Category: The Wealth Advisor

As the federal estate tax exemption has ballooned from $1.5 million ten years ago to $5.43 million today, the need for estate tax planning has drastically decreased.  Instead, higher income tax rates that were ushered in under the American Taxpayer Relief Act of 2012 (ATRA) have shifted the focus of estate planning to a new frontier:  income tax basis planning.

In this issue you will learn what income tax basis is, how older estate plans have been deliberately designed to include an income tax time bomb, and the options you have to update your plan so that your heirs will receive the maximum basis.

The Basics of Income Tax Basis

In its simplest form, income tax basis is the cost to buy an asset, which includes the purchase price plus costs and transfer fees. Basis must be tracked because when an asset is sold, income tax liability in the form of capital gains is calculated by subtracting the basis from the sales price. In other words, if the sales price is more than the basis, then the taxpayer must report a capital gain, but if the sales price is less than the basis, then the taxpayer must report a capital loss.

Basis plays an important role in estate planning in two ways:

• Basis and lifetime transfers:  When property is gifted during life, the recipient of the gift receives the donor’s basis in the property. This is referred to as “carry-over basis.”  For example, if you purchase 100 shares of Facebook stock for $60 per share for a total of $6,000 but then gift the stock to your son when the price is $100 per share, his basis in the stock is $6,000 (even though the fair market value is $10,000). Thus, if your son later sells the stock for $105 per share (or $10,500), he will owe capital gains tax on $4,500 ($10,500 sales price – $6,000 carry-over basis = $4,500 gain). 

• Basis and transfers after death:  When property is transferred after death, in general the inheritor’s basis in the property is the fair market value on the date of death. This is referred to as “stepped-up basis.”  For example, if you purchase 100 shares of Facebook stock for $60 per share for a total of $6,000 but then die and leave the stock to your son and the price is $100 per share on your date of death, then your son’s basis in the stock is stepped-up to $10,000. Thus, if your son later sells the stock for $105 per share (or $10,500), he will only owe capital gains tax on $500 ($10,500 sales price – $10,000 stepped-up basis = $500 gain).

Planning Tip:  You may unknowingly create an income tax bill for your children by gifting property during your lifetime instead of allowing your children to inherit the property after your death. A common example is when a parent deeds their residence to his or her child to avoid probate. If the child did not pay their parent anything for the residence, then the parent has made a gift of the residence to the child. If the parent’s basis in the property is $100,000, then the child’s basis is $100,000. If the parent lives in the property for 15 more years and then dies when the value is $500,000, the child’s basis is still $100,000. If the child decides to sell the property shortly after death, the child will owe capital gains tax on $400,000 ($500,000 sales price – $100,000 carry-over basis = $400,000 gain). If instead the parent had used a revocable trust or a payable on death deed to avoid probate so that the residence passed to the child after death, then the child would not owe any capital gains tax ($500,000 sales price – $500,000 stepped up basis = $0 gain).  

AB Trust Planning:  An Income Tax Basis Nightmare for Many Couples

Including assets in a deceased person’s estate is the key to giving heirs a stepped-up basis. Yet traditional planning for married couples using an AB Trust Plan deliberately excludes property from the surviving spouse’s estate. An AB Trust Plan, also known as a Marital or QTIP Trust/Family or Bypass Trust Plan, works as follows: 

• When the first spouse dies, their estate plan provides that an amount equal to or less than federal estate tax exemption will go into the Family Trust and any excess will go into the Marital Trust.  For example, if Joe dies in 2015 with an estate valued at $6 million, then $5.43 million will go into the Family Trust and $570,000 will go into the Marital Trust.  The assets in both trusts receive a stepped-up basis as of Joe’s date of death.

• Mary, Joe’s wife, will have access to the income and principal of the Family Trust to provide for her health and maintenance, receive all of the income from the Marital Trust, and also have access to the Marital Trust principal to provide for her health and maintenance.

• When Mary later dies in 2025, any property remaining in the Marital Trust will be included in her estate and receive a stepped-up basis as of her date of death. However, any of Joe’s property remaining in the Family Trust keeps the basis as of Joe’s date of death in 2015.  

