schedule a consultation and learn about your options.