Post-election: The New World of Estate Planning
Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact: jonathan@parkbridgewealth.com)
Presenter: Martin M. Shenkman, Founder, Shenkman Law (Contact: shenkman@shenkmanlaw.com)
Jonathan Shenkman: Good morning and welcome to the Parkbridge Wealth Management Winter Webinar Series. This program is entitled "Post-election: The New World of Estate Planning." As always, my name is Jonathan Shenkman, and I'm the president and chief investment officer of Park Bridge Wealth Management. In that role I serve in a fiduciary capacity to help my clients achieve their financial objectives. The goal of my program is to bring professionals together to help them better serve their clients. This is done by educating attendees on the latest topics in wealth planning and by encouraging collaboration between a client's attorney, CPA, and financial advisor, where appropriate.
My practice focuses on working with high net worth families, businesses, and not-for-profits. I manage individual investment portfolios, trust accounts, corporate retirement plans and endowments to help my clients achieve their financial goals. In addition to the 20 or so events I run every year.
I also do a fair amount of writing on the topics of investing and financial planning. You can read my work in a variety of periodicals, including Barron's, CNBC, Forbes, Kiplinger, the Wall Street Journal and Trust and Estates Magazine to name just a few. You can see all my work on my website at parkbridgewealth.com/articles, or by following me on social media at Jonathan on Money. Additionally, you could check out my weekly podcast which is also called Jonathan on Money.
And you can listen to that on Apple, Spotify, or wherever you get your podcasts. Before I introduce our speaker, please pay close attention if you're an attorney or CPA in Connecticut, New Jersey, or New York, and are taking this program for credit. I'll be giving a code during this program that you will need to write down. There will be only one code. It will be given at some point in the middle of the program. So have a pen and paper ready. After the program, you'll receive an evaluation form where you'll need to insert the code in order to receive credit. Please stick around until the end of the program for further instructions on receiving credit.
Today we're privileged to hear from Martin Shenkman, who has the distinction of being Ma'atai (father in Yiddish), and is also an attorney in private practice, based in New York. Marty concentrates on estate and tax planning. He's a widely quoted expert on tax matters, and is a regular source for numerous financial and business publications, and is the author of nearly 50 books and approximately 1,500 articles. He's active in many charitable causes, and with that introduction I'll now turn it over to Marty to speak about post-election: The new world of estate planning.
Martin Shenkman: So welcome to the program everybody. It's a new world of estate planning. The Republican sweep has changed everything, and what I want to do is talk about the new environment.
Much of the discussions about estate planning for several years now focused on pre-2026 planning - how to use the bonus exemption before it disappears in 2026. That may not happen. The Republicans have already made it clear that they want to extend all of the 2017 Trump tax cuts, and that if they can, will include the bonus exemption. It remains to be seen with the narrow margins in Congress if they'll be able to do that or not.
I think the conversation and thought process of suggesting to clients "you have to use your exemption quick!" which is what we've been saying for years, just doesn't really motivate clients to act. And I think we need to revisit that. But that's just one part of a broader planning environment. Let me take a quick minute and talk about some of the other changes that are affecting estate planning. Then we're going to focus on what people should be looking at, what clients should be looking at, and what advisors - financial advisors, attorneys, accountants - should be telling clients now in the new environment, at least what I think they should be telling them, because I think it's really vital we change the conversation.
I think it's a new and to a degree a tougher time for estate planners. When there has been this specter of a massive tax hike like the Elizabeth Warren or Bernie Sanders tax proposal, clients have rushed to estate planners in 2021, and even in the last few years, in anticipation of even this recent election, because no one knew how it would go. Lots of clients rushed to do planning.
But that's not going to be the case, and we have to give different reasoning and thought processes to motivate clients. I don't think there's any chance of any type of adverse estate tax law being enacted in the next 4 years. The only possible exception - and the Republicans again have said that they want to extend the 2017 tax breaks - is, will they, in fact, succeed in extending or making permanent the bonus exemption amount?
What does this mean? Well, it means the human aspects of planning become even more important. Families still are dysfunctional. Families still have health challenges, financial challenges, all sorts of issues. The human aspects of planning tend to be downplayed and often ignored at most conferences and in most journals - they're those soft topics. I remember many years ago at Heckerling, I was in the audience, and this was before even laptops were common, it was a long time ago, and they had a really great presentation that I just thought was captivating on human aspects of planning, and it was unusual, and I looked around the room, and there were so many people with their newspapers wide open. Remember paper newspapers? But human aspects of planning has got to be a bigger part of the conversation.
And this is something for all advisors to be addressing. We have an aging population - planning for minimizing elder abuse, for keeping people in control of their finances is absolutely a critical part of planning and something that needs to be addressed. Income tax planning should have more emphasis, planning for IRA distributions, large IRAs. These things all need to be addressed.
Asset protection planning is critical. We live in the most litigious society in the history of the planet, and litigation is not going to be affected by whatever happens in Washington. That's just the culture of the society we live in. Far too few people have done enough asset protection planning, and often those that pursue it are those in very high risk professions - surgeons, for example. But everybody needs asset protection. It's just a question of the degree.
The estate planning world keeps evolving. AI is going to change everything, and probably fairly quickly. I'm sure you've all heard of the attorney that used AI to generate a brief where it created case citations that didn't exist. But leaving that aside, AI is incredibly powerful, and it is making inroads. The wealth management world has really taken over an important part of the planning component, not the drafting, for the most part, but there's even a lot of that of estate planning. There are wealth management firms that will draft documents for clients. There are wealth management firms that will prepare all the income tax returns for clients.
