Flexibility Is The Key To Navigating A Roiling Sea Of Tax Law Changes

Heraclitus, the Greek philosopher, said more than 2,500 years ago that the only “constant” in life was change. Those of us who live in the 21st century know how right Heraclitus was, especially those of us who pay taxes.

It seems Congress endlessly tinkers with the U.S. Tax Code, cutting, adding or refining taxes and their applications. The result? Todays code is four times as long as “War And Peace,” and the regulations needed to help taxpayers decipher the document are nearly five times as long as the code itself.

So how can you assist your clients in navigating this roiling sea of tax law changes and ultimately reaching their estate, business and retirement planning objectives? How can your clients possibly keep their eyes on the horizon when there are waves constantly frothing below them?

Flexibility is the key to success. Your clients need to be able to change, adjust and modify their plans to ensure they are always on course to reach their designated planning objectives, despite tax law detours. Clients need flexible financial tools, instruments, products and trusts–as well as flexible language in their last will and testament–to succeed.

Flexible trusts should be the centerpiece of estate, business and financial plans for both tax and non-tax reasons. Trusts allow a taxpayer to consolidate assets and centralize the management of those assets with the help of professional co-trustees. Trusts can also help insulate assets from creditor and litigation proceedings.

Gift-tax-free transfers to beneficiaries can be facilitated through the use of trusts with techniques such as spousal gift splitting, multiplication of annual exclusion gifts through the use of Crummey power beneficiaries, and the use of gift discounting/minimization strategies.

Depending on which state a trust is implemented in, it may be structured to last forever. There are a number of states that allow this. Other states have “rules against perpetuity” (RAP) and require the trust to vest its assets with the beneficiaries after a period of time equal to the lives of the trust beneficiaries plus 21 years and nine months.

Trusts can be structured as dynasty trusts and thus avoid estate taxation as the assets pass from one generation to the next without end. This is referred to as a generation-skipping trust (GST) and occurs as a result of the proper allocation of the generation skipping tax exemption to each and every gift made to the trust.

Even irrevocable trusts can be flexible. A trust grantor can give as much discretion to the trustee as desired to sell, distribute or relocate trust assets to another jurisdiction in conjunction with future tax law changes or family circumstances. Special powers of appointment of trust property can be given to a grantors spouse to adjust the provisions of the original trust with his or her last will and testament. The protector provision allows a non-fiduciary to change and alter the beneficiaries of the trust.

One of the most important features of trust planning is the ability to leverage the assets–or income from assets that are repositioned into the trust–into what could be a multimillion-dollar, tax-free life insurance legacy for the trust beneficiaries. It is possible for assets to be transferred into a trust without taxation. Then the repositioned assets–or the income from those assets–can be leveraged into a tax-advantaged life insurance asset. This essentially has the effect of enhancing those non-taxable exclusion and exemption gifts into hundreds of thousands, perhaps even millions, of dollars more than the exclusion or exemption gift itself.

Life insurance proceeds from a trust can serve to restore estate assets lost through creditor attachment, litigation proceedings or market fluctuations with discounted dollars. Assets placed in trust can provide estate equalization for family members who are not actively involved in a family-owned business.

A trust can also generate liquidity for estate settlement by loaning cash to the executor, purchasing assets from the estate or giving the trustee the discretionary powers to pay the estate taxes.

There is a trust for every need. Trusts are generally defined by their purpose or by the assets that fund them. For example, a credit shelter trust (CST) is funded with the available exemption. A qualified personal residence trust (QPRT) is funded with ones residence or vacation home. A charitable remainder trust has a qualified IRC Section 501(c)(3) charity as a remainder beneficiary. A charitable lead trust has a qualified charity as an income beneficiary. A grantor retained annuity trust (GRAT) provides income to the grantor and then transfers a deeply discounted trust asset for gift tax purposes to a remainder beneficiary. An intentionally defective grantor trust (IDGT) is an irrevocable trust that insulates an asset from estate taxation but shifts trust income to the grantors 1040 income tax return.

Trusts can be as creative, innovative and flexible as the grantor desires to make them. The proper trust can give you the competitive edge when it comes to helping a client reach estate, business or financial planning objectives. It should be a primary tool when it comes to neutralizing the only constant in tax law, “change.”

When it comes to planning, we should be guided by Heraclitus and the one thing he placed his trust in: change.

John S. Budihas, CLU, ChFC, CFP, is a business, estate and trust planning consultant for Hartford Life Insurance Company in Sarasota, Fla. He can be reached via e-mail at john.budihas

@hartfordlife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 4, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.