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Recently, the Estate and Trust Study Group of the Maryland State Bar Association held a meeting on the topic of Planning for Today and for the Future: The Importance of Building Flexibility into an Estate Plan. The meeting was hosted by Stephanie Perry, Esq. and Adam P. Swaim, Esq. of Pasternak & Fidis, P.C.

Ms. Perry explained that it is critical to build flexibility into an estate plan to adapt to changing circumstances and tax laws. While she noted that they could not anticipate all the possible changes that might occur, some circumstances arise with regularity, such as changes in financial circumstances or family composition, changes in the status of fiduciaries, and changes to the estate and income tax laws. 

She briefly reviewed the current estate tax landscape, explaining that the estate tax exemptions have changed dramatically over the past several years as a result of the 2017 Tax Act, which essentially doubled the exemptions. The estate tax exemption is portable between spouses, which means that any unused, exemption of the first spouse to die can be transferred to the surviving spouse by making a portability election. This means that a married couple has in excess of 23 million dollars in exemptions. While these exemptions are very generous, it is important to advise clients that exemptions are scheduled to revert back to pre-2018 levels. Maryland and Washington, DC impose estate tax of their own, and Maryland’s exemption is currently $5,000,000. Ms. Perry stated there is no way to know what will happen with estate tax laws, and given the uncertainty, it is important to build flexibility into estate documents. 

Mr Swaim pointed out that for planning purposes, it is wise to consider and plan for both the estate taxes that may be imposed on larger estates and the income tax. The income taxes that may be imposed depend on the basis of property, which, with a few exceptions, is the fair market value of the property at the date of the decedent’s death as determined for federal estate tax purposes. Many different situations will cause property to have been acquired from a decedent, including property passing under a will or by intestacy, revocable trust property, property subject to a general testamentary power of appointment, and Q-tip property. As such, basis planning is currently a critical part of the planning process and the uncertainty around the structure of the future tax laws, from an estate tax perspective and from an income tax and basis perspective, makes incorporating flexibility into an estate plan essential purposes.  

Ms. Perry then stated that, traditionally, trust planning was used to minimize or avoid estate taxes. Specifically, they have created plans for many clients that included a credit trust that would allow the use of the Maryland estate tax exemption of the first spouse to die to reduce the assets that were subject to estate tax at the death of the second spouse because those credit trust assets are excluded. That option was disadvantageous, as there was no step-up in basis at the surviving spouse’s death if those assets continue to be held in trust. With the increased exemptions and portability and with the potential income tax advantage of leaving assets outright to beneficiaries many clients may say now that they really want to keep things simple and eliminate trust planning altogether. There continue to be reasons, however, that trust planning still makes sense.

A primary reason to consider using a trust is that it allows clients to maintain control over the ultimate disposition of the property, as you cannot maintain control when you give an asset outright to a potential beneficiary. Ms. Perry explained that parties have the highest level of protection when the beneficiary has the least amount of access and control. She noted that the objective of many clients is to provide the beneficiary with access and control, which often requires balancing competing interests.

If you have clients to are very wealthy and are incorporating GST tax planning it is important that each spouse structure his or her plan in the assets that he or she owns in a way that maximizes the use of those exemptions because, unlike the estate tax exemption, the GST tax exemption is not portable between spouses.  

Ms. Perry advised that she finds disclaimer trusts to be one of the most useful planning options in terms of flexibility. She explained that, essentially, a disclaimer trust plan provides for assets to be left outright to a surviving spouse, but grants the surviving spouse the option to disclaim any portion of those assets that are supposed to be distributed outright, if it makes sense to do so from an estate planning perspective. This gives the surviving spouse the opportunity to consider the relevant factors at the death of the first spouse and decide what makes the most sense at that point in time, essentially allowing for post-mortem planning. Anyone using a qualified disclaimer must ensure that it meets the requirements set forth by the Maryland code and the IRC. 

Ms. Perry then described options for getting assets that are in trusts pushed to the beneficiary’s estate to accomplish those income tax savings. First, an independent trustee can be granted the discretion to terminate the trust, forcing those assets into the beneficiary’s estate. This may not be appropriate in a blended family situation where control is important. Parties can also consider giving an independent trustee the power to grant the beneficiary a general power of appointment over trust assets. This causes the assets subject to the power to be includible in the powerholder’s estate, whether or not the power is exercised. 

People may also want the flexibility to address changes in beneficiary circumstances, including ongoing trusts with the right of withdrawal, which allows a beneficiary to receive assets while preventing them from being subject to division as marital property in the case of a divorce. Parties may also choose to delay the right of withdrawal or the right to service trustee, which is useful in instances in which the beneficiary is a minor or is disabled. She also noted that limited power of appointment exercisable by a surviving spouse grants the flexibility to deal with changing circumstances, for example, allowing them to direct more assets to a child with greater needs. She also stressed that it is important to have flexibility in fiduciary appointments, in case a fiduciary is unsuitable or becomes disabled. 

Next, Mr. Swaim focused on a few specific provisions that are routinely incorporated in a revocable living trust to build in flexibility to address changes in circumstances and or tax laws during the grantor’s life. For example, they include language authorizing a grantor or its agent to amend or revoke a revocable trust during any period of disability. Next, they include language to ensure the continued protection of tenants by the entirety property transferred to a revocable trust without waiving the benefits of those properties. Finally, they include language providing the trustee with the power to make gifts during the grantor’s lifetime.

A Power of Attorney can be a powerful tool to incorporate flexibility into an estate plan to adapt to changes in circumstances and/or tax laws, and can be granted under a trust agreement, and can be granted the power to create a trust, or withdraw or contribute assets to a trust. Parties may be granted power of attorney over retirement assets, insurance policies, and annuities as well. 

In sum, traditional estate planning techniques need to be re-evaluated, and new features and strategies should be incorporated in an estate plan to build flexibility into the plan so that it can adapt to changing circumstances and tax laws. 

The meeting can be viewed here.