That is something that will affect all the allied professions, and I think it's inevitable. There's just a huge advantage to a wealth advisory firm that has monthly or quarterly meetings with clients also being integrated and integrally involved in the planning process. But there's a difference between wealth management being integrally involved in the planning process, and really taking over a role such as drafting documents and preparing tax returns that they may not in many cases be able to do with the same capabilities as accountants or attorneys that really devote their careers to those specific tasks. So all of this is in flux, and the wealth management community is only going to be involved more as time goes on. The document prep services - I won't mention names, you all know many of the famous ones online - are only getting more powerful. And with AI, it's only a question of time before somebody has to fill out a template. They're going to get on the computer and have a voice ask them questions and then pop out documents.
So we need to address that. The whole environment is changing. That's all of the general background I will give with one last comment about the Connolly case and the Corporate Transparency Act. Connolly was a Supreme Court case that held that the value of entity-owned life insurance had to be included in the value of the entity for estate planning purposes. The take home point is that if you have an entity with an insurance-funded buy-sell agreement, it needs to be revisited. The broader take home point for all advisors is clients need to revisit their buy-sell planning. I can't tell you how long clients seem to go between when they create a succession plan, a buy-sell arrangement, and when they revisit it and update it. The insurance, the planning, the valuations, everything needs to be looked at for a large number of clients.
The Corporate Transparency Act, which I'm sure at this point everybody's more familiar than they wanted to be with it, has now been put on hold yet again, and I think the on-off, on-off of all these court cases has really not only frustrated clients, but frustrated all of us as advisors. Because what do you tell somebody? Here's the one nuance that I think is very important - when in late December the court held that the Corporate Transparency Act was, let's just call it, back on, FinCEN gave a lousy 2 weeks to January 13th for filing. Now it's been put on hold again, and the current status, as of at least yesterday, was that it's still on hold.
I think most people still have not filed from whatever sort of information I've heard, and I wouldn't be surprised if a significant majority of people required to file have not. But ignoring it, waiting to see what happens, I think is a mistake. I don't think clients want to file and disclose such confidential information to the Government with the law still in limbo, but I think there's a middle ground that we should all be thinking about advising clients to take.
And that is - okay, we don't know what's going to happen with it, but if it's reinstated, which FinCEN has now appealed to the Supreme Court - we don't know which way that'll go - they may only give you a couple of weeks to file, because everyone was on notice that the filing originally had to be January first.
We should advise clients that have not filed to take a little bit of time and work with their advisors because most people are struggling to understand it and need professional help, and put together a memorandum that lists all the reporting companies they may have responsibility for or be involved in, identify the beneficial owners and identify the information necessary. For example, I had a client recently and we did just that. We put together a summary. I went through all her trust-owned entities and non-trust-owned entities, put together a summary for her, and some of her entities were scores of years old, so we ordered and got copies of the certificates of incorporation for some of the old corporations. So we're prepped to file if we have to quickly, but we're not going further.
The first section of the outline I'm going to skip through, but you'll have the materials and can refer back to them. I just talk about some of the dynamics and rules in Congress for getting a law passed. I think the take home from the next few slides is that while the Republicans are clearly committed and they've already committed publicly to extend the 2017 tax acts, including the bonus exemption - and if anyone's not familiar, I'm sure you all are but just real quick: The exemption was 5 million in 2017, it was made 10 million. The extra 5 was the bonus exemption. It's all inflation adjusted, and in 2025 the estate and gift and GST exemption is $13,990,000.
We can call it 14 for rounding sake, but it's a hair less, and if it goes down by half in 2026, which is not something that has to be passed by Congress - that's in the law now, it sunsets - what's going to happen is the exemption will be more like 7 million. So for years we've been telling everyone you have to use the bonus exemption. Well, that may or may not be extended or made permanent. We don't know.
Brief comment on ultra wealthy - ultra wealthy is probably anybody whose wealth level is large relative to the exemption where the exemption amount isn't going to eliminate most of their estate tax potential cost. So 20 million, 30 million, 50 million - at some level, ultra wealthy clients, and I would say at least 50 million and up for sure, maybe for single people well below that. For ultra wealthy clients, I think it's foolish for them not to plan. They need a long term time horizon for planning with that level of wealth, and while it could be assured - is assured as anything is in the tax world - that with the one exception of whether or not the bonus exemption is extended, as I explained, there's not going to be any significant tax increase or changes in the law that I can imagine happening like GRATs and note sales. I just don't see any of that happening during a Trump administration, certainly not while the Republicans control both Houses of Congress.
I think it's probably reasonable to say that the next 4 years we're not going to see changes to those rules, but for the ultra wealthy clients, 50 million and up, maybe 30-40 million and up, they should be planning. Not with urgency, because we have several years to do it. But those years give us the ability to plan well and to deflect risks or lower the risk of a reciprocal trust doctrine challenge, a step transaction challenge. We can methodically and without pressure, which is a pleasant change from how much of planning has been done for years, plan for them.
They should plan because there's no assurance that after the next 4 years there won't be a Democratic sweep, and I am sure that if there is Democratic control of Washington, the Sanders and Elizabeth Warren and all the harsh estate tax bills that have been proposed over and over again for more than a dozen years - those are going to be on the table again.
So people with significant wealth should plan. They should plan significantly because there's no way to know what the future holds. But we now have a 4-year time horizon where we don't have pressure, and we can really plan better.
Keep in mind there have been a lot of income tax reductions planned, and those have an immediate impact on a lot more people than the estate tax reduction. So if they're juggling numbers, maybe it'll bend towards doing the income tax reductions that President-elect Trump has promised. We'll see. We don't know.
I'm not going to go through the filibuster and budget reconciliation. I gave you what I think the bottom line is - that while they're going to try, the Republicans, to get through extension of all the 2017 tax reductions, it's not a guarantee. But that's a very different environment than had there been a Democratic victory and we would find ourselves expecting harsh tax changes that could have been enacted early this year. That's not happening.
