Trump Tax Cut Extensions Are Far From a Done Deal

“That’s just an inherent part of the reconciliation process,” said Barlow, Mercer’s head of wealth solutions. “At the end of the process, the spending they approve has to be balanced with savings. So, in my opinion, it’s all really up in the air, and a lot of compromise is going to have to happen to balance this out.”

Trump has made promises about lowering taxes that go far beyond estate planning, Barlow noted.

“The president has pledged to eliminate a variety of taxes outright, including on tips, overtime and Social Security,” he observed. “In that context, it’s conceivable that the higher estate tax exemption is permitted to expire in order to help cover some of the cost of the broader tax reductions. SALT will also be a negotiating tool for Republican lawmakers in high-tax states. We just don’t know the outcome at this point.”

As a result, Barlow said, he is counseling clients and advisors with clear legacy planning goals to act on what they are sure about.

“And that’s exactly what people are doing,” Barlow said. “It’s been interesting, because I had expected that Trump’s reelection and his pledge to extend the [tax overhaul] would have slowed down the pace of estate planning activity starting back in November. That hasn’t happened. Clients are saying, ‘We don’t know what the rules could be in six months or a year, so let’s get this stuff done now while there’s certainty.’ I think that's a pretty wise perspective.”

Trusts of the Day

With the ongoing market volatility, Barlow said, Roth conversions are a popular tool in estate planning and overall tax management, as is ongoing tax-loss harvesting to help offset capital gains.

“We are constantly coaching clients to pursue both portfolio diversification and also tax diversification — so that’s having a nice balance of wealth across traditional retirement accounts, taxable brokerage, Roth-style accounts, etc.,” Barlow noted. “With trusts and estates, there are also a few clear themes of the day. Two of these are grantor retained annuity trusts, or GRATs, and spousal lifetime access trusts, or SLATs.”

Grantor retained annuity trusts are “particularly interesting” at this moment, he explained. These trusts are influenced by interest rates, particularly the Section 7520 rate, which the Internal Revenue Service uses to value the retained annuity and remainder interests in the trust. The Section 7520 rate is 120% of the mid-term applicable federal rate.

In a low interest rate environment, Barlow explained, these trusts can be effective for tax-free wealth transfer because the taxable portion of the transfer is reduced. If the appreciation of the trust assets does not exceed the Section 7520 rate, the strategy may fail.

“The mechanics are somewhat complicated, so it's important to get connected to the right experts as you’re setting up these trusts and making sure everything is going to work as intended,” Barlow said. “Advisors themselves don’t necessarily need to be the end-all expert on these tools; they just need to be able to connect their clients with the right resources and experts.”

Don’t Wait to Act on Clear Goals

With the policy outlook in Washington, Barlow said, clients and advisors need to avoid the temptation to “wait for the deadline before acting.” This is especially true for ultra-wealthy clients who are contemplating using much or all of their lifetime estate tax exemption, which is higher than it's ever been. While it could be increased or made permanent, there's also a very real likelihood that it could be reduced to help balance the federal budget.

“It's also important to consider that, when it comes to moving significant amounts of money out of the estate to the tune of $14 million per individual, that just takes a lot of planning, and there’s a big psychological barrier to action, as well,” Barlow said. “It often takes four to six months to truly think through this stuff, because let's face it, giving away that amount of money is a big deal, even for someone with hundreds of millions or billions of dollars.”

Even for clients with far smaller estates, it takes significant time and attention to square everything away.

“Even with the most plain vanilla trusts, there’s a lot to think about, from electing the independent trustee to setting the parameters about how money is intended to flow out of the trust to the beneficiaries,” Barlow said. “For advisors, it’s important that we are encouraging our clients to at least start having these conversations early and start thinking critically about how they may want to proceed.”

Credit: Chris Nicholls