Planning Strategies Under a Lower Estate Tax Exemption

By Brian Ellenbecker CFP®, EA®, CPWA®, CIMA®, CLTC®

Estate tax planning has seen dramatic changes over the past 20 years.

In 2000, the estate tax exemption was just $675,000 with a top estate tax rate of 55%.

Today, the exemption is at an all-time high of $11,700,000 with a top tax rate of 40%.  Considering the exemption amount can effectively be doubled for married couples, very few people have to worry about estate tax liability at those exemption levels.

It’s possible the exemption level could be headed back down. In 2026, current tax law cuts the exemption in half.  President Biden has proposed an even lower exemption amount of $3.5 million per person to help fund the infrastructure bill currently being debated in Congress, which would most likely take effect in 2022.

The estate tax applies not only to your investment and retirement accounts, but you must also include real estate equity and life insurance death benefits.  After adding everything together, many more people would again be impacted by the estate tax if the exemption is lowered.

Planning Strategies to Consider

Considering the magnitude and frequency of changes to the estate exemption over the past 20 years, one of the best pieces of advice is to build flexibility into your estate plan.  Many families leave their assets to their loved ones in trust, rather than outright. Doing so can provide for multiple generations, allows for increased asset protection, can incorporate both income and estate tax planning, and/or protect spendthrift beneficiaries from themselves.  If your estate plan includes a revocable living trust, consider building flexibility in by using some or all of the following techniques:

For Trust Beneficiaries:

  • Consider giving your beneficiaries the ability to change the trustees by granting them the right to name co-trustees or successor trustees. You may also allow them to remove and replace an acting trustee.  If you grant these powers, consider restricting the new trustee to being a corporate trustee.  Doing so reduces the risk of abusing this provision.
  • You may grant the beneficiary a power of appointment. This allows the beneficiary to redirect the trust assets at their death to be passed on in a different manner than originally set forth in the trust.

For Trustees:

  • Allow the trustee the discretion to make a distribution. You could restrict the situations where a trustee can make distributions, such as with the popular HEMS (health, education, maintenance, support) provision.  You give the trustee the flexibility to make distributions in a manner that best reflects your intent, while also allowing them discretion to avoid tax, creditor, or other estate issues.

Consider naming a Trust Protector:

  • A trust protector is an independent person (not the grantor, trustee, or beneficiary) who is granted certain powers over the trust.
  • A trust protector typically has a fiduciary duty to protect the trust, although this can vary by state law.
  • The trust protector’s duties and powers are specifically laid out in the trust. The powers frequently given to a trust protector can be divided into different categories – powers relating to supervision and monitoring of a trustee; powers to take action to address unforeseen circumstances or changes in law; and powers to amend the administrative or dispositive terms of a trust.  They can include:
    • Remove and appoint a trustee, successor trustee or trust protector
    • Modify or amend the trust to:
      • Achieve favorable tax status or respond to changes in tax law
      • Reflect changes that impact trust administration
      • Correct errors or ambiguities
    • Change the interest of a beneficiary
    • Terminate the trust in favor of the beneficiaries
    • Modify the terms of a power of appointment
    • Veto, direct, or consent to trust distributions
    • Direct the trust’s investments
    • Advise the trustee on matters concerning a beneficiary

It is recommended that you review your estate documents every three to five years, or sooner if there are changes to estate law or your family experiences a change in their circumstances.  Fortunately, revocable living trusts can easily be amended at any time to address your changing needs.

It’s important to discuss your situation with an estate planning attorney to ensure you understand all the pros and cons of any estate planning technique before implementing it.  If you have questions on your estate plan, reach out to your Shakespeare Financial Planner.