So I'm going to give you 4 planning ideas that I think will help clients that are sitting on a fence about planning. We're now reluctant to plan because "hey, it's not going to change." But that's a short term view, and that's something we need to discuss with clients. And the other piece which I said in the introduction, and we're going to talk about later if we have time, is it's not just about estate taxes. There's a lot of other reasons to do this planning. In fact, doing non-reciprocal spousal lifetime access trusts for mass affluent clients in the 2 to 10 million dollar range can make a world of sense for a lot of reasons. That's not our topic today, but the point is there's lots of benefits to doing this planning. We'll talk briefly about those to the extent we have time.
Let me focus on 4 planning ideas that I think you can take to clients and have them consider. The first is what I'm going to call a standby trust, and I'm using the term a little differently than the so-called standby revocable trust, a Q-TIPable trust, a disclaimer provision in trusts, and rescission, which is not a great option, but in a pickle it may be something that can get you out of a problem. Those are the 4 ideas, and I'm going to talk about each of them because I think these are different perspectives than many practitioners have taken, and certainly that many clients are not really thinking about.
I'm going to skip through the first section of the outline, but you'll have the materials and can refer back to them. I don't want to belabor the time with it, because we only have an hour total. But I talk about some of the dynamics and rules in Congress for getting a law passed. I think the take home from the next few slides is that while the Republicans are clearly committed and they've already committed publicly to extend the 2017 tax acts, including the bonus exemption - and if anyone's not familiar, I'm sure you all are but just real quick. The exemption was 5 million in 2017, it was made 10 million. The extra 5 was the bonus exemption. It's all inflation adjusted, and in 2025 the estate and gift and GST exemption is 13,990,000. We can call it 14 for rounding sake, but it's a hair less, and if it goes down by half in 2026, which is not something that has to be passed by Congress. That's in the law now, it sunsets.
Brief comment on ultra wealthy, and you know the terms wealthy, ultra wealthy - what do they really mean? Ultra wealthy is probably anybody whose wealth level is large relative to the exemption where the exemption amounts not going to eliminate most of their estate tax potential cost. So 20 million, 30 million, 50 million - at some level, ultra wealthy clients, and I would say at least 50 million and up for sure, maybe for single people well below that. For ultra wealthy clients, I think it's foolish for them not to plan. They need a long term time horizon for planning with that level of wealth, and while it could be assured, as anything is in the tax world, that with the one exception of whether or not the bonus exemption is extended, as I explained, there's not going to be any significant tax increase or changes in the law that I can imagine happening like GRATs and note sales. I just don't see any of that happening during a Trump administration, certainly not while the Republicans control both Houses of Congress.
I think it's probably reasonable to say that the next 4 years we're not going to see changes to those rules. But for the ultra wealthy clients, 50 million and up, maybe 30, 40 million and up, they should be planning - not with urgency, because we have several years to do it. But those years give us the ability to plan well and to deflect risks or lower the risk of a reciprocal trust doctrine challenge, a step transaction challenge. We can methodically and without pressure, which is a pleasant change from how much of planning has been done for years, plan for them.
Keep in mind there have been a lot of income tax reductions planned, and those have an immediate impact on a lot more people than the estate tax reduction. So if they're juggling numbers, maybe it'll bend towards doing the income tax reductions that President-elect Trump has promised. We'll see. We don't know.
I'm not going to go through the filibuster and budget reconciliation. I gave you what I think the bottom line is that while they're going to try, the Republicans, to get through extension of all the 2017 tax reductions, it's not a guarantee, but that's a very different environment than had there been a Democratic victory, and we would find ourselves expecting harsh tax changes, and they could have been enacted early this year. That's not happening.
So I'm going to give you 4 planning ideas that I think will help clients that are sitting on a fence about planning. We're now reluctant to plan because "hey, it's not going to change." But that's again a short term view, and that's something we need to discuss with clients.
And the other piece which I said in the introduction, and we're going to talk about later if we have time, is it's not just about taxes, estate taxes. There's a lot of other reasons to do this planning. In fact, doing like non-reciprocal spousal lifetime access trust for mass affluent clients in the 2 to 10 million dollar range, I think, can make a world of sense for a lot of reasons. That's not our topic today. But the point is, there's lots of benefits to doing this planning. We'll talk briefly about those to the extent we have time. But let me go focus on 4 planning ideas that I think you can take to clients and have them consider.
So the first is what I'm going to call a standby trust, and I'm using the term a little differently than the so-called standby revocable trust, a Q-TIPable trust, a disclaimer provision in trusts, and rescission, which is not a great option, but in a pickle it may be something that can get you out of a problem. Those are the 4 ideas, and I'm going to talk about each of them because I think these are different perspectives than many practitioners have taken, and certainly that many clients are not really thinking about that I think will help us as advisors advise clients better in the current environment.
And apropos to the comment that I said earlier, I don't know how many accountants are really proactive in estate planning - clients are going to be reticent to go back to their estate planning attorneys because they don't feel a tax pressure of "Oh my! The law is going to change imminently." So when you're doing tax returns as an accountant, have the estate planning discussion with the clients. Have that discussion. Even if it's not your expertise, you have enough background at some level to at least start the discussion, because getting the client to think about why they need to plan - that could be the most important part of the plan.
So what do I mean by a standby trust? For those of you that practiced in 2012, 2012 was an absolutely, unbelievably pressured, crazy year, because the exemption was supposed to decline in 2013 from 5 million to 1 million, and there was just a torrent, a tidal wave of clients coming into every practitioner's office to do planning in 2012.
