Financial advisors working with wealthy families may need to revisit estate plans after a little-noticed federal tax change, known as “the 2/37 haircut,” created uncertainty over how trusts and estates pay taxes.
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At issue is a technicality that may ultimately reduce inheritances. To protect beneficiaries from administrative tangles and distribution conflicts, advisors should encourage clients to review and, if necessary, adjust their estate plans.
Advisors should keep an eye out for guidance on this topic from the U.S. Department of the Treasury, said Jonathan Blattmachr, principal at New York-based Pioneer Wealth Partners, which provides education to estate planning attorneys, during a webinar on June 5. Hosted by estate planning firm Shenkman Tietz, the session on the 2/37 haircut (so-called because it can reduce itemized deductions by 2/37ths) addressed details of the One Big Beautiful Bill Act that could cause confusion among practitioners.
While highly technical, the issue could cost beneficiaries when they inherit and complicate the estate process
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One area where the uncertainty could have significant planning implications is changing an individual retirement account to a trust upon the accountholder’s death.
“If this whole rule sticks, it’s going to make going from an IRA to a trust less attractive,” Robert Keebler, partner with Keebler & Associates and chairman of the American Institute of CPAs Advanced Estate Planning Conference, told Financial Planning in an interview outside the webinar.
Keebler gave a hypothetical example in which a husband died and left income to his widow and the remainder of his estate to his children from his previous marriage. In Keebler’s example, income intended for a surviving spouse could trigger tax consequences for other beneficiaries, creating disputes over who should be responsible for the tax burden.
Because of the distributable net income deduction, there will be “what we call ‘phantom income’ that was invented by the tax code,” he said.
The process promises to be complex and time-consuming, Keebler said.
“How do you do those calculations? How do you make those adjustments?” he asked.
During the webinar, Keebler suggested clients could circumvent the confusion by leaving their IRAs
In the meantime, financial advisors can help clients by guiding the way to a resolution, perhaps with the assistance of outside professionals.
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Keebler noted advisors should allow adequate time, given the complexity involved. “That attention should probably begin within six [to] eight weeks of when somebody dies,” he said.
