First Party Supplemental Needs Trust Are Do-It-Yourself Estate Planning Documents Really Such a Bargain?


On December 20, 2017, Congress passed a tax bill (herein “Tax Cuts Act”), with provisions that impact the Estate, Gift, and Generation Skipping Taxes (transfer taxes) effective January 1, 2018 through December 31, 2025.

For people who have not reviewed their estate plan documents for some time, it may be prudent to take another look. The current increased federal estate tax exemption is scheduled to sunset at the end of 2025 and a later Congress may take action to roll back the exemption or indeed repeal the federal estate tax.

For people who have estate plans drafted a number of years ago, taking a second look is warranted. Several provisions in older documents are phrased in terms of tax concepts, such as the estate tax exemption and marital deduction that may skew your intentions based on the increased federal exemption and the separate Illinois estate tax. It may be important to update the estate plan to match your intentions to protect against a future drop in the exemption (such as expiration of the current exemption in 2026 or earlier or later action by a new administration.)

Action Steps for People Not Likely to be Subject to Federal or State Estate Tax

For people with older estate plan documents, their plans should be reviewed to make sure thie intentions match the tax concepts that may be included in those plans in light of the Tax Cuts Act.
People who will not likely be subject to the federal or state estate tax, the non-tax benefits of proper estate planning still exist, including protections for an immature beneficiary or beneficiary with a disability, creditor protection, protections in case of divorce or remarriage, probate avoidance, or incorporating business planning strategies to take advantage of the qualified business income deduction for pass through entities.

Action Steps for People Subject to Illinois Estate Tax

Older estate plan documents may not take into account the disparity between the Illinois estate tax exemption and the substantially increased federal estate tax exemption. Upon the death of the first spouse, the trust may mandate that the amount exempt from federal estate tax be placed in an exemption trust (sometimes called a “Family Trust.”) The end result is that trust being overfunded and possibly exposing the trust to Illinois estate tax. A review can confirm whether any changes to the documents should be made.

Action Steps for a Person who is a Current Beneficiary of a Trust

For a person who is beneficiary of a trust created by a deceased spouse or other deceased Grantor, these trusts should be reviewed to ascertain whether any action can be taken to secure basis step up at the death of the beneficiary. For many such trusts, upon the death of the beneficiary, the assets in the trust do not receive another step up. These trusts should be reviewed to examine withdrawal rights and powers of appointment. A strategy such as “trust decanting” may enable the trust to be amended to allow basis step up, if appropriate.
For people who have created irrevocable gift trusts for the benefit of other family members, these trusts should also be reviewed to consider whether any action can or should be taken to secure basis step up at the trust’s termination. In addition, there may be opportunities to sell low basis capital assets to the irrevocable gift trust or perhaps a swap of assets may be an option.

Action Steps for People with Significant Wealth

For people with significant wealth, the increased exemption presents a “use it or lose it” opportunity to leverage gifts for future generations particularly if the increased exemption does sunset. Traditional estate planning techniques take on new significance in the current environment and might include:
Making gifts to existing or new irrevocable gift trusts, including but not limited to GST Trusts, Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), Lifetime QTIP Trusts;
Leveraging gifts to support funding of life insurance or existing sales to trusts;
Pairing gifts with philanthropy;
Re-evaluating valuation discounts on gifting assets;
Re-evaluating estate plans for maximum creditor protection.

Some people may feel comfortable they will not be subject to the federal estate tax, but for a client who is still working, he or she can expect their estate to double within ten years; they may want to evaluate their current estate plans in that light.
In light of the tax law changes and uncertainty in the future, now is the time to review your estate plan. Estate planning reviews are an integral part of the process to be sure your plan accomplishes your goals, complies with current law, allows for flexibility for the future, and takes advantages of benefits available now but not guaranteed in the future. To schedule a review, please contact our office at 630-571-0222. We look forward to working with you!

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