It got so busy for most practitioners that by even September, most practitioners I knew were sending letters to clients saying, "If we haven't already started your planning, I'm sorry we can't do it. You better get somebody else." People were overwhelmed, and from the client's perspective even those that made it in the door, there wasn't the time to go back and have financial forecasts done, to necessarily restructure entities. You couldn't even get an appraisal if it wasn't ordered by maybe even October. You would at most get a number, and then the appraisal came in early part of 2013. But for a lot of people as they came in later and later in the year, you couldn't even get an appraisal number. You had to find alternative ways to plan. It wasn't the optimal way to plan.
Planning can't be done well in an incredible rush for time pressure. Why is that relevant now? It's relevant because many clients are going to say, "Hey, I don't want to bother planning. I'm going to wait and see what happens. They're going to extend the bonus exemption." And again, that's not the only reason to plan, and that's a very important conversation every advisor should have with their client. But a lot of clients are going to say, "Yeah, I get that. I should use the bonus exemption. You've been telling me that for years, but right now, with the Republican sweep I'm going to wait and see if they just extend it." The problem is going to be - when are they going to be able to get this passed?
I mean Trump has talked about trying to get a big massive bill that addresses all these different issues from immigration to tax cuts at one time - that may or may not happen, and I don't know if they have the votes to do it.
A concern is that if clients take the "I'm going to see what happens" approach, they may find that we don't know an answer until later this year. And what if it doesn't happen now? It's going to be too late to really plan thoroughly, carefully and methodically, and it's going to cost more money, and it's not going to be as good. Planning done in a rush doesn't give you enough time between retitling assets, let's say, between spouses to fund trusts and minimize a reciprocal trust or a step transaction doctrine.
If husband has all the assets and he puts 10 million dollars in wife's name so she can fund a non-reciprocal SLAT for him - if that is all done and the trust created in the last 2 months of 2025, there's a much greater risk of having a challenge under a step transaction, meaning it was really the husband, not the wife, that made the gift. The two trusts are not independent because they were done in such short order. If planning is started now, if at least a standby trust is created, you can move quickly by year end, or whenever the law change becomes clear.
So bottom line, I think for clients - if somebody's worth 10, 15, 20, 30 million dollars, those are people in the ranges that are thinking about, or should be thinking about funding an irrevocable trust to get assets out of their estate. And that doesn't mean no access. But the problem is, if they wait till November, and it looks like the bonus exemption will expire, it's hard to plan. Why not create the trust today?
Why not create the trust today? Have the trust ready? Yes, it's an expense that if they don't choose to fund it, maybe they've wasted it. But there's other good reasons we'll talk about for funding like asset protection. Why not get a plan in place? If a plan's in place, and let's say the client owns investment real estate LLCs or a family business, you can even prepare assignments of the entities to the trust, have the trust signed and in place today, and then to pull the trigger, the client only needs to go and sign a couple of assignments. It's fully funded - they're done.
So it gives the client the ability to do the prep, retitle assets, have a thoughtful trust done, and all they're doing is investing just the money for the trust - they don't have to make any other commitment. So that's the concept of a standby trust for people that feel less urgency to plan but may show up if we don't get the bonus exemption extended and have a problem.
On Slide 16 - and I don't want to belabor this with the time we have - other stuff to cover. But you can use, I'm going to assume everyone's familiar with a Wandry or King type of adjustment. But let me explain them simply for anyone that's not familiar. Wandry was a court case where the client did not give the 14 million dollars exemption - instead of giving 50% of a family LLC that was appraised with discounts at 14 million, the assignment gave 14 million worth of LLC interest.
So that way, if the IRS came in and said "Your appraisal was wrong" - okay, we didn't give 50% of an LLC, we gave 14 million. So only the percentage interest was given up. It avoids an unintentional gift.
A King type provision is, I'm selling 20 million dollars worth of stock or LLC interest to a trust. I have it appraised for 20 million, but the IRS may come in and say "No, it's really 30 million, and you have a gift tax liability on 10 million dollars." So what I do is I sell it for a note to the trust. But instead of the note saying that the 20 million value of the entity, the note says it's the 20 million value to be adjusted by gift tax value as finally determined. So if the note value increases because of an IRS audit, you can't say I made a gift by making the sale. Those are two of the many different variations of what are called defined value mechanisms you can use if we get into a pickle.
Two-tier adjustment - adjustment number one is - and this goes back to my comments about 2012 when we couldn't get appraisals because people waited so long - or they may not want to spend the money for the appraisal just yet. Adjustment number one under a Wandry type clause would be: I'm estimating the value of this interest at 12 million dollars, for example, but we're going to adjust it when we get a formal appraisal.
Jonathan Shenkman: Jump in real quick. Sorry to interrupt. I just want to jump in with the code. Make sure you have a pen and paper ready for attorneys and accountants who are taking this program for credit. Please write this down. The code is G41. Again, G as in great, the number 4 and the number 1, one final time: G41.
Martin Shenkman: Okay, hopefully everyone's got the G41 code down. Another number 2 of the 4 concepts that I want to present - there's another approach. Clients may feel "You know what? All right I get it. We don't know what's going to happen, and if I wait to the very end of the year, it may be too late to plan with thought and carefully. And then I'm going to have all these other issues that come up like the reciprocal trust, step transaction, etc."
An answer to that that gives the client "backsies" where they can undo the planning - that's the concept of this and the next technique I'm going to explain. So you can create a Q-TIPable trust. The most common approach to planning - everyone's familiar, and I'll say it, I know you know it, but I'll define it real quickly - is a spousal lifetime access trust. I create a trust for my wife and all descendants. My wife creates a trust for me and all descendants. We build in some differences so they're not identical, so hopefully the IRS or creditor can't argue that they're reciprocal.
That's a typical plan. Who's the beneficiary of the trust that I just created in my hypothetical common non-reciprocal trust planning that married couples use as sort of the beginning discussion of planning (but there's much more that could be done than that)? It's the spouse and all descendants.