How to Build Basis Planning Into Your Estate Plan

There are several options to choose from if your goal is to maximize basis for heirs:

• Undoing the AB Trust Plan and instead leaving everything outright to the surviving spouse will result in a stepped-up basis for the entire estate.
• Giving the surviving spouse or other beneficiary of a lifetime trust a general power of appointment will cause estate inclusion of the remaining trust assets at death, thereby resulting in a stepped-up basis.
• Giving a trust protector or advisor the ability to add a general power of appointment to cause estate inclusion at the beneficiary’s death takes a wait-and-see approach to basis planning.
• Decanting an existing irrevocable trust that does not include basis planning into a new trust that does is an option in some states.
• Swapping low basis assets held in a defective grantor trust for cash or other high-basis assets will bring the low basis assets back into the grantor’s estate.

Planning Tip:  For many married couples whose estates are not taxable, AB Trust Planning will cause more harm than good. For example, if a couple has been married for 50 years, they want to leave their estate to their children, and they are not particularly worried about the surviving spouse remarrying, an AB Trust plan will have two detrimental effects: (1) the deceased spouse’s assets will be unnecessarily tied up inside of a discretionary trust, and (2) the assets remaining in the trust when the surviving spouse dies will not receive a second stepped-up basis. On the other hand, a couple in a second or later marriage may prefer the benefits of a discretionary trust – providing for the surviving spouse but insuring that what is left goes to the deceased spouse’s heirs – but still want the deceased spouse’s heirs to receive a stepped-up basis.  Alternatively, either couple could live in a state that collects a state estate tax which makes AB Trust Planning a necessity. This is why basis planning has become so important and must be included in all estate planning discussions.

Do You Need a Basis Planning Review?

Instead of falling back on “one size fits all” AB Trust plans, today estate planners must look carefully at each client’s unique family situation, financial position and potential estate tax liability to determine the appropriate mix of techniques to minimize both estate taxes and income taxes. If your estate plan is more than a few years old, chances are it contains an income tax time bomb. Please call us if you have any questions about basis planning and to arrange for a basis planning review.

 

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Over the years, we’ve discovered that many people make a BIG mistake, catapulting their assets and loved ones right into the court system. Most of our clients want to avoid probate because it has a reputation for being expensive, time consuming, stressful – and public, meaning anyone anywhere can see who got what and how to contact them. Beneficiaries may become victims to nosey neighbors, predators, and unscrupulous “charities.”

Q:  What’s the one mistake that causes all these problems?

A:  An unfunded trust.

In this issue you will learn

• What it means to fund your trust
• What happens to assets left out of your trust
• Which assets should, and should not, be funded into your trust
• How funding your trust will ensure your final wishes are carried out and save your loved ones valuable time, money, and the frustration of going to court – while preserving privacy

What Does it Mean to Fund Your Trust?

Funding a trust is simply the process of transferring assets from your name into the name of your trust. Often, beneficiary designations are changed to your trust as well.

Funding is accomplished in three ways:

1. Changing the title of the asset from your individual name (or joint names if you’re married) to the name of your trust – for example, from Jane Smith to Jane Smith, Trustee of the Jane Smith Living Trust dated January 1, 2016. 
2. Assigning your interest in an asset without a title (such as artwork, jewelry, collectibles or antiques) to your trust.
3. Changing the primary or contingent beneficiary of the asset to your trust. Think life insurance, retirement accounts, and annuities.

Planning Tip:  Put together a list of your assets, their values, and locations, then start funding the most valuable ones and work your way down. Keep plugging away until your trust is fully funded. Our office can help.

What Happens to Assets Left Out of Your Trust?

For many people, avoiding probate court is a main reason they set up a revocable living trust in the first place. Unfortunately, you are not “done” when the trust documents are signed. If you don’t take the next step to fund, probate court is guaranteed.

WARNING:  If your trust is left unfunded, you will send your family and assets into probate court.

Which Assets Should, and Should Not, Be Funded Into Your Trust?

In general, you will probably want to fund the following assets into your trust:

• Real estate – homes, rental properties, vacant land and timeshares
• Bank and credit union accounts – checking, savings, CDs
• Safe deposit boxes
• Investment accounts – brokerage, agency, custody
• Notes payable to you
• Life insurance – if you don’t have an irrevocable life insurance trust
• Business interests
• Intellectual property
• Oil and gas interests
• Personal effects – artwork, jewelry, collectibles, antiques

On the other hand, you will probably not want to fund the following assets into your trust:

• IRAs and other tax-deferred retirement accounts – only the beneficiary should be changed
• Incentive stock options and Section 1244 stock
• Interests in professional corporations
• Foreign assets – in some countries funding an asset into a U.S.- based trust causes adverse tax consequences, while in other countries trusts aren’t recognized or are ignored due to forced heirship laws
• UTMA and UGMA accounts – your minor grandchild is the owner, not you as the custodian; instead, name a successor custodian
• Cars, trucks, boats, motorcycles and scooters – most states allow a small amount of assets, including vehicles, to pass outside of probate, in others, a beneficiary can be designated for vehicles, and in others, vehicles don’t have to go through probate at all

Planning Tip:  Work closely with your estate planning attorney to determine what should go into your trust and what should stay out. Our office can help.

