There may be a new Sheriff in Washington DC and advisors might think that the sunset provisions on 2017 tax legislation will not kick in, but it makes sense, a wealth manager says, to consider all eventualities and build robust plans.

US citizens should consider embracing trusts and other structures to make the most of lifetime exemptions under the estate and gift tax regime before they expire, a wealth management figure says. 

The election of Donald Trump as President, and the control at present of the House and Senate by the Republicans doesn’t automatically mean that sunset clauses in the 2017 Tax Cuts and Jobs Act will not kick in at the end of 2025.

Much depends on what, for example, House Republicans, with the narrow majority that they have at present, choose to do. 

If legislators don’t vote to extend the 2017 changes, or only allow for a partial adjustment, the lifetime gift/estate tax exemption of $13.99 million in 2025 will fall by half in early 2026. (See a related analysis.)

High net worth individuals and their families can't be complacent.

“It is foolhardy to bank on certainty,” Andrew Crowell, D A Davidson vice chairman for wealth management, told this publication. Crowell joined the firm in August 2013 with the merger of D A Davidson & Co and Crowell, Weedon & Co.

In the usual tax-filing season at the start of a new year, advisors are busy helping clients navigate tax complexities. A new administration in Washington DC adds new possibilities – but isn’t necessarily a reason for people to sit on their hands in the hope that tax exemptions will not be cut. Planning remains essential, as does the work of getting details in order. An important task, Crowell said, is to ensure that all assets are correctly titled: neglect this can cause problems.

“The way in which assets are titled can influence or determine who controls the assets, tax consequences, whether assets are subject to creditors’ claims and who will receive the assets at your passing, so it’s critical that the assets are correctly titled as you intend,” she said.

After-tax returns
FWR asked Crowell how he works with clients, given that after-tax returns are what count.

“It’s not what you make but what you keep in terms of investment returns that ultimately matters, so tax efficiency is a critical part of financial planning. Tax-loss harvesting is one common strategy for helping reduce capital gains taxes,” he replied. “Tax-free municipal bonds in place of taxable bonds is another. For retirees who have sufficient means to live on and do not need their required minimum distribution, they can make a qualified charitable distribution from their IRA.”

An important part of the toolbox are US trust structures, such as grantor retained annuity trusts, or GRATs, as well as charitable remainder trusts and charitable lead, depending on a person’s goals.

“Many people in 2017 took advantage of lifetime exemptions…there was pre-gifting into trusts. Generation-skipping trusts are ideas that should be considered,” Crowell said. 

“If the individual does not want to give to charity but rather transfer assets to eventual beneficiaries, receiving a stream of income until the trust’s termination, the individual could fund an irrevocable grantor retained annuity trust or GRAT in which the trust is funded typically with assets that are expected to appreciate,” he said. “The grantor receives an annuity stream of income for the life of the trust with the beneficiaries receiving the assets at the end of the trust. The grantor is responsible for paying income tax on the trust income, but the beneficiaries receive the growth tax-free.”

Charitable trust options
Crowell explained the charitable trust options. “For example, if a retiree has philanthropic intentions, they could fund a charitable remainder trust. The CRT is an irrevocable trust in which the donor gifts assets to a charity and receives a stream of income for a period of time with the charity getting the remainder of the assets at the trust’s termination.

“Alternatively if the retiree has philanthropic intentions but does not want the remainder to go to a charity but rather the annual stream of income, a chartable lead trust can be established. Under this irrevocable trust arrangement the remainder assets go to the beneficiaries of the trust, typically family members,” he said. 

Other tools
Life insurance is part of the toolset for clients and advisors.

"As part of a comprehensive written financial plan, we always examine the end of plan tax and expense implications. Deaths are emotional times and adding financial worry or stress can be somewhat alleviated through the proper use of life insurance. Most frequently we see it used for paying off mortgages or other expenses to prevent the forced selling of assets. We also see it used by business owners through buy/sell arrangements in which the life insurance proceeds are used to 'buy out' the deceased’s interest in the business so the beneficiaries have liquidity," he said. 

Crowell, who is part of a large organization, with offices in 30 states, is not a CPA but looks at people’s financial affairs from the perspective of wealth management.

New technologies affect the role of Crowell and his peers. 

“I have been surprised at how many clients have gone to online tax preparation services...they are using these services and not using a CPA,” Crowell said.

He was asked if this online shift carries risks for people. 

“I do not think this is a problem per se, but it requires the taxpayer to extremely confident in the robustness of the software platform or website to ensure that mistakes aren’t made and that they’re not paying more or less tax than is required,” he said. 

As reported here, there has been pushback by some states – such as in California and New York – against the use by residents of out-of-state trusts. 

“I hear a lot of people talking about it [use of OOS trusts] but I have not had a single client in California use a trust in one of these states. I have, however, had clients move out of California,” Crowell said. 

Hitting filing deadlines can be challenging, particularly when private market investments – currently a hot area – are involved. 

Distributions of investments can, such as in the case of private equity, take time to get done and this can cause taxpayers to ask for filing extensions, Crowell said. 

Sadly, disasters such as massive fires in California, or the floods that hit Northern Carolina, and elsewhere, can force the IRS to grant taxpayers more time.

The IRS has extended the deadline for filing and payment of taxes until October 15, 2025 for filers who live in the zip codes where natural disasters have occurred he added.