But if I change that plan ever so little, and I say the only beneficiary is going to be the spouse while she's alive or he's alive, and then on death it goes to the kids - a little different trust, a little less flexibility. But I can make that trust qualify as a Q-TIP - qualified terminable interest property, or marital trust.
So if my spouse is the beneficiary, and she's the only person that can get access to the trust during her lifetime, and she must get paid the income at least annually, and we'll go through some of the other requirements in a minute - if I qualify, if I can make that trust qualify in terms of a marital deduction, there is no use, there could be no use if it is a marital deduction of the exemption amount.
If my spouse is the only beneficiary, and there's broad income and principal distributions, if I'm unhappy with the plan, I don't have to use my exemption. We can almost get the money back, because my wife is the only beneficiary, and if the money is all distributed to her, I haven't wasted any exemption. That's a Q-TIP marital trust.
Now, one of the things that's very important to understand that's key to the Q-TIPable Trust plan is if I set up a trust that could qualify as a marital trust for my spouse today, it doesn't qualify for the marital gift tax deduction without one critical step that has nothing to do with the trust, and that is the election on the gift tax return showing that that trust is a marital gift.
If you don't make the appropriate election, the Q-TIP election on the gift tax return, it is not going to be a marital trust. That election is the key to being able to give your client what I call backsies - the ability to unwind the plan.
Here's the thing. Client says, "Okay, I get it that there's a risk that the exemption could go from 14 million rounding to 7 million. I know the Republicans want to extend it, but I don't want to be caught blindsided that if it doesn't go through now I can't get the planning done, and I've lost this huge potential estate tax benefit." That's a logical concern, because you don't know what comes after 2028 with the next election, and where the next Congress and President may go with the estate tax.
So you could fund a trust today that trust today can be similar to a SLAT, except it's only the spouse during her lifetime or his lifetime, and you meet the other marital trust requirements. However, until the gift tax return is filed - and that's October 2026, generally October 15th but I don't know if that falls on a weekend, I didn't look - but till October 2026, your client has the ability to change the consequence of that plan.
So a client could set up a trust that's a type of SLAT except it qualifies for Q-TIP. So the kids and grandkids aren't beneficiaries today and wait until October next year to decide what to put on the gift tax return. If it turns out that the Republicans are successful in extending the bonus exemption, the client can make the marital deduction election on their gift tax return, checking the box. And then the result of that is going to be that it's a marital deduction. None of their exemption was used because, hey, it's extended. Why bother! And they can really get all the assets back through the spouse.
If it turns out that the Republicans can't get through the extension of the bonus exemption - for example, the dollars just don't work, they couldn't get enough by way of tariff increases to pay for it, or because of the income tax trade off that we talked about - then in October, when the gift tax return is due, and you have until October of next year - by then we certainly have to know what the law is for 2026 - they can not elect a marital deduction. It'll use up the 13,990,000 of exemption that they have. And now you've moved the assets out of the estate and you've secured their bonus exemption. But you've given the client until October of next year to make a decision what to do.
That to me is a very powerful approach. Third approach or concept - and again, this is - I had said there were two of these concepts, and really a third we'll come to, but it's not as secure - to give the clients backsies where they could do the planning now so they can do it more calmly, properly, cheaper, less tax risk, because there's more time between the steps, not a rush at the last minute like we had in 2012.
Here's another approach to do it. I'm going to use as the base of discussion the same non-reciprocal SLAT, a lifetime access trust plan that is sort of the starting point for most of these discussions. Let me define that just in case anyone's not 100% familiar.
I create a trust for my spouse, my wife. Wife and kids are beneficiaries. She creates a trust for me and all descendants. We build in differences, different powers, different distribution standards, fund with different assets. I like to put them in different jurisdictions, one in Nevada, one in Alaska, so there's substantive differences. The reason for the difference is, if the trusts are too similar, the IRS or creditor - it's not just taxes, it's creditor protection as well - could argue that the trusts were reciprocal and unravel them.
What does unraveling them mean? Unraveling them means they can treat legally that it's as if I set up the trust that I'm a beneficiary of, my wife set up a trust that she's a beneficiary, not the opposite meaning. They uncross the trust. By the way, when I said I used Alaska and Nevada, I like using jurisdictions that have self-settled trust provisions, because I think you can make a fallback argument - if the creditor, and again creditor protection to me is very important, or the IRS says "Marty, that trust that you created for your wife is identical to, too similar to her trust, we're uncrossing it" - if you uncross it, it makes me the grantor to my trust. That's how the IRS can say it's in my estate. That's how a creditor can say they can reach it.
But if I'm in a self-settled trust jurisdiction, and there's now over 20 states that permit self-settled trusts, my argument is - okay, but under Alaska or Nevada, South Dakota, Delaware law, Ohio, Michigan, Connecticut - a lot of states - I can say, listen, I can create a self-settled trust still out of my estate. That's why I like to do that.
But here, take the self-settled trust - I'm sorry - take this non-reciprocal trust plan. You can insert an extra provision into your typical SLAT form and give the client the ability for backsies. Again, the concept is some clients may feel "Gee, if I know they're extending the bonus exemption, I don't want to make that gift now, but on the other hand, if they don't extend it, I don't want to get backed into a corner and not be able to plan and lose a 7 million dollars exemption," because for an awful lot of - I don't know if moderate wealth is the right descriptive term - but a lot of clients, that 14 million dollars exemption is more than enough to address their estate planning. Why lose it?
So I can set up the typical non-reciprocal trust SLAT plan, but I'm going to add one provision into the trust document. In the trust that I create for my wife, and I'm making a 14 million dollars gift - 13,990,000 to use all my exemption today - I put in a provision. I'm going to say my son Jonathan is deemed to be the primary beneficiary. Trust is a contract - I can say anything I want if it's not against the law, right?