What Are the Benefits of Trust Funding?

Funding your trust makes it possible to obtain trust benefits:

• Your trust is easy to update.
• Your trustee, instead of a judge, will take control of your trust assets if you become incapacitated or die.
• Your trustee will have direct access to your trust assets without a court order.
• Your trustee will be empowered to pay bills and manage, invest, sell, and reinvest your trust assets without court intervention.
• Your private wishes will remain private instead of being publicized.
• Settlement time, costs, and frustration are reduced.

The Bottom Line on Trust Funding

A trust has a myriad of benefits, including probate avoidance. Yet, in the end, an unfunded trust doesn’t avoid probate.

ACT NOW: Call our office now and we’ll help you make sure your assets are owned properly and that your trust is up to date.

 

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Your estate plan may include trusts that will continue for the benefit of your spouse’s lifetime and then for the benefit of several generations of your family.  Implementing and maintaining trusts that will cover the administration, investment, and distribution of trust property over the span of multiple decades is challenging and generally requires you to have flexibility in your trust agreements.  In this issue you will learn five ways that flexibility can be incorporated into your trust agreement.
 
1.      Carefully select your trustees.
2.      Define your trust beneficiaries.
3.      Include powers of appointment.
4.      Allow for trust decanting.
5.      Provide for the appointment of a trust protector.
 
If you would like us to review your trust agreements and make recommendations for improving their flexibility, please call our office now.
 
1. The Wrong Trustee Can Derail Your Ultimate Wishes
Choosing the right succession of trustees for a long-term irrevocable trust is critical to the trust’s success and longevity.  You have most likely considered naming (or have already named) one or more of your family members as Trustee(s). You may have also given the ability for the Trustee to appoint additional family members because they will better understand the varying needs of your beneficiaries and will keep the costs of administering the trust down. 
 
However, your family members will not be able to fulfill all of their fiduciary obligations without hiring legal, investment, and tax advisors.  These expenses will add up and can ultimately cost more than a corporate trustee, such as a bank or trust company, which will be able to meet all fiduciary obligations under one roof for one fee.
 
On the other hand, forcing your trust beneficiaries to be stuck without a reasonable means for removing and replacing trustees will land your beneficiaries and trustee in court.  Therefore, it is crucial to build provisions into your trust agreement which allow beneficiaries or a trust protector (more on them below) to remove and replace trustees without court intervention. 
 
Planning Tip:  Selecting a trustee is one of the most important decisions you will make when creating any long-term irrevocable trust or dynasty trust.  Serious consideration should be given to naming a corporate trustee, either alone or as a co-trustee with a family member or trusted advisor.  A corporate trustee will act as a neutral party to oversee discretionary distributions and investment strategies that benefit both current and remainder beneficiaries.  To create flexibility, specific beneficiaries (such as current income beneficiaries) or a trust protector should be given the right to remove the corporate trustee and replace it with another corporate trustee.
 
2. Your Trust Beneficiaries Need to Be Clearly Defined
You need to carefully consider who you want to include as beneficiaries of your trust twenty, thirty, or even fifty years into the future.  Should adopted children be included (both minor and adult adoptees)?  How about children born using “assisted reproductive technology”?  In the past the definition of a “descendant” or “child” was straightforward, but today it can encompass much more than blood heirs. 
 
Planning Tip:  While you cannot predict or foresee everything that will happen in the future, you should carefully consider who you want to provide for after you are gone.  Clearly defining the class of beneficiaries who will benefit from your trust will allow for a smooth transition between generations and potentially head off litigation.
 
3. Powers of Appointment Can Add or Eliminate Beneficiaries
If you are concerned about how your children, grandchildren, or even great grandchildren will eventually grow up, you can build flexibility into a dynasty trust by giving your spouse or other beneficiaries the ability to include or exclude heirs through the use of powers of appointment.  A power of appointment is also important if a trust is designed as a dynasty trust but the beneficiary fails to have children, and it can also be used to include or exclude charitable beneficiaries.
 
