Fly, Rattle, and Roll

November 7, 2018

I don’t know how many people fly to various destinations across the U.S. from Baltimore via the Charlotte Airport travel hub, but I assume it’s quite a lot.  Having done so many times, my experience has been that on some of the small commuter airplanes that routinely fly the Charlotte route the ride can be quite rough.  My wife laughs at me when I affectionately refer to any Charlotte lay- over flight as a “rattletrap”, since one time in particular, the plane literally sounded like it was rattling and squeaking all the way, and figuratively lurching towards the runway touch down.  Of course there are very smooth flights to Charlotte from Baltimore, and I recently rode on one of those and it was amazing – a fifty minute scheduled flight that arrived fifteen minutes early!  And turbulence, let’s not forget about that.  I don’t like it, and again I will say that the southern flight routes always strike me as more turbulent than others, like the smoother long-distance Midwestern routes, to Denver for example (except for in and around Denver airport!).  Oh well,  I guess none of it is predictable!

All this thinking about the characteristics of modern flight travel gets me thinking about the current state of our politics, and more specifically, the 2017 Tax Act.  I’m serious!  How analogous can these two things be?  I mean you can’t make this stuff up, regardless of which side of the political runway (flight path) you’re on!  So first we’ve had a lot of shaking, rattling, and rolling for the past eighteen months in Washington and across the country.  Really?  Well yes –  unbelievable, and perhaps unprecedented events, including political infighting, eye-popping initiatives and attempts to foil them, upheavals, policy changes (both domestic and foreign), questions and shifts concerning traditional notions about government and its institutions, attacks on the press, interference in our electoral processes by foreign governments, turmoil of seemingly every kind, and much, much more.  And yet, from an estate planner’s point of view, by and through the 2017 Tax Act, along with Portability now a “permanent” fixture of the estate tax landscape, it is a remarkably smooth ride for 99% of U.S. citizens – from both an estate tax and income tax perspective.

Quite literally, the current administration and the Congress, despite the rollicking barrel rolls, vertical climbs, mid-air stalls, nose-dives, and general free ride of 2017 and through mid- 2018, have managed to land a legislative jumbo jet by passage of the 2017 Tax Act in December.  Now hold on some will say.  Okay, I agree we’re not talking about wins for seniors or people with disabilities here.  But from a pure estate planning perspective, this is a friendly monster with almost all the right colors and political stripes – a routine flight that intended to go cross-country but somehow became epic, broke the stratosphere, and landed on the moon.

Now, back to reality.  Let’s explore the Act in a limited way for purposes of this article.  You can read about it in further detail via a multitude of summaries and articles put out by tax services, brokerage firms, trust companies, and news organizations; or, you can read the complete voluminous Joint Explanatory Statement of the Committee of Conference.  First, let’s be clear – there are winners and losers due to the Act.  And like any legislation of this magnitude, there are purely personal and business income tax-related portions, which are hugely important and affect all of us; and concerning our further purposes here, estate and gift tax-related portions and their effect on clients’ estate planning.

Although the following is not meant to comprise an exclusive list, changes of major importance on the purely personal income tax side of the Act include:  new rate brackets, with top rate of 37%; changes to standard deduction and elimination of personal exemption; simplification of Kiddie Tax; increase of Child Tax Credit; changes to charitable deduction; limitation on deduction of home mortgage interest; limitation on state and local income tax deduction; non-deductibility of miscellaneous itemized deductions; Qualified Business Income Deduction (I.R.C. §199A); Alimony payments not deductible, and not income to recipient; increase in AMT exemption; elimination of health insurance mandate.

Changes of major importance on the purely business income tax side of the Act include: reduction in corporate tax rates (top rate of 21%); and tax-favored treatment of business income from pass-through entities (I.R.C. §199A).

The Act’s direct impact on estate planning (trusts and estates) cannot be understated – it is simply astonishing.  The federal estate tax exemption or the basic exclusion amount for individuals is now calculated by experts to be $11.18 million, or $22.36 million for a married couple.  That is more than eleven times the size of the basic exclusion amount then in existence when this writer first began his legal career.  This means that the federal estate tax, while not completely abolished, is practically eliminated for 99.5% of decedents. And the gift tax exemption? That is $11.18 million also. This changes everything! Well maybe not everything, because for example the new exemption amounts “snap back” to the prior exemption level of $5,490,000 per person in 2026; but it possibly changes many of the assumptions we’ve always made – for example, that strategic use of the now $15,000 annual exclusion gift amount or estate tax charitable deduction is so critically important.  But are they?  On the other hand many fundamental concepts in estate planning remain largely unchanged and most of the staple planning approaches used over the past several years remain viable and leading edge, such as QTIP trust planning between spouses; although of course there are different planning techniques available for people with assets under $5 million, assets between $5 million and $11 million, assets between $11 million an $22 million, and assets exceeding $22 million, and in any event men and women of all ages still (and always will) need to provide for their surviving spouses, partners, significant others, children, nieces and nephews, other loved ones, pets, and organizations the way they want, and at the lowest possible cost, while providing for the lifetime management of their own financial and health care affairs.  Except that now, it is possible to design and construct these foundational planning elements into your planning better, easier, and with more flexibility and asset protection than ever, and with the lowest possible income tax ramifications ever.  Yes, it is an exciting time to engage in estate planning.  But what is there to talk about now that the estate tax has effectively been eliminated (at least on the federal level)?  Well, … everything?  To name just a few topics of major concern:  understanding how and why income tax is the “new” estate tax; the ramifications of outright distribution; how to plan for disability or incapacity; dealing with long-term care costs; disposing of tangible personal property; understanding inheritance tax; how to leave assets between spouses; planning where there are unmarried partners; marital control; planning for retirement plan assets; long-term care asset protection for spouses; lifetime asset protection; planning for the shares of children and grandchildren; providing for pets; designing flexibility in planning; trust protectors and other special fiduciaries; asset protection for marriage – pre-nuptial and post-nuptial agreements; planning for persons with disabilities; housing issues; Social Security and Medicare; philanthropy; elder law and Medicaid issues; and much more.

In wrapping up this article, how do we keep from shaking and rolling too much during the years to come despite all the changes happening around us?  Well, if you are age fifty or older, you know that’s probably not possible – there’s going to be a lot of this during life and it’s unavoidable.  But if you responded “periodic plan updating”, you are not only right, you hold the key to the smoothest possible flying over time, with the least worry.  We all want a smooth flight versus a turbulent one – yet only a minority of people plan, and of those planning-oriented folks, only about one-third are willing to become truly educated about their planning, keep the plan updated throughout the years, and thereby remain in control of that one aspect of planning they have near complete control over.  I recently watched a film produced by the famous independent filmmaker, Werner Herzog, about the child (now an adult) who survived a Peruvian airplane crash (she was the only survivor).  Perhaps you’ve seen it, but if not the film outlines an amazing story of survival – not only the child’s actual fall from the sky into the rainforest, but her experience during the days and weeks following the crash as she walked out of the jungle, reached civilization, and was finally rescued.  We have the ability to control the outcome of our estate planning, and we don’t have to let it crash, even when the months and years ahead seem unpredictable, full of high speed turbulence, and unpredictable change.  Recognize that in estate planning, you are not a passenger – and you are not in a passenger’s seat – unless you choose to be.  You are the pilot.