Trusts Will Not Die,Even Without Transfer Taxes
By Fran M. DeMaris Cannon Financial Institute, Athens, GA
The impact of possible transfer tax repeal or reform is still subject to speculation; therefore, reports of the demise of sound tools such as trusts have been greatly exaggerated.
Are trusts passe? Will their use diminish and evaporate in light of tax reform? Will they die along with any changes to the tax system? Are they destined to be only a historical anomaly?
The angst concerning tax reform and/or repeal on the part of fellow professionals in the financial services industry is palpable. The impact on our business, however, is still largely subject to speculation. Since the transfer tax system has been in place in one form or another since 1916, there are clearly no professionals with pre-transfer-tax experience to guide us, and the world has changed so dramatically that no previous examples would be useful. It is time to reevaluate the options trusts make available in terms outside of taxation to see if their viability is truly threatened. When this path is chosen, the startling revelation is the realization that taxes have never been the only story; in fact taxes may not have had the impact in estate planning many have assumed. Fiduciary accounts provide a variety of benefits depending on the type and structure chosen. Trusts have been and will continue to be a spectacular option in the planning process, regardless of what may happen in taxation either now or in the future. Each decision to select a trust is predicated on the particular circumstance and situation each client presents.
The Revocable Living Trust provides a number of lifetime advantages, none of which has any transfer tax implication during lifetime. At its core in lifetime is its ability to provide meaningful investment advice, implementation, and monitoring over time. Operationally, it can be extraordinarily beneficial through its ability to maintain recordkeeping, tax lot information, handle bill paying, and cash sweep functions. In incapacity, it may avoid guardianship and at death, it may avoid probate. Clearly, this application provides enormous variety to meet changing needs throughout lifetime and accomplishes wealth transfer, fully completed at death. Responsible fiduciary management during lifetime is a clear benefit to individuals and those they choose to protect. Through the ability to be independent and unbiased, professionally trained and experienced, audited and regulated; professional fiduciaries continue to bring protection, patience, and unique value to the clients served, offering solutions to problems that might otherwise go undetected or unresolved.
Successful wealth transfer is a matter of proper planning. The identification of the beneficiaries, the assets to be given to each one, and the timing of those transfers are unique to each client. With the accumulation of wealth comes the responsibility of both on-going management of asset portfolios, and the choice of to whom and how it will transfer. This seems quite simple on the surface, but the results are often staggering and many times do not create the end result desired. Many factors must be considered to achieve success. The variation in circumstances is broad and requires superior drafting to meet individual preferences. This tailoring process requires a detailed understanding of the client’s current personal abilities and needs, with an eye to future anticipations, as well as a determination of distributional intent. Never have clients been more emphatic in their desire to continue to control those assets they have accumulated. Never have client family circumstances been more diverse: the increasing life span, multiple marriages and blended families, geographic distances within family units, dysfunctional family members and relationships. Many of these issues have caused clients to search for mechanisms to allow them to retain control of assets, even beyond death. The current QTIP marital trust, pivotal in many estates, would be no less necessary if transfer taxes were to be eliminated. They might, however, simply come to be known as TIP marital trusts. Control, it seems, may truly be the most important single feature in quality estate planning for high-net-worth individuals and their families.
There is no question, trusts will continue to be useful and necessary in assisting clients who have concerns with their beneficiaries about immaturity, drug or alcohol abuse, spendthrift habits, disabilities, or "inappropriate marriages". There is also an expectation that there will be increasing breadth in the beneficiaries people will choose. In addition to spouses, children, grandchildren, and other traditional family members; single clients have beneficial intent for "significant others" and adopted children as well. As the diversity of chosen beneficiaries increases, the desire to exert some control in the management of assets and the expectation of continuing control over extended periods of time may be increasingly likely. The inclusion of charities as beneficiaries completes intent for many individuals and families, as well as providing an alternative distribution when the intended beneficiary does not meet certain set expectations.
