As the 2017 Tax Cuts and Jobs Act gets set to expire in 2025, there are many considerations to make when it comes to wealth and estate planning. While 2025 might seem far off, it’s not, considering the complexity of the planning.
“There are only two and a half years to undertake any planning, all of which will take a good bit of analysis, thinking and consideration,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “If put it off until the last minute, there won’t be enough time to fully consider the issues. So, time is of the essence.”
Smart Business spoke with Altman about wealth and estate planning moves that should be discussed well ahead of potential 2025 tax law changes.
What should be considered before the 2017 Tax Cuts and Jobs Act expires?
What could be affected are lifetime gifts. When this tax act expires in 2025, the current $12.06 million exemption, which is inflation indexed and could be closer to $13 million at the end of 2025, falls to roughly $6.5 million. This is a substantial means of compounding estate tax savings.
What can be done for succeeding generations under the current law is enormous and it’s at stake if someone fails to plan before the act expires.
How have changes to the SECURE Act affected planning?
Those undertaking wealth planning ahead of the tax act expiring should also look at their 401(k), will and trusts, and update those to reflect recent changes in the SECURE Act. These may have affected planning strategies, so it’s important to dust off those documents to see if everything is still compliant, that they understand the implications of the changes and that they’re OK with the payout terms that are now needed to get favorable income tax benefits.
Those who are paying IRA and 401(K) assets to a trust should make sure that they give them the maximum benefits from an income tax deferral that they can get under the SECURE Act, which for most beneficiaries is a 10-year payout.
There is a small subset of what are called eligible designated beneficiaries — e.g., a surviving spouse, certain disabled persons — who can take a lifetime extended payout while most people are going to get a 10-year maximum payout. When paying into a trust, that trust must have certain terms to make sure that 10-year payout is available. But considering the SECURE Act changes, it’s important to ensure the trust has the terms that are needed to maximize deferral. It’s also important to understand the implications.
There are trade-offs involved with a trust that gets that 10-year payout. For example, the distributions must come from the IRA to the trust and out from the trust to the beneficiary. For some people, that’s not going to be very palatable, so review those documents and adjust where necessary.
What non-tax matters should be considered?
There are a lot of planning considerations that have nothing to do with tax. One example is a trust’s creditor protection benefits. A properly drafted trust created for a child can be exempt from the claims of their creditors, can be protected from divorce and can give the beneficiary immediate asset management.
Building flexibility for these long-term trusts is also a key consideration. If someone has a trust that’s designed to continue for their 20-year-old child’s entire lifetime, that might last 75 years. And what’s the world going to look like in 75 years? So, if that person can include powers of appointment, trustee removal or replacement powers, the power to change situs of a trust, which is where a trust lives for tax purposes, they can allow for future changes in the trust’s tax home to get better state income tax outcomes and to better meet the needs of future generations.
People misperceive how much work goes into thoughtfully putting this together. From start to finish, this kind of planning will take at least six months, though probably closer to a year. It’s complex planning. Don’t put it off. As the deadline approaches, any competent lawyers who are doing this kind of work will likely be fully subscribed and unavailable to help. So, it’s important to act now. ●
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