Musings from the CEO – “Estate Planning Continuity”

By Mike Hoffman, Esq., CPA

At an Estate Planning conference this summer one presenter made some comments about the “old way” of doing things not being proper. He went so far as to say, “the Credit Shelter Trust is inappropriate since 99.8% of folks will have no estate tax!”  His point was that many families can rely on “portability” to preserve the use of both parents’ estate tax exclusions.  I respectfully disagreed, and raised the question, “What about estate planning continuity?  Or more appropriately, the lack of estate planning continuity?”

Portability is the “fix” in the estate tax law codified in 2010, which allows a spouse’s unused estate tax exemption to be carried over and applied at the death of the surviving spouse.  It is not to be relied upon, as it could be lost by lack of filing, remarriage or tax law change.

My point was that ignoring the precepts and concepts around the reasons we have drafted trust wills (i.e., wills that create trusts for beneficiaries) would be skirting our responsibilities.  A typical trust will creates the possibility of several trusts, based on formulas, which are governed by the tax laws and facts and circumstances.  Abandoning these well-thought-out funding calculations and related provisions ignores the possibility that laws change.  For instance, the “Trump bump”, that took the estate tax exclusion from $5.5 million to $11 million is set to sunset at the end of 2025; and that is if the Democrats don’t successfully take over the Presidency before that.  Every Democratic candidate’s tax proposals have included an extreme reduction in the estate tax exclusion, coupled with a significant increase in the tax rate.

Further, abandoning the trusts (and formulas set out for funding) ignores the other advantages of trusts that we continually educate clients about, which are just as important as minimizing or eliminating estate taxes.  Trusts allow for:

• Client control of person(s) in charge of the assets by appointing trustees;
• Asset protection from judgment creditors and divorcing spouses;
• Assets to remain in the family;
• Beneficiaries to have significant income tax flexibility;
• Property protection from costly probate;
• Overlay of a formal ownership structure that promotes discipline;
• “Standing” for remainder beneficiaries during a period when our demographics and life expectancy are causing us to see a sharp increase in several forms of dementia.

The icing on the cake: trusts can extend these advantages out over ten generations, so long as there is property to protect!

Another presenter at the conference proposed to simplify his estate planning drafting by leaving all assets to a QTIP Marital Trust; one trust versus two, which would be easier to explain to clients.  That trust (sometimes referred to as a Clayton Trust) would contain the flexibility to force a Credit Shelter Trust portion upon death, if advisable.  My question was, “What if there is no ‘estate planning continuity’?”  In other words, what if there is no estate planning attorney hired to make sure possible calculations, divisions and elections are timely made? What if we aren’t around to make sure meaningful calculations are done and intelligent decisions made when many of these clients die?

Kids of that 100-year-old widow dying in Phoenix, where she moved to be closer to her daughter and grandchildren, or that client who retired to Florida, whose kids are scattered throughout the country, are unlikely to contact the law firm in Atlanta, Georgia to help them with the probate.  And of course, that’s assuming they hire a lawyer at all, since there may be nothing to probate because all of the assets were titled to a Revocable Trust.   The point is, we have to be responsible professionals and assume that there will be no “estate planning continuity”, that tax laws will change, as will the facts and circumstances (including locations) of our clients.

I can’t tell you how many times I’ve gotten a call from a local attorney from a small community where my client has died, who has been hired by the family to handle the probate. They have questions about the trusts and formulas. They are hoping for ratification of their advice to the family to ignore funding the trusts since their parent’s estates are less than the estate tax exclusion, and just distribute the assets outright, either to the surviving spouse, or the descendants.  I just hope the attorney has fully paid their malpractice insurance premiums, because he or she has just triggered several lawsuits merely waiting to ripen. Think about it, assets left to the surviving spouse who eventually remarries and leaves those assets to his or her new spouse.  It happens, I’ve seen it many times; usually from the perspective of the children who are at wits-end watching the family assets leave the family.  Maybe the lawsuit will come down the road when the son or daughter goes through a divorce and finds that their marital estate has been affected by the amount of property inherited outright from their parents.  Or it’s the person that lost their entire inheritance due to a judgment creditor that eventually appeared “in the wings.”  Remember, there are many reasons that our clients create trusts for beneficiaries, not just saving estate taxes.

Since we cannot rely on “estate planning continuity”, the Will better be self-explanatory, with formula adjustments for tax law changes that can be anticipated and precatory language for guidance that will be read by future generations.  After all, part of being good stewards for subsequent generations is to educate and guide them into the right decisions.

My vision is that the great-great grandchildren of our clients are still talking about how smart our client was in creating the estate planning structure that still protects the assets, and instills in them the sense of responsibility and stewardship.  We can smile and say we helped!

Should you have any estate planning questions or concerns please feel free to contact us at 404-255-7400 or info@hoffmanestatelaw.com.