Timely Wealth Transfer and Estate Planning Strategies

Katherine Akinc (Brink Bennett Golden LLP) joined Russ Norwood and Alex Clendennen of Venturi Private Wealth and discussed timely wealth transfer and estate planning opportunities in 2020. This blog on timely wealth transfer and estate planning strategies is a modified transcription of the virtual event that was hosted on May 21, 2020. 

Ahead of the 2016 election many people scrambled in the back half of the year to try to take advantage of estate planning opportunities before the pending election, where there was some concern that the tax treatment of wealth transfer may change if there was a change in the White House. Obviously it’s too soon to tell what the outcome of the November election will be, but a combination of this and current market events makes this a timely topic. The silver lining of a possible market correction this year along with the current COVID-19 pandemic is that there’s an opportunity to possibly get a discount on transfers. There are a number of techniques in estate planning that are very dependent on interest rates. With record low interest rates, there’s an opportunity to get “double leverage” on potential transfers if this is something that fits into your situation.

Looking at 2020 , the exemption, which is the amount that somebody can give during their life or at death that is free of estate tax, is about $11.5M, which is an incredible amount when you consider where it’s been in the past. And this amount is also portable to your spouse, meaning that if you don’t use some of your exemption, your spouse has the opportunity to use it. So there’s an  opportunity this year with that amount that you can give or transfer to future generations. We also have the annual exclusion, which is the amount that you can give every year to another person – $15,000 free of gift tax without using your exemption.

When we take a look at some other tax rates, we have a top federal income tax rate of 37%, cap top long-term capital gains rate of about 20%, plus net investment income tax. And then there’s something called the 7520 rate or 120% of mid-year AFR (applicable federal rate) which currently sits at 0.91%. The 7520 rate is determined monthly by the IRS and refers to section 7520 of the RS code. Historically very low and very advantageous for people looking to do estate planning.

To give some context, as far as where we’ve been in years past, we’re in a golden age of estate planning right now. If you look at the exemption again, the amount that you can give free of estate tax, and you go back to the late nineties, it was only $600,000 and that amount has steadily increased through the years and has worked its way up to about $11.5M right now. And if you also look at the estate taxes, they’ve steadily come down as well. They were once 55%, and we’re sitting at 40% right now. So you can see this progression that has just been more and more generous to families that are trying to find ways to pass that wealth to future generations. Some of the current tax laws sunset at the end of 2025. And the exemption will actually be cut in half. So that’s definitely a date to keep an eye on as it was put in place in 2017, by the most recent tax cut.

Another that we’re seeing on the horizon, especially in this environment, is the federal spending that’s been happening to stimulate the economy throughout the COVID-19 crisis, in the form of trillions of dollars. And of course this is going to hit the deficit in a big way. So as we work ourselves out of this crisis, policy makers in Congress are going to be looking for ways to find revenue to offset some of that deficit. And you could consider estate taxes and exemptions as potential low- hanging fruit. If there’s a change in the White House, it could indicate that there might be a change to some of these more popular topics that politicians like to talk about. Estate tax, which only affects a very small percentage of the population in its current form, is certainly something that could be in the crosshairs, if we do see a change in November.

When you have an inflection point, as far as the law sunsetting or the law being changed January 1st of the following year, you get a lot of people that are rushing to take advantage of where the law sat before. Don’t be stuck in the bottleneck of all these people trying to take advantage of the exemption and wait until November, December, if something’s going to change in January.

Tax Planning

If you prepared your current estate documents in the 2000’s, or even a little bit after then, they may be more complex than needed under the current exemption law (based on what your estate is right now and the exemption). If you did this, even if you did your plans in the early two thousands, when the exemption was $1M or $2M, and now it’s up to that $11.58M, the tax planning trust, et cetera, that was created may no longer be needed. A lot of these older planning documents, and even some today that are done are structured with these formula gifts, which is essentially saying the greatest amount upon the death of the first spouse, the greatest amount possible will go to a bypass trust for the benefit of the second spouse. It doesn’t matter if your estate holds $4M worth of assets, or if your estate holds $500,000 worth of assets. When the first spouse dies the maximum amount is going to go into that trust. And sometimes that means that you end up having a trust that holds $200,000 when you really don’t need that anymore.

In the meantime, while this estate tax exemption has been going up and up and up, there’ve been a lot of changes on the income tax side. We’ve got this 37% top income tax bracket, but there’s also the other sums for depending where you live (Texas doesn’t have it) and for some states, there’s the state income tax, there’s Obamacare tax. In some cases, particularly for people in states like California or Colorado, that ends up being more than 40% tax. So the income tax rate can be higher than the estate tax rate for some people. You might be thinking, “oh, it doesn’t matter because I’m in Texas”, but if your kids or whoever your beneficiaries are, live elsewhere, then it does matter. 

Another important thing to highlight with income tax becoming more important is the importance of basis. So you buy a house in Austin and you get a basis, let’s say you bought it 20, 30 years ago when it was a reasonable price and you got your basis in your home. When the first spouse dies the basis in that home and basis in all your property gets a basis adjustment to the value of the property at your date of death. So that house that you bought for $200,000, that’s now worth $800,000 at the death of the first spouse – the basis is reset at $800,000 for both spouses halves, the surviving and the deceased. So when you sell that house in the future, or when your kids do, they pay a lot less in capital gains tax.

