Our topic today is estate planning and tax issues in the pre-election environment.
One candidate wants to raise ‘em, another hopes to do otherwise. Whoever wins will find his administration operating under tight fiscal conditions, moderate words for what may feel like the cold, strangling grip of death.
It’s often this way. Woodrow Wilson ran his 1916 campaign under the slogan, “He Kept Us Out of War”. A few months after the inaugural ball, the US entered what I habitually call the first war to end all wars. World War I was the greatest conflict in US history up to that point, with nearly 4.5 million men mobilized and 116,000 dead (the Civil War was far costlier in lives, though not as many men served). Wilson rose to the challenge, was a titan at the peace conference, and died early from the strain. You never can tell how affairs will develop.
History provides endless examples. Some are positive: when John F. Kennedy entered the White House, with his brother Bobby as attorney general, the pair never imagined they’d champion the Civil Rights movement. That bit of history comes from their very lips, courtesy of the maligned White House taping system, which somehow never caught Marilyn Monroe’s visits to the Oval Office. In those days, discretion still ruled, or perhaps they simply had a stronger tolerance for sleaze.
Surprise is the order of our days. It’s basic to life, yet when it flexes its muscles, surprise creases every countenance. Exceptional personalities are not always welcomed. In 2002, Defense Secretary Donald Rumsfeld talked sense to the press and regretted it. I don’t favor long quotes, but this one is golden, particularly as election day draws near:
Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.
Boy, he got blasted – particularly for the ‘unknown unknowns’ fragment, which became the stuff of late-night comedy legend. I recall reading the quote in the Moscow Times, and it made a lick ‘o sense – it forced me to put down my Campari and soda, if you follow. Sharing thoughts with Jack, my know-it-all English friend, fuse-lit a familiar reaction:
“Of course it makes sense! It’s a standard formulation in statistical analysis!” he roared, leaving off the obvious trailer of “you ninny,” because we are good mates, and it was just then my round.
We know what we know: Joe Biden promises to cut the gift and estate tax exemption from $11.58 million to around $3.5-5 million, depending. Biden also wants to boost the estate tax north of 40% and the step-up in basis would be eliminated. President Trump’s policy is a known unknown: we assume full steam ahead on the course set by his first term, but who can say? He once suggested a preference for an inheritance tax over estate levies, and may not be keen on the step-up. Key provisions of his tax reform slip into sunset on New Year’s Day 2026. This is long after a potential second term ends, but a suggestive acknowledgement that even one’s finest brainwaves have limited shelf lives.
What happens post-election is terra incognita, no matter how candidates may dream. When surprises are lurking, it’s time to get planning. Recall General Eisenhower, who said that plans never work in the stress of battle, but the preparation itself fuels victory. Grand words, perhaps, but we’re talking estate planning – it needs all the perk-up it can get.
So, what should one do? Let’s set our panic line at the lowest gift and estate tax exclusion limit named by a major candidate: $3.5 million. Anyone holding more needs to consider their options, both to prepare for the worst and to benefit from today’s rules while they’re still relevant.
Wealthy married couples can consider a Spousal Lifetime Access Trust – an irrevocable trust created by one spouse to benefit the other. When the establishing spouse dies, the trust distributes payments to the survivor. The exclusion of SLAT assets from the founder’s estate shields them from estate taxes. While both parties are alive, SLATs provide bankruptcy and litigation protection for the included assets, and if structured correctly, trust assets can be loaned to the beneficiary spouse, though they must be repaid.
If your estate plan doesn’t savor that acronym, consider a GRAT – a Grantor Retained Annuity Trust. GRATs work best with assets that hold strong appreciation potential, and are particularly favorable in low interest rate environments. The grantor creates the trust and receives an annuity stream for a set period. When that line is crossed, the remaining trust assets are transferred to beneficiaries. GRATs offer wonderful potential for limiting estate and gift taxes.
CLATs – Charitable Lead Annuity Trusts – are very much like GRATs, except that a charity receives the annuities. Once the established term is complete, remaining assets are transferred to the grantor’s beneficiaries. As with GRATs, favorable estate and tax-planning advantages accrue to estates that establish CLATs.
Charitable remainder trusts, commonly seen as mirror images of CLATS, provide an income stream to the trust’s initiator or assigned beneficiaries, with remaining assets going to a designated charity when the term expires. CRTs provide limited tax deductions to the founder, protect appreciated assets from capital gains tax at sale, and shield any trust income from taxation. They can be established using cash, securities, real estate and certain other assets.
If the election is giving you anxiety, don’t wait for November – consult your tax attorney or estate planner forthwith, and they’ll be happy to share the fine print on these and other interesting ways to protect your family’s assets.