Priming the Pump

Many married people are not aware that the State wrote a premarital agreement for them before they got married. They also were unaware that they had the right to write their own agreement before getting married instead! When married couples become aware of this, they often contact Estate Planning and Elder Law Attorneys for help in addressing their concerns.

The good news is that if both parties to the marriage are able and willing to do so, they can still write a postnuptial agreement to override the premarital agreement that the state put in place for them when they got married. If one of the couple is unwilling or unable to enter into a postnuptial agreement, or if they cannot agree on the terms of the new postnuptial agreement, then there could be trouble ahead.

The reasons for entering into your own custom drafted premarital agreement or postnuptial agreement are numerous. The concerns do not just address what happens in the event of separation or divorce, but also what happens to assets after the death of one or both of them. The couple may have concerns about how to pay for long term care after the first death between the couple. It is not just the two partners that a marital agreement can address but also concerns about the intervention of other family members or friends.

There is an unprecedented $11.58 million lifetime exemption for gifts and estates. This exemption is set by law to expire, or “sunset,” by 2026 if there is no legislative change. With the looming election and a possibility of a shift in the control of the Presidency, this is a perfect time to think about filling up the dynasty trust tank. The unprecedently high exemption is presently available but may disappear if the political winds change. There is no such thing as a permanent tax law so we should make hay while the sun shines.

Why would one want to use a dynasty trust? The lid that caps what can go into a dynasty trust has been lifted by the current tax law. We can now draft long-term dynasty trusts (that could be perpetual) with flexible provisions that can stand the test of time. Trusts that have already been completed may even be modified. Clients with trusts already in place that they utilize for annual gifting should be given a fresh look. Maybe those trusts are not long-term enough or do not have enough flexibility drafted into them?

What about clients who have under $10 million? They may not be willing to gift away substantial sums of money that may be needed for their own needs later in life. Fortunately, there are jurisdictions that allow you to make gifts to dynasty trusts and still be a beneficiary of that trust. Even if gifting now in light of possible tax law changes is off the table, clients should review their current plans to make sure they are taking advantage of the long-term tax and non-tax benefits of trusts. A refresher is always beneficial.

Trusts can allow beneficiaries to use assets while still enjoying protection from creditors and divorces. Trustees can loan trust assets to beneficiaries (to buy a house, for example) or to a business. Trusts can invest in LLCs. In doing so, drafting makes a difference. A forward-looking dynasty trust can be achieved even without requiring that beneficiaries have full knowledge of trust assets and investments. One can even have a “designated representative” to receive accountings and information.

The timing now is excellent for those clients wishing to take a second look. If the tax law is changed, chances are good that planning put in place in 2020 will be grandfathered. Therefore, if there is a change in who is in the White House, history shows that the first years of a new President are usually when new legislation is passed while there still is political capital to spend. We have never had exemptions so high, so it is anybody’s guess whether reducing them will come back into vogue. There has been very little recent discussion about the exemption limits, but if worries about deficits start to take center-stage, it would not be surprising to see the gift and estate tax in the crosshairs. Prudence and expediency are key, and reviewing your plans with our attorneys is a great first step.