Planning Tip:  Powers of appointment at each generation should be considered when creating a trust that is intended to last for decades into the future.  In many cases, the powers can be as limited or as broad as you desire without creating any gift tax or estate tax problems.
 
4. Trust Decanting Takes Something Old and Makes it New
Trust decanting involves taking the funds from an existing trust and distributing them to a new trust that has different and more favorable terms.  Decanting should be included in your trust agreement because it allows the following: 

• Tweaking trustee succession provisions.
• Converting a trust that terminates when a beneficiary reaches a certain age into a dynasty trust.
• Changing a support trust into a full discretionary trust so that a beneficiary’s creditors cannot reach the trust.
• Clarifying ambiguities or drafting errors in the trust agreement.
• Changing the governing law or trust situs to a less taxing state.
• Modifying powers of appointment.
• Merging similar trusts into a single trust or creating separate trusts from a single trust.
• Adjusting the trust terms to provide for a special needs beneficiary.  

Planning Tip:  You may be concerned that building decanting provisions into your dynasty trust will defeat your long-term goals and intent.  Nonetheless, without building any flexibility into your trust agreement from the beginning, it is likely that your heirs will end up in court to fix a trust that no longer makes practical or economic sense. 
 
5. Trust Protectors Can Fix Just About Any Problem
A trust protector is an individual or entity that is empowered to see that your wishes are ultimately fulfilled.  A trust protector’s duties can be as limited or as broad as you choose.  In essence a trust protector can be given the power to modify the terms of a trust without necessarily having to decant it and to address unforeseeable events such as changes in tax laws or family dynamics. 
 
Planning Tip:  Of any of the options you can include in your trust agreement to insure flexibility, a trust protector is in and of itself the most flexible.  This is because a trust protector can be given the right to appoint, remove and replace trustees; include or exclude beneficiaries; adjust powers of appointment; and decant the trust into a new one.  Therefore, trust protector provisions should be included in all of your trust agreements. 
 
Are Your Trust Agreements Flexible?
Unfortunately trust agreements that are more than a few years old usually lack flexibility provisions for allowing the trust terms to be adjusted as the needs of the beneficiaries and governing laws change.  The good news is that modern trust law contemplates these changes and can be invoked to fix an old trust that has gone awry.
 
If you are interested in learning how to build flexibility into your revocable trust or how to modify an existing irrevocable trust, please contact us.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances. 

Now is the ideal time to start year-end tax planning so that credits and deductions can be maximized before the December 31^st deadline. Below you will find a variety of tax-saving strategies you should consider using immediately so that you can get your 2015 tax house in order well in advance of the fast-approaching holiday season.

Plan Now for a Bountiful Fall Harvest

The last thing you want to worry about during the holiday season is tax planning.  Now is the perfect time to discuss the following tax-saving opportunities with your financial team so that you can implement them in the next few weeks:

• Check your portfolio to determine which dud stocks can be sold to harvest losses and offset gains – keep in mind that short term losses are the most effective for offsetting capital gains and you must wait at least 31 days to buy back that dud stock to avoid the IRS wash sale rule.

• Analyze your 2015 vs. 2016 projected tax liabilities and accelerate or decelerate income and capital gains accordingly.

• Maximize contributions to your 401(k) and IRAs – if you are age 50 and over, you should take advantage of the extra $1,000 (for an IRA) or $6,000 (for a 401(k)) you can contribute to your accounts in 2015.

• Wipe out that Flexible Spending Account by purchasing new glasses, contact lenses or incurring other medical expenses.

• Purchase an electric car.

• Install a renewable energy source in your home such as a solar-powered water heater.

• Refinance your mortgage.

• Make an extra mortgage payment or two.

• Pay estimated state and local taxes and property taxes.

• Review and adjust your withholding and estimated tax payments to ensure that you will avoid underpayment penalties.

• Determine if your traditional IRA should be converted to a Roth IRA – factors to consider include your current and future anticipated tax status, family situation, and the ability to pay the tax due from other sources.  We can help you and your financial team determine if a conversion is right for you.

• If you are the Trustee of an irrevocable trust, you should consider whether it is appropriate under the discretionary terms of the trust agreement to disperse distributable net income (DNI) to beneficiaries in lower tax brackets.

Planning Tip:  Tax planning is never one-size-fits all, or even most. In fact, what may be tax-advantageous for one taxpayer may be tax-detrimental for another. For example, the Alternative Minimum Tax (AMT) is snagging more and more taxpayers. Those who have substantial deductions, such as taxpayers who live in a state with a high personal income tax rate and high real estate taxes, are potential victims of the AMT, and reducing regular tax liability for these taxpayers through deductions will increase their AMT exposure. Thus, tax planning must be done on a case-by-case basis in view of your unique family and financial situations. Before making any year-end tax moves, you must consult with your financial team to ensure that the moves you make are the right ones.

Plan Now for an Early Gift-Giving Season

While traditionally the holiday season is the time for giving thanks and exchanging gifts, you should consider making gifts sooner rather than later to avoid the year-end rush. Below are some gifting ideas you can use now to benefit your family, friends, church, alma mater or those in need:

• Make cash gifts to family and friends – in 2015 the maximum amount that an individual can give without incurring a gift tax is $14,000; married couples can give $28,000.

• Make cash gifts to non-profit organizations.

• Donate appreciated assets, such as stock or real estate, to non-profit organizations.

• Set up a donor-advised fund – you should work with your financial advisor to select the right company or community foundation to set up your fund.

• Supercharge a 529 plan for your children or grandchildren – individuals can contribute $70,000 and affluent couples can contribute $140,000 to a plan without incurring any gift tax; in addition, some states offer tax deductions or credits against 529 contributions.

• In this low interest rate environment, inter-family loans are worth considering – intra-family loans allow you to lend money to family members at a lower interest rate than a bank or corporate lender and can be a powerful tool to transfer wealth without incurring any gift or estate tax.

• If you are considering any advanced gift planning, such as gifting through a grantor retained annuity trust (GRAT), family limited liability company or private foundation, then time is of the essence to get the trust or entity created, funded and initial gifts made before December 31^st.

• If you have used up your entire lifetime gift tax exemption in prior years, note that you have gained an extra $90,000 (or $180,000 per married couple) to gift in 2015.

• If you have an IRA and are over age 70½, in need of deductions and charitably inclined, stay alert for year-end legislation that allows individuals to donate up to $100,000 from an IRA and exclude the donation from taxable income.

 Planning Tip:  Certain payments made for educational or medical expenses are not considered gifts at all:

• Payments for educational expenses are not taxable gifts if the payment (1) is made directly to the institution providing the education, not to the individual receiving the education, and (2) is for tuition only.

• Payments for medical expenses are not taxable gifts if the payment (1) is made directly to the institution that provides medical care to an individual or to the company that provides medical insurance to an individual, and (2) the medical expense is of the same type that is deductible for income tax purposes.

Thus, in 2015 you can pay for your granddaughter’s emergency appendectomy ($20,000), the same granddaughter’s tuition for her fall semester of college ($8,000), and still gift the same granddaughter $14,000 for Christmas without incurring any federal gift tax liability.

Begin Year-End Tax Planning Right Now

Ideally tax planning should be done throughout the year, but unfortunately most people do not even start thinking about their tax situation until late into the fall.  Doing nothing at all will leave less in your pocket and planning done at the eleventh hour may end up sloppy and incomplete.  As always, we are here to assist you and your financial team with your year-end tax planning.  We encourage you to call us to discuss your questions so we can ensure that you are taking full advantage of all appropriate year-end tax saving opportunities.

 

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Estate planning for couples in a second or later marriage can be tricky, particularly when one spouse is significantly wealthier than the other. One solution for allowing the well-to-do spouse to maintain control of his or her assets but keep the other spouse happy is the Lifetime QTIP Trust. In this issue, you will learn what a Lifetime QTIP is and the multiple benefits this special type of trust can provide to you and your spouse if you have lopsided estates.

The Basics of Creating a Lifetime QTIP Trust

In the estate planning world a “QTIP Trust” has nothing to do with those handy cotton swabs used for cleaning ears, applying cosmetics, or making children’s crafts. Instead it refers to “Qualified Terminable Interest Property Trust,” which is a fancy term for a type of trust that allows a wealthier spouse to transfer an unrestricted amount of assets into trust for the benefit of a less wealthy spouse free from estate and gift taxes.

Many married couples have estate plans that make use of a QTIP Trust after the death of one spouse using the so-called “AB Trust” strategy. After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption ($5.43 million in 2015) and the “A Trust” holds the excess. Under this strategy the “A Trust” is in fact a “QTIP Trust” which qualifies for the unlimited marital deduction, meaning that property passing into the trust will not be subject to estate taxes until the surviving spouse dies.