So my son Jonathan is deemed to be the primary beneficiary, and in his capacity as the primary beneficiary, I'm giving him the authority to disclaim anything given to the trust. Now normally a disclaimer - if Jonathan disclaimed, he would lose his rights to be a beneficiary. I'm changing that - I can do what I want, trust is a contract.
Normally he would just lose his rights, but I'm saying no, I'm giving Jonathan as primary beneficiary the authority to disclaim the entirety or any portion of the assets that I transferred to the trust. What does that mean? If I set up a trust today, Jonathan has 9 months to file a disclaimer, and if he files that disclaimer, all the assets I gave to the trust revert back to me - no gift. I get backsies. I unravel the plan, done nothing to report on a gift tax return.
If you are not familiar with that concept, it's really a variation on the typical use of disclaimers which have been used in estate planning forever. But what we're doing is applying it in a somewhat unique way in a trust and irrevocable trust to give the ability, 9 months later, to back out of that trust if the client changes their mind.
Now maybe the client wants to wait - if you start the plan, I guess you're not going to get it done until April or May perhaps. So you have until next year to make the disclaimer. But the point is, you can set up a trust now. Step one is a standby trust and get the planning done, just don't pull the trigger if you will, and don't sign the assignments or donate cash securities until the client makes the final decision based on law change.
Item 2 was a typical trust which is again just a variation of the standard non-reciprocal SLAT planning, and number 3 is to build in a single provision for disclaimers that lets me unravel the trust. So those are 3 very powerful ways to get clients to plan - do it calmly, not wait for a potential year end rush, and so on.
Now, rescission - I'm not going to belabor for a great deal of time because I think there's some issues with it. But let me explain the concept. Rescission, and I've cited a revenue ruling and there's a court case, Penn versus Robertson, is really an income tax construct. The idea of rescission is, let's say I sold you the Blackacre piece of property I own, and we decide by November we're both unhappy with the deal. Let's reverse the transaction - you're not happy, I'm not happy. Give me my $100 back and I'm going to give you the title, or give me my Blackacre title back, I'll give you the $100 you gave me. If you unravel, unwind the transaction in the same tax year, there is some precedent that if the parties - and you see it in the second bullet point - restored to the same relative positions they would have been in had no contract been made, the contract to sell Blackacre for $100, you don't have to report the transaction as an income taxable event.
That's the basis - and I've simplified, and there's some issues that if you're going to do this, you need to look into it. But let's say a client goes through with the planning, and you didn't do any of the other techniques that I had suggested, and now they're unhappy because the Republicans are able to extend the bonus exemption. If you unravel that plan before the end of the year, there may be an argument that you don't have to report it as a gift.
It's a bit of a stretch because I'm not aware of law on point taking an income tax construct and applying it in the gift tax world. But conceptually, if it works for income tax purposes, why shouldn't it work for gift tax purposes? So that's another tool that you may want.
I've given you some more citations and more detail in some of the comments. We could spend a whole lecture just on rescission, but I think it's something to keep in your toolkit if you get an "oh no" client very unhappy. They made a plan, and by the way - this may work for a client that made a gift last year before the election. Oh, won't work - we're in the wrong tax year. It's only going prospectively. This would have been, I guess, a good lecture for December to check with people to see if after the election if they want to try to rescind.
But the point is, if somebody does a transaction this year and then they find they don't want it to change, they don't want it to go through, you may be able to rescind it. On slide 22 is some sample language - and again, there's more issues and thoughts to it.
What I've tried to do is give you 4 concepts that I think can help you help clients plan better, more thoughtfully, with less risk, and even give them the ability to unwind, unravel, or as I said backsies on the plan if they change their mind depending what's happening. For somebody that's worth 30 or 40 million dollars to lock up a 14 million dollar exemption, which could be 40, 50, 60% of their estate - they may not want to lose that option, but on the same hand they may be uncomfortable doing it if it turns out the exemption's extended.
Now let's change gears completely. And this is just my perspective, this is not anything based on law. I think given the lower pressure from an estate tax perspective - I don't think we're going to have an Elizabeth Warren Bernie Sanders type bill possibly enacted in the next 4 years - so the estate tax worry is lower. If the estate tax worry is lower, why not reassess the trade off? What is the trade off? And this is really important, especially for clients that are giving a large percentage of their wealth. Like I said, 40%, 50, 60% - that's a large percentage. You got to be careful how much is put into an irrevocable trust.
But if I view the risk today of estate tax changes decimating my estate is lower, why not take more risk of taking greater access to the assets that go in the trust?
In other words, if I was really concerned that I got to get the planning done and better work because the Democrats swept and we're going to have a Bernie Sanders type tax plan, I may want to be a little more secure with the transfers because I'm afraid that it'll create an estate tax. But now the dynamic has changed, and clients may be less anxious about funding trusts to get assets out of their estate if you give them more access to the trust. That may be the answer to get them comfortable.
And by the way, I like giving the appropriate amount of access which depends on some financial modeling and insurance planning to see where the clients are. I don't want a client to run out of money. So common step for planning for couples is non-reciprocal SLATs. But I don't think that is necessarily using a SLAT form, if you will, the right answer. Why? Because you can use hybrid DAPT SPATs, DAPs instead of just SLATs.
I'll explain each term quickly, in case somebody's not familiar. And by the way, even though I'm using as this example a married couple, the techniques I'm describing are perfect to use for a single individual. The concept behind a SLAT is, if I put a lot of money into a spousal lifetime access trust, so long as my wife is alive and we're married I can indirectly benefit. If she decides to go on a cruise hopefully she'll take me, and not somebody else. But I can go as her spouse, because if she gets a distribution from the SLAT I'm her spouse she can pay for me.