Charitable giving in the future is also assuredly going to remain strong. Though the form it takes may modify through the coming years, that is consistent with past experience, and provides no reason to raise unnecessary concerns. Charitable intent appears to be the overwhelming reason people make charitable gifts, based on the reasons they provide to charities. The vast majority of charitable givers, who are impacted by taxes in their decision making, are more concerned with income tax savings than transfer tax savings. Charitable foundations create far more than charitable giving. Young donors are pleased with the independent control private foundations allow. Many wealthy individuals intentionally choose not to leave all their wealth to their children, acknowledging that to do so might not be in the children’s best interests. Private foundations provide opportunities for families to work together for a common goal, to instill a sense of responsibility in younger generations as they share in the learning process, and to develop a clearer understanding of the possibilities available to create cultural improvements for themselves and their communities. Charitable Remainder Trusts, particularly in light of the restrictions of TRA ’97, may be improved with respect to gifts where a non-spouse beneficiary is to be used as either the only beneficiary or a successor beneficiary. Today, the 10 percent minimum charitable share rule creates significant gifts to many non-spousal beneficiaries and has eliminated their very availability for many younger individuals who might choose to retain a life estate on the gifted property. Charitable lead trusts have never enjoyed as enthusiastic a response as charitable remainder trusts. However, they might provide a substitute for a private foundation; especially where lesser assets are available and lower cost and less strident tax preparation are important. Additionally, charitable lead trusts can be established to shift income tax to the trust in a scenario where the client has exceeded the applicable percentage limitations by other past or present charitable contributions, tied to only the income tax burden. As charities have increased the aggressiveness by which they pursue donor pledges, the Charitable Lead Trust is also useful as a mechanism to ensure the payment of pledges made that require significant dollars payable over extended years. This type of long-term giving happens with increasing frequency in pledge drives for buildings and endowments.
Irrevocable life insurance trusts would seem to be the obvious trusts at risk to transfer tax change. However, even here there may be some very rational uses into the future. Funding of buy-sell agreements is very well accomplished through this technique and with so many small businesses moving to transfer, a rational approach will continue to be required. Life insurance trusts can also continue to be used to provide either debt reduction or the assets to create an estate at death to be passed to any beneficiary, including charity. The income tax advantages here will continue to drive new opportunities. Insurance providers have always been very responsive to changing tax issues in the past, and it seems unlikely they will fall behind in the future.
Estate settlement might be simplified some by changes to tax law, but to date no "simplification" or past "tax reform" has altered the need for timely, professional, high-quality administration. The transfer of small businesses, particularly when only a portion of the family wants continued involvement, creates complex and demanding solutions to be successful. Equitable treatment of a class of beneficiaries, where their talents and limitations are dissimilar, strikes dissonance in many families. Many aspects of administration will continue to be challenging despite any modifications in taxes, as most of the issues in wealth transfer today have been complicated by families who are geographically distant, may not have maintained much familial connection, and are often, in fact, simply dysfunctional. Privacy continues to be important to many individuals. Historically, trusts have met this need. And though litigation continues to be an increasing part of our concern, our obligation to try to get those individuals who have created and earned wealth the results they seek, has never been more pressing.
Discussions of fiduciary products have historically been tied to the transfer tax system, as taxes have been perceived to be a major motivating factor for client change and positive decision making. Since the elimination of all tax will never occur, there will clearly remain opportunities for tax planning, but positive decision making in families may increasingly be tied to income tax planning as we move further into the future. As the highest marginal income tax rates of the 1970’s at 70 percent have reduced to our current 39.6 percent, there has been no softening in people’s attempts to reduce the taxes they pay individually. This appears to be one trend on which we can count. People will generally want to reduce the levels of tax they contribute. Shifts in concern will attach to the most productive tax reductions available, hopefully in conjunction with the best match to meet client goals and objectives in the larger sense. In a best case scenario, change creates opportunities to reevaluate and redirect the decision making process to fulfill the ever changing needs, goals and objectives of clients throughout lifetime. This time of some uncertainty brings us the challenge to be certain we are meeting all the needs that clients present; trying at every level to match intents and concerns with the widest variety of possible appropriate solutions for each individual client and family. Tax, or even no tax, should never change our commitment. Understanding the importance clients place on control in both their personal wealth and the destinies of future generations, provides an opportunity to bring new value and commitment to bear in dealing with present and future clients.