Here is an example: Fred and Susan have both had previous marriages. Fred has two children from his prior marriage and Susan has three, and their estates are disproportionate – Fred is worth $2 million and Sue is worth $10 million. With the AB Trust strategy, if Susan dies first the B Trust is funded with $5.43 million and the A Trust is funded with $4.57 million. No estate tax will be due at Susan’s death since the B Trust uses up her federal estate tax exemption and the A Trust qualifies for the unlimited marital deduction. In addition, when Fred later dies, the A and B Trusts can be drafted so that what is left passes exclusively to Susan’s three children (or whomever else she chooses, much to the chagrin of Fred’s children).

What if instead of creating and funding the QTIP Trust after Susan dies, she creates and funds the QTIP Trust for Fred’s benefit with tax free gifts while she is still alive? This is the “Lifetime QTIP Trust.”

Planning Tip: QTIP Trusts created during life or after death must meet certain requirements to qualify for the unlimited marital deduction.  

• The trust must be irrevocable.
• The Lifetime QTIP Trust must be created for the benefit of a spouse who is a U.S. citizen – there is no such thing as a “Lifetime QDOT.”
• The spouse must be entitled to receive all of the net income from the trust at least annually.
• The spouse must have the right to demand that non-income producing property be converted into income-producing property.
• The spouse must be the only one who has the power to appoint trust property.
• For Lifetime QTIP Trusts, a federal gift tax return (Form 709) must be timely filed. Form 709 is due on or before April 15 of the year following the year a gift is made to the trust.
• The spouse does not need to have a right to distributions of principal from the trust although they are permitted.
• A Lifetime QTIP Trust can provide that if the beneficiary spouse dies first, the grantor spouse can become the income and principal beneficiary and the trust assets will be excluded from the grantor spouse’s estate. (Yes, you read that correctly.)

While at first glance QTIP Trusts may appear to be restrictive due to their multiple technical requirements, in reality they are quite flexible and will work well in a variety of situations.

Planning With a Lifetime QTIP Trust Offers a Multitude of Benefits

Outright gifts to your spouse during life or after death lead to total loss of control. If you and your spouse have lopsided estates and families from prior marriages, the problem is exacerbated by the difference in your wealth – while the well-to-do spouse will be just fine if the less wealthy spouse dies first, the opposite is not true. If you and your spouse are in this situation, a Lifetime QTIP Trust offers the following benefits: 

• The wealthy spouse can create and fund a Lifetime QTIP Trust without using any gift tax exemption.

• Unlike the estate tax exemption, the generation-skipping transfer tax exemption is not portable. A Lifetime QTIP Trust can provide an opportunity to make use of the less well-to-do spouse’s generation-skipping tax exemption.

• During the less wealthy spouse’s lifetime, he or she will receive all of the trust income and may be entitled to receive trust principal for limited purposes.

• When the less wealthy spouse dies, the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s otherwise unused federal estate tax exemption.

• If the less wealthy spouse dies first, the remaining trust property can continue in an asset-protected, lifetime trust for the wealthy spouse’s benefit (subject to applicable state law) and the remainder will be excluded from the wealthy spouse’s estate when he or she dies.

• After both spouses die, the balance of the trust will pass to the wealthy spouse’s children and grandchildren or other beneficiaries chosen by the wealthy spouse.

Planning Tip:  As with other types of estate planning, Lifetime QTIP Trusts are not “one size fits all” and must be specifically tailored to each couple’s unique family dynamics and financial situation. In addition, only an attorney experienced in implementing advanced estate planning techniques should draft your Lifetime QTIP Trust.

Do You and Your Spouse Need a Lifetime QTIP Trust?

While a Lifetime QTIP Trust is a good alternative to outright gifts, not all married couples will benefit from this type of planning. Please call our firm if you and your spouse are in a second or later marriage or have uneven assets. We will help you determine what will work best for your family.

 

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Estate planning has truly evolved over the past 20 years. Gone is the uncertainty about federal estate taxes and the absolute requirement for married couples to use complex trusts to minimize these taxes. But also gone is planning for the “traditional” family. In this issue you will learn why estate planning has become more complicated and what you need to do now to insure your estate plan is flexible enough to roll with the changes.

Warning:  Estate Planning Today is Harder Than Ever Before

In 1995 the federal estate tax exemption was only $600,000 and the estate tax rate was 55%. Back then it was easy to accumulate a taxable estate by simply owning a home, a few investments and some life insurance. And while married couples could pass on two times the exemption ($1.2 million) free from estate taxes if they incorporated Marital/Family Trusts into their estate plan, these trusts came with strings attached. Yet these inflexible trusts were worth it to avoid the hefty 55% tax on assets valued over $600,000.