Personal Estate Plan Options: Formula Gift Plan, Clayton Plan, Disclaimer Plan

Basis and assets are really important. However, if your property is held in a trust, it usually does not get that basis adjustment. There are three different structures for how your personal estate plans could be set up: a formula gift plan, a Clayton Plan, or a Disclaimer plan. The formula gift plan is very common; that’s the traditional one. If one spouse dies, the greatest amount of property that can pass free of the estate tax goes to the bypass trust, for the surviving spouse. And if there’s anything over that, then it goes to a marital trust.  So that is a set formula, regardless of how much your estate is. If your will is set up so that it has this kind of formula gift plan, then the rigid rules apply.

The Clayton Plan is a little bit more flexible. This one says that at the death of the first spouse, all of their estate goes to the marital trust, but then for 15 months after the death of the first spouse, the executor can decide if they want it to stay in the marital trust or move it to the bypass trust. The marital and the bypass trust each have different benefits. The marital trust is just for the benefit of the surviving spouse. The bypass trust can be for the surviving spouse and children. Anything held in the marital trust will get a basis adjustment both at the death of the first spouse and at the death of the second, but it’ll be included in your estate for estate tax purposes.

So with the Clayton Plan, the first spouse dies and everything goes to a marital trust. The surviving spouse, usually also the executor, meets with their wealth manager and their attorney and asks what to do with this. Well, you have to consider tax laws at that time. If this occurs in 2045, there could be completely different tax laws. 

A Disclaimer Plan is somewhat similar to the Clayton Plan. If the first spouse dies, everything goes to the survivor, and then the survivor has nine months after that. These dates are dictated by state law or federal law (15 month or nine month period). But in Disclaimer Plans, they have nine months to decide whether they’re going to keep it all or disclaim any of it. And if they disclaim any property, that goes to the bypass trust and has different benefits as well. So again, under the disclaimer plan, the first spouse dies and the surviving spouse talks to their advisers and says, what do I do? What are the tax laws in place at this time? Not at the time of planning, but what are the tax laws in place at the time of death, which could be completely different. And undoubtedly based on our history, it will be completely different. There might be more of an emphasis on wanting to have income tax savings. Whereas for other estates there might be a focus more on estate tax savings. So while traditionally the formula gift plan has been what is in a lot of documents, I [Katherine Akinc] lean more towards the Clayton Plan or Disclaimer Plan these days, because I really would like to incorporate flexibility into people’s estate plans as much as possible because laws have changed so much and will continue to change.

Revocable Trust

COVID-19 and everything that’s been going on this year has really highlighted the importance of having something in place that’s flexible to take care of you and your spouse and your family, both during lifetime and after one’s death. For people who are aged 60 to 65 and older, it is recommended that they consider a revocable trust based plan. For those of you who aren’t familiar with a revocable trust, sometimes it’s referred to as a management trust or a living trust. It’s the same thing.

It is a trust structure that you or you and your spouse create during your lifetime. You put property in there and you can put it all at once. You can put some now and put more in later; it’s fully amendable and fully revocable. It’s tax neutral in that you don’t get any tax benefit, but it doesn’t hurt you either. You just continue to file your 1040 and report everything that’s in the trust on your 1040, but the revocable trust structure starts off where perhaps you and your spouse are co-trustees and you keep living your life. The goal is to set it up and forget about it. However, if down the road, one spouse starts to lose capacity, or if they have to go into the hospital unexpectedly or something like that, the other spouse can continue to run things easily. They just become sole trustee; they can go to the bank because the accounts are held in the name of the trust. If for some reason they need to sell the house, that’s no problem because the house is held in the name of the trust, and they’re able to act as trustee for both spouses, which ensures a smooth transition. And if something happened to both spouses, that’s where a successor trustee who you name (corporate trustee, a child or some trusted family member) can step in. There’s no locking of bank accounts upon death or anything like that because everything’s held in that trust for your benefit. And whoever is going to take care of you that you choose is named as the successor and can step in.

It is important to  recognize that estate planning is more than just the documents. If you want documents, legal zoom can give you documents. I’m not going to say how good the documents are going to be, but the reason you want to go and work with an attorney and work with a wealth manager and have a team in place is that so that you have a support system that if something does happen – people are there to say, this is what so and so wanted. Build that team now, while you have capacity, while you know what’s going on. If you never lose capacity, which is hopefully the case, then you’ll just stay as trustee until the day you pass away peacefully in your sleep. There’s no downside to having this kind of trust structure. In fact, everything’s held in the trust, then you can avoid probate, so that’s another benefit.

Everything that’s been happening with the pandemic has highlighted even more, how we need documents. It’s important that  you have documents that are flexible, that can move and adjust as you do, as your life does, as the tax laws change. And, and to just make things easier for you going forward. And that applies to everyone regardless of the size of your estate.


The content provided in this transcription is informational and is not investment advice or an offer or solicitation for the purchase or sale of investments.  The information provided on this site does not, and is not intended to, constitute legal advice; instead the information is intended for general informational purposes only. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter. No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction.

Contact Us

Thank you for your interest in Venturi Private Wealth. We would love to speak to you about our firm and how we can help. Please complete the form below and we’ll get right back to you.

Austin Team

OKC Team

Contact Form

Investment Management

Thank you for your interest in Venturi Private Wealth. We would love to speak to you about our firm and how we can help. Please complete the form below and we’ll get right back to you.


Lorem Ipsum

Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat.

Duis autem vel eum iriure dolor in hendrerit in vulputate velit esse molestie consequat, vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit praesent luptatum zzril delenit augue duis dolore te feugait nulla facilisi.

Lorem ipsum dolor sit amet, cons ectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat.