Americans have been living through a “golden age” of estate
planning, but it’s coming to an end, says one consultant to
ultra-high-net-worth families and family offices.
That means financial advisors and other estate planning
professionals must seize the opportunities for their clients now, says David
Wells, founder of Nashville, Tenn.-based Family Capital Strategy. According to
Wells, clients have recently been able to move assets to their heirs without
aggressive tax avoidance strategies.
During this unique period, the lifetime gift and estate tax
exemption has resided at $11.7 million for individuals and at $23.4 million for
couples, which means estate planning has primarily been a concern for the
wealthiest, Wells says.
However, with new tax policies being debated in Congress,
including a potential rollback of those estate tax exemptions, tax-aware estate
planning could become more relevant for a large portion of the average
advisor’s clientele, while family offices and advisors serving the extremely
wealthy will have to change many of the assumptions that their clients’ plans
rely on.
“The solution will typically come from aggressive use of
trust structures,” Wells says. “When a family chooses to use trust instruments
for future instruments, there will be a certain amount of consequences that
comes from that.”
He says two other proposed changes will push more families
into using trusts and other structures to soften the tax bite. The first is a
proposed increase in the capital gains tax rate for high earners to bring it
more in line with their income tax bracket, which means they lose the advantage
of deriving income from investments rather than a salary. The second is the
elimination of a step-up in cost basis for their assets when they die.
Other potential changes, like the elimination or curtailment
of valuation discounting within an estate, will be important but have less
impact, Wells says.
As a result, many families, with their estate planners in
tow, have rushed to change their plans over the past seven months, he says.
These changes have included the creation of trusts as well as giving strategies
to take assets out of the grantor generations’ estates and take advantage of
today’s high tax exemption.
Wells says a massive amount of assets are being transferred
today while the grantor generation is still alive.
“If you talk to estate planners, the past few quarters have
been massive,” he says. “They’ve been crushed with work trying to get the real
wild card question answered: Does this stuff happen in 2021, and if so, is it
retroactive back the full year? Or does it get passed sometime in the third
quarter and enacted in 2021? It’s a jump ball.
“I am more of the view that something will be passed this
year but become effective in 2022. This is the best time to do all of this kind
of work, but the question remains: How do we serve the needs and demands of the
current generation without saddling future generations with inheritances and
legal structures that will end up being detrimental to their own lives?”
Wells believes many estate planning decisions are being made
too quickly without laying out a long-term framework for family wealth to guide
heirs’ decisions.
Most people will never have to manage an inheritance, notes
Wells, while others have been preparing for one their entire lives. By putting
money in a trust, families will inevitably change how their beneficiaries
relate to their wealth—and into the middle of that is dropped a trustee.
“A trust is a sensitive instrument,” Wells says. “It’s a
legal document with a human relationship attached to it. There is a written
document, but human beings sit alongside that.”
Three Steps
He thinks of estate planning in three steps, with the first
step being that the grantor generation has to decide what their wealth’s
purpose is, whether they want to continue family ownership of any currently
operating businesses, how much wealth is enough and to what extent they want to
give to causes and communities.
The second step is to decide what it means to treat
beneficiaries fairly. Does it mean treating every beneficiary or inheritor
equally, or does treating people fairly mean dividing up assets in some way
other than equally?
“Three kids dividing the wealth three ways is one way to set
numbers, but is that the right thing?” Wells asks. “What about one child who is
an art teacher versus another that is a heart surgeon—both are serving important
roles but have radically different earnings potential. How do you answer the
question about what you’re trying to give to them?”
The third step is communication, he says, because it’s hard
to execute an estate plan successfully unless all of the relevant stakeholders
are aware of the plan.
But discussions about money and finances are still taboo in
many families, so heirs and beneficiaries are left in the dark about why
certain decisions are being made about the wealth and their inheritance.
“In too many families, the first time beneficiaries hear
about finances is when the trust goes live,” Wells says. “Is that really how
the grantors want the message of all of their efforts to be communicated?”
The most important thing families can do right now, according
to Wells, is protect assets from estate taxes altogether, but the process must
be carefully thought out, especially when establishing generation-skipping or
“dynasty” trusts that can keep a family’s assets out of the estate tax regime
for decades—or even centuries.
“The families setting up estates that allow long-duration
vehicles and dynasty trusts as well as gifting to avoid estate taxes are really
hitting the home runs today,” he says.
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