Aside from minimizing estate taxes, 20 years ago avoiding costly probate was another concern. No longer was a Last Will and Testament that required oversight by a probate court the preferred document for passing assets on to heirs. Instead the ultimate probate-avoidance tool – the revocable living trust – became all the rage.

Fast forward 20 years and in 2015 the federal estate tax exemption is a whopping $5.43 million and will continue to increase annually based on inflation. In addition, between 2002 and 2013 the federal estate tax rate dropped from 55% to 40%. On top of the generous exemption and lower tax rate, married couples can now combine their estate tax exemptions and pass on two times the threshold ($10.68 million) without Marital/Family Trust planning by making the “portability” election. Aside from this, probate can be easily avoided by establishing payable on death bank accounts and investment accounts and in some states payable on death vehicle titles and real estate deeds.

Thus, today the focus of estate planning has shifted away from estate tax planning and probate avoidance to more relevant concerns:

• While the federal estate tax rate has declined from 55% to 40%, since 2012 the top federal income tax rate has increased from 35% to 43.4% and the top long-term capital gains rate has increased from 15% to 23.8%. This has made minimizing income taxes an integral part of estate planning.
• Today many families are blended, dysfunctional or completely estranged.  This has made flexible estate planning and finding ways to modify what was thought to be an irrevocable plan the “new normal.”

Estate Planning for the “New Normal” – Minimizing Income Taxes, Maintaining Flexibility and Doing Over Irrevocable Plans

Under a traditional Marital/Family Trust plan the goal was to exclude the Family Trust assets, including all appreciation, from the surviving spouse’s taxable estate. While the Family Trust assets would not receive a step up in basis, this type of planning made sense since the top estate tax rate of 55% dwarfed the top capital gains rate of 15%.

Today with the generous and ever-increasing estate tax exemption and “portability” of the exemption available to married couples, it is estimated that 99.8% of Americans will have no federal estate tax exposure. As a result, traditional Marital/Family Trust planning is no longer a necessity for the majority of families. In fact, an older Marital/Family Trust plan will lead to income tax liability for heirs since the assets of the Family Trust will not receive a step up in basis.

Therefore, instead of planning for excluding assets from the taxable estate, the new trend for couples with less than $10 million is to plan for estate inclusion so that their heirs will receive a basis step up.  This can be accomplished in a number of ways:

• Leaving assets outright to your spouse and making the portability election; but beware if your spouse is a spendthrift, has creditor issues, or if you want to insure your assets stay within your bloodline.
• Taking a wait-and-see approach, such as all to the Family Trust with the ability to disclaim to the Marital Trust or vice versa.
• Including flexibility in the Marital Trust provisions.
• Using a Family Trust but allowing for basis increase through a customized power of appointment.

While building flexibility into your plan is ideal, what if your plan becomes irrevocable before you were able to make it flexible? What if the plan needs to be modified to obtain a step up in basis or for other income tax reasons? What if you create an irrevocable trust for the benefit of a beneficiary who later becomes incapacitated or disabled? What if it would be advantageous to change the situs of your irrevocable trust or its governing law, add or remove beneficiaries, add a trust protector or advisor, or change the trustee structure? Is it possible to modify or even revoke your inflexible, irrevocable trust?  The answer under many circumstances is yes, by:

• Reforming the trust:  Using judicial interpretation to determine and properly restate your intent.
• Modifying the trust:   Changing the terms of the trust by agreement or a court order to meet your tax‐saving objectives provided that the resulting terms are not     inconsistent with your intent.
• Equitably deviating the trust:  Modifying the trust provisions by agreement or a court order upon the showing of an unforeseen change in circumstance the impact of which would frustrate your intent.
• Invoking the Trust Protector:  Allowing a third‐party to exercise specific powers as defined in the trust agreement.
• Decanting the trust:  Allowing the trustee to distribute property in further trust for a beneficiary.

Planning Tip:  How old are your current estate planning documents? Do they still contain mandatory Marital/Family Trust provisions?  Do they include a trust protector or advisor?  Do they allow for decanting and changing the trust situs?  Do they address the possibility that a beneficiary could become incapacitated or disabled?  If your documents are more than a few years old, then it’s time for an estate planning checkup.

Where Does Estate Planning Go From Here?

