Were you naughty or have you been nice in 2021? This article is directed towards Congress, all estate planners, including attorneys, accountants, trust officers, life insurance agents and financial planners. This will help you decide whether you’ve been naughty or you’ve been nice.
1. [Now Apparently Defunct] Build Back Better Act’s Potential 8% Surtax on Trusts:
The language in the [now apparently defunct] proposed legislation applies a 5% surtax to taxable income (technically Modified Adjustable Gross Income) above $200,000 and an 8% surtax to taxable income above $500,000 in a non-grantor trust regardless of the wealth or taxable income of its beneficiaries. This includes a simple trust for the benefit of a person’s children and/or special needs beneficiaries who may be in very low tax brackets. If you’re a member of Congress who is backing the proposed legislation with this language, then you’re on the Naughty List.
2. [Now Apparently Defunct] Build Back Better Act’s Potential 50% Limitation on Qualified Small Business Stock (“QSBS”) Deduction:
Many years ago, Congress enacted IRC Section 1202 which generally provides for a $10 million income tax deduction for stock that qualifies as QSBS. This was done to encourage entrepreneurs to form business and to create jobs. The current language in the [now apparently defunct] proposed legislation discourages this activity by essentially cutting the deduction in half. So one day they want to encourage job creation and the next day they want to discourage it a bit. If you’re a member of Congress who is backing the proposed legislation with this language, then you’re on the Naughty List.
3. Staggered Distribution Trusts:
If you encourage your clients to create trusts that make mandatory outright distributions to the clients’ children upon reaching staggered ages, then you’re on the Naughty List. This subjects the trust assets to the creditors and divorcing spouses of the children. Trusts should generally be designed to keep the assets in continuing trusts so they are protected.
4. Using Support Trusts rather than Discretionary Trusts:
A “health, education, maintenance and support” trust is generally classified as a support trust for creditor protection purposes and is potentially open to the divorcing spouses and creditors of its beneficiaries depending upon applicable state law and/or state judicial decisions. A third-party discretionary trust is generally protected from all creditors. Therefore, why are most trusts still designed as support trusts? If you use support trusts for most clients, then you’re on the Naughty List.
5. Needlessly Paying State Income Taxes:
If you see that your client pays substantial state income taxes on taxable income that isn’t needed and you fail to advise your client to consider an Incomplete Gift Non-Grantor Trust (“ING Trust”), then you’re on the Naughty List. As estate planners, we are supposed to look for opportunities to save taxes for our clients. With the State & Local Tax Deduction now limited to $10,000 per year, state income tax planning should now be a huge part of every estate planner’s business.
6. Not Discussing Asset Protection:
If you don’t discuss asset protection with your clients, then you’re on the Naughty List. Most of our clients are worried about protecting their hard-earned wealth. They don’t always know to ask how to protect it. It’s your job to be proactive and raise this as a discussion topic during your meetings.
7. Not Mentioning a Domestic Asset Protection Trust (“DAPT”) to a DAPT State Resident:
If your client is a resident of one of the 19 jurisdictions that has a DAPT statute and you don’t advise your client to set up a DAPT, then you’re on the Naughty List. This is a no-brainer. We know for a fact that it works. There is no question. And the client doesn’t need to pay an annual co-trustee fee. It’s a one-time attorney’s fee to buy protection for the rest of the client’s life! In fact, it is inconceivable that any resident of a DAPT state with even as little as $1 million in net worth doesn’t have a DAPT. That is generally the fault of the advisors.
8. Using a Regular DAPT or a FAPT rather than a Hybrid DAPT for a Non-DAPT State Resident:
If your client isn’t a resident of one of the 19 jurisdictions that has a DAPT statute, then there is nothing more protective than a Hybrid DAPT since it’s really just a third-party trust with a clever marketing name. Except in rare instances, there is no good reason not to put your client in the strongest position to protect the assets as possible. If your go-to strategy is either a regular DAPT or a Foreign Asset Protection Trust (“FAPT”) rather than a Hybrid DAPT, then you’re on the Naughty List.
9. Always Using the Client’s Home State’s Trust Laws Rather than those of a Leading Trust Jurisdiction:
A trust can use any state’s trust laws, so why limit yourself to always using the client’s home state’s trust laws? That is short-sighted when there are often asset protection, divorce protection, income tax, estate tax, decanting and/or other reasons to use the trust laws of a leading trust jurisdiction, such as Nevada or South Dakota. If you only use your client’s home state’s laws, then you’re on the Naughty List.
10. Advising your Clients to Hurry and Make Gifts When they Shouldn’t:
Many of our clients have net worths that are high, but yet are under the federal estate tax exemption. For those clients who are under the estate tax exemption, many advisors will push them to make gifts in case the exemption is reduced which at this point is scheduled to occur at the beginning of the year 2026. There is plenty of time to decide. No client should be pressured right now. If the client makes such a gift and dies well below the estate tax exemption, then the client’s heirs will have lost the step-up in income tax basis because the client was pressured to over-gift. If you are advising clients who are under the exemption to make substantial gifts, then you’re on the Naughty List.
11. Failing to Consider Income Tax Basis Planning:
Since roughly 99.9% of people in the United States would have no federal estate tax were they to die today, most people are dying with a substantial amount of unused federal estate tax exemption that could have be applied to low basis trust assets using certain advanced estate planning techniques. Therefore, it has become relatively customary to ask clients whether they have any living parents or grandparents who don’t have taxable estates and whether we might be able to use their unused estate tax exemption to give them a power over the client’s low basis assets to obtain a basis step-up. If you never consider income tax basis step-up planning in the current tax planning environment, then you’re on the Naughty List.
If you’re an estate planner or a member of Congress and you’re not on the Naughty List, then congratulations, you’re on the Nice List!
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
- Estate Planning Techniques in a Time of Low Interest Rates
- The Installment Sale to an Intentionally Defective Grantor Trust
- The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He has been named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020 and 2022. He can be reached at 702-341-6000, ext. 2, at firstname.lastname@example.org or at his firm’s website, www.oshins.com.