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Wealth Planning 2021: Ways to Weather What’s in Store in the Year Ahead

THE WHOLE POINT OF A SOLID, UP-TO-DATE ESTATE PLAN is to help protect you and your family against life’s changes—and 2020 was an object lesson in just how sweeping change can be. Over the course of 12 months we saw a health and humanitarian crisis, severe economic disruption, see-saw markets and an unusually contentious election. For many people, this rush of external events underscored the importance of having in place a plan for their family’s future, and of adjusting existing plans.

Will 2021 prove just as unpredictable? While there’s clearly no way of knowing, it seems foolish to discount the possibility. What is apparent is that a number of issues and factors in the coming year could have an impact on your estate plan, including a probable reduction in the federal estate tax exemption. “It’s important to have a plan in place that can absorb the shocks of some of the items on everyone’s minds today: the economy, the pandemic and so forth,” says Jean Y. Kim, a managing director and wealth strategist with Merrill’s Strategic Wealth Advisory group.

In addition to external events like shifting markets or changes in the law, you might experience personal changes that could trigger the need to create or revisit your estate plan—for instance, a marriage, birth, divorce or a death. In light of all the things that might be coming down the line, this might be an especially opportune moment for you to initiate a conversation with your financial advisor, tax professional and attorney.

The key is to have a plan that’s flexible enough to accommodate shifting circumstances. “Your plan should be able to adapt to changes in your life, or your children’s lives, often with very little or even no revision needed,” says Lynn Bebeau, director, trust specialist with Merrill.

Changes to estate taxes?

Because estate planning generally involves the transfer of wealth, during life or at death, to beneficiaries in a manner that seeks to minimize taxes, the results of the 2020 election could be consequential. For one thing, although President-elect Biden’s proposed tax plan does not include specific changes to the federal estate tax rate or exemption, there is likely to be a push by a Democratic Congress to lower the exemption and raise the rate. Projections from the Tax Policy Center, which studied President-elect Biden’s budgetary proposals throughout the campaign, are that the exemptions could drop to as low as $3.5 million from $11.7 million for individuals; and to a combined amount of $7 million from $23.4 million for married couples.1 The Tax Policy Center also expects the estate tax to increase to 45%.2

That’s not to say we’re certain to see those changes. “A candidate’s campaign position is rarely if ever what actually gets passed into law,” says Kim. “Just about everything’s a negotiation. What becomes law is almost always a compromise.”

Because of the uncertainty, it’s critical to keep tabs on what’s happening on Capitol Hill, says Anthony Fittizzi, a managing director and trust specialist with Bank of America Private Bank. “Being proactive in looking at how clients can transition wealth to the next generation under current law is something we’re focused on.”

But while tax considerations are important, they’re far from the only factor in a well-designed, flexible estate plan. “When we meet with clients who are establishing or reviewing a plan for the benefit of their family, we often say, ‘Don’t let the tax tail wag the estate planning dog,’” Bebeau notes. “In other words, acknowledge and respond to possible changes in tax laws, but keep family at the forefront of your planning.”

The value of a candid conversation

To help insure that you have an estate plan that’s as flexible as you need it to be, it’s important to have a conversation with your financial advisor, after consulting with your tax professional and personal lawyer, so they can all work in tandem. What might that involve? For one thing, a number of foundational questions. “Some of the things we’ll ask include: Has your family tree changed? What is your net worth now? What kind of assets do you have? Who are you hoping to take care of in the future?” says Fittizzi. “The answers can help your attorney, accountant and financial advisors determine strategies that can make an estate plan truly personal.” He adds that some areas they might focus on include:

  • How to tend to your personal financial security and care, now and later in life.
  • Ways to provide for your family in a manner that enhances their lives while encouraging their productivity.
  • The potential to minimize taxes by using outright gifts or a trust for transfers under current laws.
  • A reassessment of your plan’s executor and trustees, especially when it is a relative or friend, in light of potential changes in their health, and in certain cases a discussion about the potential benefits of a corporate fiduciary.
  • Ways to protect assets from creditors—for instance, in the event of a child’s divorce or a lawsuit.

Many ways to be generous

If one of your priorities is to transfer wealth to the next generation, your wealth planning advisor, accountant and attorney can work together to help you find one appropriate to your goals. Among the most commonly used:

Gifts. “The simplest vehicle is an outright gift, which can be tax-free if it qualifies for the gift tax annual exclusion--up to $15,000 per recipient, per year," says Fittizzi. He adds, "In addition to this annual exclusion, exemption gifts can also be made to children or grandchildren‑up to $11.7 million per donor in the aggregate‑and it’s something you can do right now.”

Loans. While technically not a gift, an intra-family loan can transfer assets to children for a limited time. It would need to be paid back within a set period, though at an extremely low, government-set, minimum interest rate (currently about 0.15% for a short-term loan).

Trusts. Rather than gifting outright, you can move assets into a trust, which will have a trustee such as a financial institution, a family member or another individual. Fittizzi notes, “Those assets can be invested, managed and administered for the benefit of your children or grandchildren over a period of time, having been gifted tax-free under current law, even if that law changes in the future.” While many types are available, here are a few of the most popular trusts:

  • A dynasty trust is designed to avoid or minimize estate taxes for successive generations of beneficiaries.
  • A trust for children or other descendants  can protect assets from creditors. If the trust beneficiaries are children, it makes it harder for a spouse to claim assets in the event of divorce.
  • A spousal lifetime access trust allows assets to be placed into a trust for children, while still providing a living spouse access to trust assets, as needed, to maintain their lifestyle should other personal assets be depleted. Spousal lifetime trusts provide a measure of flexibility that many other trusts do not.

If 2020 taught us anything, it’s that being prepared for change is critical. As Fittizzi puts it, “Revisiting an estate plan from time to time is always worthwhile. In the current environment it may be essential.”

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1 Mermin, Gordon B., Janet Holtzblatt, Surachai Khitatrakun, Chenxi Lu, Thornton Matheson, and Jeffrey Rohaly. An updated analysis of former Vice President Biden’s tax proposals. November 6, 2020


Important Disclosures

Opinions are as of the date of this article and are subject to change.

Investing involves risk including possible loss of principal.


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