If she buys a vacation home, or has the SLAT buy a vacation home, or give her money to buy a vacation home, she can let me stay there because I'm her spouse, and the law permits that. For non-married couples you don't have the same access, so these techniques are more important.
But why limit the access in these irrevocable trusts that we're talking to clients about to only the spouse being a beneficiary? Let me start with the middle one - DAPT is a Domestic Asset Protection Trust. It's a self-settled trust. DAPT is a trust in which I, as the settlor, I'm the guy creating the trust, I'm also a beneficiary. Now, to do that, you have to be in one of the 20, I think it's 20, and maybe a few more already, jurisdictions like Alaska, Nevada, South Dakota, etc., that permit these trusts. You have to name an institutional trustee in those jurisdictions. If you don't have an individual because you have to have situs in the jurisdiction, I prefer naming institutional, and they're really just inexpensive administrative trust companies. And there's a lot of good ones in a lot of different jurisdictions, so that you have the independence of someone deciding to make a distribution to me, or whoever the settlor is, if it's a self-settled trust DAPT.
Now even though there's very few cases saying that DAPTs are problematic, and the cases all have very bad facts - Mortensen, Labaca are some of the notable cases - some practitioners are uncomfortable, say being in New York or New Jersey where you can't do a DAPT, doing a DAPT in Nevada or Alaska, South Dakota, Delaware, etc.
But if you have assets in the jurisdiction, and you name a trust company in their jurisdiction, the argument is you have nexus. Well, a somewhat step back from that is a hybrid DAPT. What's that? I am not going to be a beneficiary in my trust today, but rather, I'm going to give my college roommate Joe the ability to add back me as a beneficiary. So I'm not a beneficiary today. I think the argument is that if Joe is acting, and the document should specify in a non-fiduciary capacity, the court can't say "Marty, you're a beneficiary." The court can't say "Joe, you have to add him back." He can do whatever he wants, so that hybrid DAPT of me not being a current beneficiary but the right to add me back is arguably safer than just a straight trust where I'm the beneficiary as a DAPT.
So the argument or the concept is, why just create a SLAT? If the client's concerned about how much they're giving, especially now that the tax pressure is viewed as much less, why not give me more access if I really need access? If I'm single, maybe I'll do a DAPT. If not, maybe a hybrid DAPT. A SPAT is a spin off on the hybrid DAPT, and it's just a technical nuance. It stands for Special Power of Appointment Trust.
So instead of Joe, my college buddy, having the ability to add me back as a beneficiary, because if he adds me back now, it's a self-settled trust, and the argument is - if I'm living in New York and New York doesn't respect or have law permitting self-settled trust, is that an issue?
Again, there's uncertainty and risk with that. But there's not a lot of cases saying it doesn't work and the few cases that I'm aware of are all really bad facts. A SPAT takes, some people argue, a safer approach. What is that? Joe, my college buddy can't add me back, but he has a limited or special power of appointment which we've used in trust planning forever in estate planning. He can simply direct the trustee to make a distribution to me.
I'm never a beneficiary but Joe, my college roommate, or I can name a group of 3 people if I don't want to put all my faith in Joe, a majority of which, or any one of which can exercise the power to appoint trust assets to me.
So instead of just the SLAT and digging out a SLAT form, these are variants that can give more access, and that's really important, and you don't want to get boxed in using just SLAT forms, because for other clients some or some variation of this is important. And by the way when you're worried about the reciprocal trust challenge - if I did a hybrid DAPT for my wife and she did a SPAT for me, I think those are very material differences between the trusts.
Other access points: permitting a tax reimbursement provision, permitting a loan provision, permitting the right to add charitable beneficiaries, etc. So there's lots of ways to give more access. An example is you can have a vacation home owned. So clients that are looking - "Well, I got 20 million in my securities account. I don't want to put 14 of that 20 in a trust." Okay, but you got a 2 million dollars vacation home.
So why don't you put 12 million in securities and 2 million dollar vacation home? If the vacation home's in upstate New York and my trust is in Nevada, I have to set up an LLC on the vacation home because you don't want a Nevada trust owning real estate in a different jurisdiction, but the point is, you can use lots of ways to get clients access, and it can go well beyond some of the standard forms or typical forms that I've seen used. The site for being able to let a spouse use a home is on the bottom of 25.
Now let me change gears again for the few minutes we have left. I think we have about 7 minutes left. Let me change gears again. I think there's a problem with everything that we've discussed until now. I think these techniques of the Q-TIPable Trust getting a standby trust in place, the disclaimer - little less sold on the rescission, but if I need an option to pull out a hat because the client's unhappy, at least it's a possibility. I would caution the client about the risks.
But the problem with that is, I think a very significant portion of clients should be planning anyhow, and not just planning to use the bonus exemption. That's been the thrust of most of the articles and seminars for not only professionals but even directed at clients that I've seen for years. Right? Use your bonus exemption, use it, use it because it's going down in 2026. We don't know that. I think we need to change the conversation.
I'm going to just elaborate briefly on some of the points that we've talked about. To me, the number one reason to plan is asset protection.
Nobody can tell me that all of you on the call as professionals and all your clients aren't concerned or shouldn't be concerned about asset protection. We live in an incredibly litigious society. I'm going to give you a non-scientific, non-quantitative example - turn on 1010 WINS radio. Listen to it for an hour when you're driving somewhere. What percentage of the ads are attorneys seeking people that were injured or hurt? I think it's probably 30%. It's huge.
