SOURCE: McManus & Associates

McManus & Associates

May 11, 2017 09:00 ET

10 Must-Do Estate Planning Strategies while Waiting for Congress to Act on Tax Reform

Top AV-rated attorney highlights opportunities available now to support an effective wealth transfer plan

NEW YORK, NY--(Marketwired - May 11, 2017) - The election of Donald Trump to the presidency and Republican control of both houses of Congress make estate tax reform extremely probable in the next two years. However, given the incoming administration's other proclaimed priorities, including the repeal of Obamacare, minimization of illegal immigration, increases in defense spending and infrastructure improvements, there are likely several months before Congress turns its attention to a tax system overhaul. McManus & Associates, a top-rated estate planning law firm founded by John O. McManus over 25 years ago, today named "10 Must-Do Estate Planning Strategies while Waiting for Congress to Act on Tax Reform," a recent chapter in its Educational Focus Series. During a conference call with clients, McManus -- the firm's Founding Principal and an AV-rated attorney -- highlighted appealing opportunities currently available as part of an estate plan. To hear his insight on timely tactics to support an effective wealth transfer strategy, go to

"There is much uncertainty about particular aspects of the Republican tax proposal -- including a replacement tax on the wealthy -- and there is already concern about the likely impermanence of any new legislation," said McManus. "These factors highlight the importance of flexibility in preparing an estate plan and proceeding with wealth transfers suited to the current political and economic circumstances."

1. Annual exclusion gifts

It is still uncertain whether both the estate tax and the gift tax will be repealed. In the past, Congress has avoided taking action to repeal the gift tax, because it prevents individuals from shifting assets to create a loophole to minimize income taxes.

Therefore, you should make annual exclusion gifts to chosen loved ones of $14,000 per recipient, contribute to 529 Plans (which grow free of income tax), and contribute unlimited gifts for the benefit of family members directly to educational institutions and medical facilities for their benefit.

There has been no discussion about raising the annual gift exclusion amount of $14,000, but taking advantage of the opportunity early in 2017 will maximize the potential appreciation on this year's gift before 2018 gifts can be made beginning January 1st of next year.

It is also prudent to consider completing these gifts in trusts, which protect the cash and investments gifted from attack by spouses, lawsuits and creditors, and can allow the donor flexibility to control and access the funds held in trust.

2. Lifetime exemption gifts

For the same reason, the $5.49MM lifetime gift exemption should also be utilized. Larger gifts afford a far greater potential for shifting wealth because more assets are available for investment and, therefore, can compound in value to a greater extent.

Again, relying upon an irrevocable trust as the vehicle through which patterned and consistent lifetime gifts are made is one of the most reliable and powerful means of ensuring a legacy of substantial wealth for future generations of the family.

3. Short-term and mid-term Grantor Retained Annuity Trusts (GRATs)

Effectively, the purpose of the GRAT is to make a loan of investment assets to your children or loved ones without using any of your lifetime gift exemption. Your loved ones benefit from any growth above the initial contribution. To be valid, the original contribution must be paid back (with modest interest) in installments over a fixed period of years.

Since interest rates remain historically low, it remains an ideal time to implement GRATs, especially since there are indications that interest rates will continue to rise in the foreseeable future.

When interest rates are lower, the GRAT pays less back to the grantor, meaning that more assets remain outside of the grantor's estate after the completion of the GRAT term of years.

4. Estate Freeze Installment Sales

An installment sale to a grantor trust is a strategy that is comparable to the GRAT and works best with income-producing real estate, interests in a family business, or more illiquid investments with potential for significant future growth. In this form of planning, the investments are sold to an irrevocable grantor trust in exchange for a promissory note.

Since the trust is a "grantor trust" for income tax purposes, no capital gains tax is realized at the time of the transfer. Additionally, since the trust buys the investments for fair market value, no lifetime gift tax exemption is used.

All growth on the investment takes place within the trust and is therefore not taxed as a part of the estate. Many also find this strategy appealing because the revenue or proceeds generated by the investment can be paid back to the original grantor as satisfaction of the debt on the promissory note that the trust is obligated to pay.

5. Family Limited Partnerships

Proposed IRS regulations were issued in 2016 that would limit discounting of transfers of family business interests. The adoption of these proposed regulations has been delayed and their enforcement could be defunded by Congress, but they are still likely to be adopted by the Treasury for implementation under a future administration.

Therefore, a family limited partnership remains a viable tax minimization strategy. Partnerships are sophisticated vehicles for centralizing family investments, providing for the orderly transfer of assets, providing asset protection, and expanding family investment opportunities. 

An ancillary benefit of establishing a partnership and funding it with assets is that the strategy has afforded the opportunity for discounts on wealth transfers to family members.

