When was the last time you reviewed your wealth transfer plans? Here, we explain why a review—and possibly an update—should be on your schedule.
One of the biggest—and most talked about—changes to come out of the Tax Cuts and Jobs Act of 2017 was an increase in the estate tax exemption. And although that change could impact your estate plan, it’s not the only change that could. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 includes provisions that could impact your estate planning decisions. That means now is a good time to review your wealth transfer plans with your wealth advisors. Here are a few topics to explore.
Double-check for unintended consequences
At the end of 2017, the Tax Cuts and Jobs Act increased the estate tax exemption from $5.49 million to $11.1 million per individual, or up to $22.36 million for a married couple. And those amounts are set to increase each year to keep pace with inflation: For 2020, the amounts are $11.58 million per individual and $23.16 million for married couples.
If your estate is worth less than that amount, you may think you can breathe a sigh of relief. “In many cases, estate plans are indeed being streamlined,” says Allison Gregory, a Wealth Advisor with Wells Fargo Private Bank. “But reviewing the details of older estate plans is critical to make sure there are no unintended consequences.”
For example, imagine that an estate plan set up before 2018 put $5.49 million out of a $7 million estate into a family trust, with the surviving spouse getting the $1.51 million remainder but having no access to the family trust’s assets. If the trust were set up to address assets in an amount equal to the entire exemption, it’s possible that, since the entire $7 million would now be exempt from estate tax under the updated law, the full amount would need to go into the family trust. In that case, the surviving spouse could be left with nothing outside of the surviving spouse’s interest in the family trust.
Also, 12 states and the District of Columbia impose their own estate tax, and six states have an inheritance tax in addition to the federal estate tax. This layer could further complicate funding formulas in existing documents or require new funding formulas in order to reduce potential state estate tax.
“That’s why you need to review your estate plan with your wealth, tax, and legal advisors and make sure the funding formula still works,” Gregory says.
Plan now for the long term
While any changes to a wealth transfer plan should be carefully thought out and should be in line with the individual’s values and goals, remember that the exemption enacted in 2018 does have an end date: It’s scheduled to revert to 2017 values on Jan. 1, 2026. For some people, that might make setting up a trust now even more attractive.
Gifting assets to a trust now may let individuals take advantage of the exemption while they’re still living. That means that more assets might not be subject to the estate tax, even if the death that triggers that liability happens after Dec. 31, 2025.
But gifting to trusts could also be a point of concern for many clients who worry about giving too much during their lifetimes and not having enough left for themselves. “As a result,” Gregory says, “we are seeing an increase in use of vehicles such as Spousal Lifetime Access Trusts (SLATs), which use the increased exemption and allow one spouse to gift assets in trust to the other as well as the children to solve for both needs.”
“A SLAT is a type of irrevocable trust established by one spouse for the benefit of the other spouse,” shares Cody Tresselt-Warren, a Senior Wealth Planner at Wells Fargo Private Bank. When a SLAT is established, the donor spouse uses their federal estate tax exemption to fund the trust. A variety of assets can be used to fund the trust, including cash, securities, real estate, life insurance, and closely held business interests.
“Careful consideration should be given to the source of funding, as the assets have the potential to appreciate free of any future estate tax,” says Tresselt-Warren. “Closely held business interests are often used, as they may have very significant future appreciation.”
During their own lifetime, the beneficiary spouse will have access to the funds, typically limited to health, education, maintenance, or support needs. “The trust could also be structured to benefit children and grandchildren—either during the spouse’s life or afterward—ultimately creating a generational wealth transfer opportunity,” says Tresselt-Warren.
Thoughtful planning is required when constructing a SLAT; be sure to give careful consideration to potential benefits and alignment with your values and goals. “It is also important to communicate between spouses and future generations the goals and thought behind establishing the trust to help avoid wasting the exemption,” says Tresselt-Warren. A conversation with your advisors at Wells Fargo Private Bank and your tax and legal advisors can help you determine if a SLAT is an appropriate wealth transfer strategy for your needs.
Other planning considerations
Estate tax provisions aren’t the only changes in the law that could affect planning for wealth transfer.
“I believe that there has been an estate planning shift,” Gregory says. “Instead of a focus on reducing potential estate taxes, the focus is on building flexible documents with an eye toward income tax planning. This may be more impactful for estates under the exemption amount. For example, it may make more sense for assets to be includable in the surviving spouse’s estate to take advantage of the step up in basis at their passing.”
“In addition, clients who own real estate, oil and gas interests, or closely held business via pass-through entities like limited partnerships and LLCs need to understand how the tax law changes may impact them,” says Gregory. “We work with our clients’ tax advisors to inform them of the potential benefits and impacts on their unique situation and help them make any necessary adjustments.”
One other consideration: If your estate plan includes any “stretch” language, you’ll want to consider reviewing your plan with your estate attorney soon. The updated retirement account withdrawal requirements under the SECURE Act have eliminated the option for heirs to “stretch” withdrawals beyond 10 years to break the tax exposure into installments, or delay taking any withdrawals beyond 10 years to wait for a time when their tax rate might be lower. While spouses, minor children, and individuals with disabilities who inherit an IRA won’t be subject to the 10-year limit, you may want to consider potential impacts to other beneficiaries.
According to Tresselt-Warren, “Some clients are also considering how to utilize their retirement assets to support charitable causes as part of their estate plan.” Naming charitable organizations as beneficiaries of your retirement account(s) can provide a tax-efficient way to satisfy your charitable intent.
Gregory says, “The bottom line is that the new tax laws have opened up some interesting tax-planning opportunities for our clients as well as some potential pitfalls. It is critical that you work with your advisors to understand the effects on your family’s unique circumstances.”
Act sooner instead of later
While 2026 might seem like a far-off deadline, waiting to address your estate plan could be a costly gamble.
Tresselt-Warren and Gregory agree that high net worth investors should be mindful of the upcoming U.S. election. Shifts in the control of Congress and the White House might result in changes to the estate tax exemption.
“These changes may sunset earlier, depending on what happens with Congress and elections,” Gregory says “We feel there’s a limited window to work with your wealth, tax, and legal advisors and get some of this tax planning done.”
Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.