And they - it's a dominant theme of the advertising on major radio stations, and if you listen to them, you hear phrases like "I'll get you what you're entitled to," "I'll get you more." There's a sense of entitlement that if there's a problem, an injury, not just an injury, any kind of negative event that happens to somebody, they're entitled to money, and there's a strong litigation bar that will come after you. The plaintiff's bar - I think it's imprudent for anybody with any substance of wealth not to plan. That's why I said non-reciprocal SLAT planning, or even DAPT and hybrid DAPT planning for single people is something that should be looked at, not just for the wealthy people looking to preserve their exemption, but by anybody with significant substance.
If you have 2, 3, 4 million dollars of net worth and very little of it's protected in retirement plans, why not put some of that into non-reciprocal SLATs? I don't care about the exemption. I don't care that you're not going to pay an estate tax in any event - why not protect what you have? I was talking to a colleague yesterday who I was doing estate planning for, and he's planning on retiring in a year or 2 or 3. If you're going to retire, I said, you're not going to be able to rebuild the wealth that you've made. You've got to protect it.
You've got to protect it. We all should be taking these steps so to me, that should be the focus of the conversation, and you can do all the planning we just talked about with asset protection as a focus and a benefit. I don't care what happens to the exemption. You need to do the same planning for this.
And depending on the financial situation and how much they're going to put in, you can select different access points as we talked about earlier in order to get it. Another point - income tax benefits. There's lots of ways you can put income tax benefits into a trust. Now, if it's a grantor trust where the settlor pays the income tax, it will be non-grantor when they die. So adding flexible beneficiary options, such as charity - when you make a charitable gift out of a non-grantor trust, which it will be on death, or if you turn off Grantor Trust status, you can have a better income tax benefit than if you make it individually.
With non-grantor trusts and SLATs, and all these other - SLATs can be structured as non-grantor trusts, you just need an adverse party non-adverse party to approve distributions to the spouse - you can avoid New York or New Jersey income tax. So if a client's got just a securities portfolio, set up a trust in Nevada, fund it with securities, name a Nevada Trust Company, or Alaska, Delaware, or whatever, and you don't have a nexus to New York if it's structured as a non-grantor trust. All the trading and gains in that securities account should avoid state income tax.
So non-grantor trust income tax planning should be huge basis planning. So I could set up a trust and name an elderly aunt who's got a very small estate as a beneficiary, and give her a power of appointment over trust assets, and you can use a formula so it doesn't exceed her exemption, especially if it goes down in 2026, which I'm thinking it's not, but we don't know. And on her death all the assets in the trust that I created step up.
So if you use Jonathan to invest your money, and you got a huge gain well above your basis, and you give a power of appointment, general power, to an elderly relative - on their death, not the client's death - you eliminate all the capital gains. There's all sorts of ancillary income tax benefits that are really beyond what we're going to cover. But the point I was trying to make is, there are lots of income tax planning ideas that can really help clients. Just the basis step up planning is huge.
So even if the client's not worried about an estate tax, building that power of appointment while we have a high exemption, especially if it's an elderly person that may die before the law changes in the next 4 years is a huge win. That and asset protection should drive the planning even if there is no estate tax benefit.
I think it's also important, not just for new planning, but review existing planning. And you have to be careful - there was a CCA where the government issued where they claim there was a gift by the remainder beneficiaries, the kids, to the father because they added them back with a tax reimbursement clause. So you got to be mindful how much tinkering you do with existing trusts, but between decanting, non-judicial modification, maybe just a trust protector action - we should all as advisors revisit existing planning.
So accountants that are doing an income tax return for trust - if that trust is a decade old, get a conversation going, get them back to their estate planner - what can we do to enhance this? If the trust is a decade or more old, the odds are it's not done with the same kind of modern trust planning. The most common thing I see all the time is trusts that pay out all the money at age 30 to the kids. Well, at age 30 the kid could get sued or divorced. Why do you want to lose the money? The trust should be extended.
Communicate with clients. Clients are not aware of a lot of these things. Clients are so focused often on estate tax that they forget about the income tax benefits of trust planning and asset protection planning. So just to wrap up - I think planning should continue. I've tried to give you ways to make clients comfortable in the current environment, but I think really for educating clients, if we all educate clients about asset protection income tax benefits as well as until we know what's going to happen with the bonus exemption - there's lots of creative and flexible options we can use to help clients.
And for really wealthy clients, I think it's foolish not to continue planning because they have a nice path for the next 4 years to be able to plan methodically and carefully and without pressure. They should do it because there's no way to know what the future holds, and we're done.
Jonathan Shenkman: Great. Thank you so much for those informative remarks. If anyone has any specific questions or new business opportunities, feel free to reach out directly to Marty or myself, where appropriate. I'll be sure to include his contact information in the follow-up email to this program. As I mentioned at the onset, the goal of these programs is to stay up to date on timely wealth management related topics, and to collaborate where appropriate. I think we could all agree that the clients who are best prepared are the ones who are served by a team of knowledgeable advisors.
Four more quick items before I let you go. First and most important - later today you'll receive an email from me with an evaluation form for the program. It'll ask you to input the code that I mentioned today in order to receive your credit. After that is submitted, in the coming days, you'll receive an email from ACE Seminars with your certificate. Again, please keep an eye out for an email from ACE Seminars. If you don't see that email in the next few days, be sure to check your spam folder. Again, the email with your certificate will not be from me, it will be from ACE Seminars.
Second, my next webinar is on Tuesday, January 28th featuring Elizabeth Forspan of the law firm Forspan Clear based in Great Neck, New York. She'll be speaking on the topic "Where Good Estate Planning Equals Poor Elder Care Planning," and I'll be sure to send out an invitation to this program in the coming days. In the meantime, I'd love to continue to grow this webinar community. So if you do have a friend, colleague, or client who'd like to be notified of my upcoming webinars, they can email me with the word "webinar" in the subject line. I'll add them to my webinar distribution list. My email is Jonathan@parkbridgewealth.com.
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