Wealth Planning Workload Surges Post-Election; Estate Tax A Focus

Tom Burroughes Group Editor December 21, 2020

Wealth Planning Workload Surges Post-Election; Estate Tax A Focus

This news service has spoken to a number of lawyers, private client advisors and others about what sort of work they are doing following November's elections and the likely changes to taxation that could take place.

Estate and gift tax planning are red-hot business areas for US wealth advisors as the clock ticks down toward the start of a new US administration in 2021. And while there remain some political wild-cards – such as the Senate run-off races in Georgia for January – private client advisors think they have some clearer ideas about what clients should do. 

Family Wealth Report has spoken to a number of wealth advisors in the US about what they are advising clients about. While it appears, as at the time of writing, that a “blue wall” threat of big tax hikes might not come to pass, the need to fill public coffers ravaged by COVID-19 is bound to put wealthier citizens in the firing line. (We will run some more analysis of the estate and tax planning landscape in the New Year.)

“The one area I see clients moving forward is with their estate and gift tax planning. Wealthy people should be doing this sort of planning anyway,” Sam Petrucci, global head of wealth planning at Deutsche Bank, said. 

In 2017, President Donald J Trump’s administration signed into law a near-doubling of the estate tax threshold to $11.18 million (now up to more than $11.5 million) for a single person; and to $22.36 million for married couples. The change runs until 2025, when the rates fall back unless new legislation is enacted. The 40 per cent top rate remained. Under the current system, the executor must file a federal estate tax return within nine months of a person’s death if that person’s gross estate exceeds the exempt amount ($11.58 million in 2020). That estate generally includes all the decedent’s assets, both financial (stocks, bonds, and mutual funds) and “real” (homes, land, and other tangible property). It also includes the decedent’s share of jointly owned assets and life insurance proceeds from policies owned by the decedent.

Tax rules allow an unlimited deduction for transfers to a surviving spouse, charity or to support a minor child.

Petrucci said he has been as busy during the fall/early winter as at any time in the past decade. It is not just the shifting sands of politics that have galvanized more action – the pandemic has sharpened clients' awareness of their mortality.

“People should be doing this sort of planning anyway,” he said. 

Now is the time to think about getting planning sorted out and this is not just about politics, Paul DePasquale, partner, Baker McKenzie, based in New York, told FWR. And he said that while some personal tax matters are in play, others might not move anyway.

“Some of the provisions of the 2017 tax reforms will not be changed by the Democrats as these elements had bipartisan support, such as cutting corporate tax rates from 35 per cent – some of the highest in the OECD collection of major nations. A Democrat-controlled Congress may increase the corporate tax rate but it likely would not raise the rate back to the 35 per cent rate,” DePasquale said. 

The pandemic and associated disruption has not just accelerated financial planning, it may have given some HNW and ultra-HNW families time to think through the details. 

“People have had more time for planning than they have had before,” Deutsche’s Petrucci said.

Structures and tools
There is a range of tax-efficient strategies that can be used, such as Spousal Lifetime Access Trusts, and these are probably the most common strategy at the moment, given their flexibility for clients, Petrucci said. 

“Wealthy taxpayers currently face a ‘use it or lose it’ scenario if one assumes that the estate and gift tax exemption amounts will revert to prior levels. Therefore, they may consider the benefits of a Spousal Lifetime Access Trust (or `SLAT’),” Petrucci pointed out in a recent briefing note. “In short, this type of trust allows a taxpayer to make a gift which will be removed from their estate for estate tax purposes; however, it provides flexibility given that distributions can be made to their spouse if the funds are needed in the future (with the biggest risks being divorce or death of the beneficiary-spouse).”

“Another popular way to utilize the exemption is to make gifts to a trust known as an `ILIT’, short for Irrevocable Life Insurance Trust, which purchases ‘second-to-die’ life insurance on a married couple. This type of insurance is payable upon the second spouse’s death (typically when estate taxes will be payable) and, importantly, provides a source of liquidity for the estate. Furthermore, many taxpayers with substantial wealth may consider the benefits of a `Dynasty Trust’, set up in a jurisdiction such as Delaware, which can last for several generations without the imposition of further estate or gift tax," Petrucci said.

The background economic situation also affects options, wealth planners have noted. With interest rates barely in positive territory, some “estate-freeze” ideas such as `GRATs’, or Grantor Retained Annuity Trusts, or `IDGTs’, aka Intentionally Defective Grantor Trusts, allow a taxpayer to gift appreciation on assets in excess of an IRS hurdle rate (38-40 basis points for October 2020) with little to no use of their estate and gift tax exemption.

Baker McKenzie’s DePasquale agreed that very low interest rates, while a problem for savers, opened opportunities in other ways for planning. “In the US, more traditional planning is being repurposed,” he said, talking about areas such as intra-family loans. That is being encouraged by ultra-low interest rates," he continued. 

There continue to be calls – such as from the UK a few weeks ago – for wealth taxes and other levies on the “one per cent” (although in reality the share of the population caught could be higher than that).

What do advisors think of the possibility?

A wealth tax is “less likely” to come to pass, DePasquale said. “A wealth tax would be difficult to administer as it would amount to an annual estate tax; and, if so, the demand for valuation services would surely escalate.”

Even so, taxes on top earners are likely to rise, he said. “We are going to enter a period where we spent a lot of money and the issue is how do we pay for it? There is not a lot of sympathy for the rich.”

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