- Irrevocable trust planning may benefit from using new planning and drafting techniques to optimize results in the unique post-Act environment. Practitioners should understand the new types of trusts and the pros and cons of using them.
- The Proposed Regulations under IRC Sec. 199A introduce new controversy and challenges for practitioners endeavoring to structure non-grantor trusts.
- The type of planning that needs to be addressed will vary significantly by the client’s wealth level, income tax circumstances, and other factors. These differences may be more pronounced than pre-Act.
- The use of non-grantor trusts, while potentially advantageous, entails a level of detail and risk that deserves more consideration. There is a myriad of income tax considerations, and traps, to non-grantor trust planning, as well as other factors that should be evaluated. While much of the literature following the Act has extolled the benefits of non-grantor trust planning, and that can be true, now that more time has passed perhaps a more objective and holistic analysis will be useful to practitioners.
- The potential need to use self-settled domestic asset protection trusts (‘DAPTs’), or variations of DAPTs, to provide clients access to the large wealth that must be transferred to secure some portion, or all of the current large exemptions has increased post-Act. At the same time, there seems to be concern among some practitioners about the efficacy of this technique. Practitioners need to understand the issues to guide clients to make informed decisions about the use of DAPTs and variants, but to also give clients the comfort level to proceed with planning that could prove valuable.
- The ultra-high net worth (‘UHNW’) clients have become active in the current environment. Many have given up on any hope of estate tax repeal, and view the current environment (high exemptions, no 2704 Regulation restrictions, etc.), as the ‘best it will ever be’ to plan. While the Act has not itself changed the techniques available to these UHNW clients, what types of issues and considerations or new ideas might be integrated into planning for these clients? With substantial wealth transfers being undertaken by this client segment, the differences in opinions about various planning techniques used by for clients consummating large wealth transfers are fascinating to consider. These variations highlight the uncertainty of UHNW client planning, and perhaps opportunities to refine and improve planning techniques.
- New developments concerning split-dollar life insurance planning, for those clients that can still benefit from such techniques despite the high exemptions, should be considered in formulating such plans.
- New developments concerning self-settled domestic asset protection trusts should be considered in planning such transactions.
Trust and Related Planning Post 2017 Tax Act
“In the wake of the Tax Cut Jobs Act of 2017 (‘Act’), the focus of planning discussions has shifted to the use of non-grantor trusts to secure income tax deduction, and perhaps secondarily to the use of the larger but temporary estate tax exemptions. While these are important planning changes that practitioners need to address, the planning environment is much more complex. There have also been important other recent developments affecting planning for irrevocable trusts, including the following:
Overall irrevocable trust planning is more complex than ever. Practitioners need a wider variety of trust planning techniques in their tool kits than ever before. All this occurs at a time when most even wealthy clients view the transfer tax system as irrelevant given the current high exemptions. That will likely prove a mistake for clients who do nothing and miss out on income tax, asset protection, and estate planning that may well prove with hindsight to have been advisable. Practitioners need to educate all clients as to appropriate planning to consider for their wealth levels in what is a new and different planning environment.”
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