The structure of the partnership segregates ownership between general partners, which control all management of the partnership, and limited partners, which only have a right to receive its profit but little other rights in operating the partnership. As such, gifts made of the interest owned by a limited partner can receive a discount on its valuation (often between 30% and 40%) because of their lack of control and marketability. This allows the underlying assets to be shifted without depleting nearly as much of your lifetime gift exemption, resulting in immediate estate tax savings upon the completion of the gift and preserving the exemption for future wealth transfers.

6. Upstream Gifting

Under the current tax laws, a step-up in the cost basis of an asset is granted when an individual passes away, meaning that the surviving family members can sell the asset without realizing any capital gains tax. This benefit is likely to be eliminated if the federal estate tax is repealed.

Furthermore, there are few options for an individual to minimize or eliminate capital gains tax before death. While the step-up in basis remains available, consider giving appreciated assets to a trust specifically designed to cause the assets to be included in a less affluent parent's estate. Inclusion in the parent's estate would allow assets to be sold with minimal capital gains tax consequences within a reasonable period of time during the child's lifetime.

The trust would then ensure that the proceeds would thereafter be held for the benefit of the child's family after the parent's death.

7. Community Property Trusts

It is not uncommon for a surviving spouse to desire to sell appreciated assets that were owned jointly while both spouses were living. Under such circumstances, the surviving spouse must still pay capital gains tax on 50% of the growth because only half of the property benefits from the step-up in basis upon the first spouse's death.

The only exception to this is joint assets that are characterized as "community property" and which enjoy a full step-up in basis when the first spouse passes.

Three states (Alaska, Tennessee, and South Dakota) currently allow for out-of-state spouses to create and fund a trust and to elect for the trust property to be treated as community property.

This presents an opportunity that would allow a surviving spouse in the future to sell assets without paying any capital gains tax.

8. Charitable Remainder Trusts (CRT)

Those wishing to sell appreciated assets, liquidate inherited assets that have a carryover basis, and otherwise diversify in a tax-efficient manner will continue to utilize CRTs.

In establishing a CRT, the creator of the trust retains the right to receive an annuity or fixed percentage of the trust assets each year. After the term of years of the CRT or the creator's lifetime, the balance of the CRT assets pass to charitable organizations of your choosing, including a private family foundation.

Since the beneficiaries after the CRT period are not-for-profit organizations, any sale of assets within the CRT does not realize capital gains. The only tax that is due is based on the amount of the annuity transferred back to the individual who funded the CRT.

Many families choose to couple the CRT with life insurance so that the proceeds of the insurance coverage replace the wealth passing to the charities (and which would have otherwise been distributed to the family members) after the CRT period.

9. Drafting Flexibility in Core Planning Documents

If the step-up in basis is eliminated by Congress, then the advantages of keeping certain assets inside the estate evaporate. Therefore, without the step-up in basis, it is critical that you have reverse swap powers in the trust provisions, which would allow the swap of low basis, appreciating assets (that are likely to see the greatest appreciation once the assets are inside the trust) in exchange for the trust's high basis assets.

Given the uncertainty of future tax changes and family circumstances, it is also critical for a trust to include limited powers of appointment for the beneficiaries (including a spouse) or the Trustee (referred to as a decanting). This will allow the beneficiary or trustee to transfer the assets to a new trust that contains the provisions that best reflect the tax laws and your wishes at that time.

By including these authorities in an irrevocable trust, it provides important options for family members to adapt to dramatically different circumstances which may arise in the future.

10. Philanthropic Planning

Rather than making gifts directly to charity and surrendering any say as to the application of the gifts thereafter, a Foundation allows you to retain control over the administration and investment of the assets that you have earmarked for future grant-making, while enjoying the full income tax benefit immediately. By making gifts to charities in increments over time, you and your family can maximize your influence over their ongoing use to the selected charities.

The private foundation will be the recipient of any direct donations that you make and can also be the recipient of any assets remaining in the Charitable Remainder Trust.

With respect to appreciated stock, you would not have to liquidate any securities positions in order to make the donation (and therefore pay income tax on the capital gains tax due upon the sale), which would reduce the net value of the gift to charity and deduction you may enjoy. 

Rather, you directly transfer the appreciated stock to the Foundation, getting a deduction for the full value of the positions transferred to the Foundation, and then the Foundation can subsequently sell those interests without any capital gains tax.

"Even if tax legislation passes, it's likely that the rules of the game will continue to change -- perhaps frequently -- going forward," commented McManus. "It's essential to stay in the know regarding the potential impact of new laws, in addition to tools currently available to protect your wealth. McManus & Associates is committed to helping our clients stay apprised of the estate tax environment."

For trusted guidance on estate planning strategies on which you can capitalize before Congress passes tax legislation, call McManus & Associates at 908-898-0100. Learn more about the award-winning firm at

About McManus & Associates
Twenty-five years ago, McManus & Associates was founded to deliver the highest quality estate planning services that the largest firms promise with the more intimate, personalized relationships that a boutique firm can offer. Since that time, some of the most prominent families in finance, media, academia and medicine -- both domestic and international -- have relied on the firm to serve as their advisor in wealth and family mission planning.

Contact Information