Estate-tax-driven estate plans are a thing of the past for most Americans. Higher income tax rates, changing state laws, unfavorable jurisdictions and wayward heirs all add up to the need for an estate plan that adapts over time. Modern families need modern estate planning solutions, and our firm is ready to help you and your loved ones plan for now as well as what may happen in the future.

 

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Farming or ranching is more than a means of livelihood – it is about preserving a legacy and unique way of life.  Unfortunately, many farmers and ranchers don’t fully protect their legacy with an up to date estate plan. An out of date or inadequate estate plan could result in a farm or ranch that has been passed down for generations ending up being sold and converted into non-agricultural use.

Sadly, farmers and ranchers are not the only ones who avoid making or updating an estate plan – many others, including business owners and parents, also avoid planning, which can cut their legacy short.  In this issue you will learn about three common estate planning mistakes farmers, ranchers, and others make, the lessons we can learn from them, and how you can avoid those same mistakes.

Lesson #1 – Make a Plan and Keep it Up to Date
Like farmers and ranchers, others have complex estate planning needs.  For example, you may be a small business owner who has children who want to continue the business and children who do not, or you and your spouse may have a blended family or children with differing needs.  This complexity can make it difficult for you to decide what to do, which may result in no estate plan being created at all.  On the other hand, you may have taken the time to create an estate plan but failed to maintain and adjust the plan as your life and family have changed.

Planning Tip #1:  If you do not have an estate plan, you need to seek expert advice about your planning options and assurance that your goals can be achieved.  You will need to work with a team of advisors (including attorneys, accountants, bankers, and insurance specialists) who can help you create a plan that will work for your current situation.

If you already have an estate plan, you need to understand the importance of keeping your plan up to date as life events happen (births, deaths, marriages, divorces, illnesses, bankruptcies, lawsuits, jackpots) and laws are modified or repealed.  As your personal and financial situations change, your team of advisors (including attorneys, accountants, bankers, and insurance specialists,) will help you update your plan so that it will work for your new situation.

Lesson #2 – Don’t Rely on Joint Accounts and Beneficiary Designations
Like many farmers and ranchers, you may believe that the easiest way to plan your estate and avoid probate is to own property in joint names with family members, establish payable on death (POD) or transfer on death (TOD) accounts, and name family members as beneficiaries of your life insurance policies and retirement accounts.  Relying on joint accounts and beneficiary designations is a huge mistake on many fronts.
 
First and foremost, you are giving up control of your real estate and other property by owning it jointly with others.  In many cases, business entities (corporations, partnerships, and limited liability companies) or trusts are better options for maintaining flexibility, minimizing liability, and retaining control.
 
While you may have taken the time to make an estate plan, the use of joint property with rights of survivorship, POD or TOD accounts, and individual beneficiary designations on life insurance policies and retirement accounts can frustrate the intent of your plan. This is because these assets pass outside of your will or trust.  In addition, outright distributions by rights of survivorship will not be protected from creditors, predators, and lawsuits. 
 
Finally, although joint and beneficiary assets will avoid probate, these assets will still be included in your taxable estate.  This may create an estate tax liability at the state and/or federal level without a well-planned means for payment since the assets will go directly into the hands of your beneficiaries.  In turn, other property that passes through intestacy or a will or trust will be used to pay your estate tax bill, potentially creating unfair and unequal inheritances.    
 
Planning Tip #2:  How property is titled dictates who inherits it.  You need to coordinate assets held in business entities and trusts with assets that are jointly owned or pass under a beneficiary designation.  Otherwise your intended heirs may end up with nothing and payment of your estate tax bill may cause unintended consequences.
 
Lesson #3 – Don’t Overlook Liquidity Needs
Incapacity and death are expensive.  Aside from day-to-day family expenses and medical bills, attorneys, accountants, trustees, and other administration expenses need to be paid.  To make matters even more challenging, federal estate taxes are due within nine months of death, and state death taxes are also typically due within this same time frame. 
 
Where will your family get the cash to pay these expenses?  Like farms and ranches, a primary residence, vacation home, investment real estate, collectibles, and a family business are illiquid.  Without properly planning for immediate and long-term cash needs, your family may be forced to quickly sell your real estate and other illiquid assets at a reduced rate.
 
Planning Tip #3:  You need to assess your liquidity needs and create a plan for managing debt and expenses upon your incapacity or death.  Your financial advisor, insurance specialist, and banker can assist you with securing lines of credit and the proper amount of disability insurance, long-term care insurance, and life insurance.  You should also consult with an experienced estate planning attorney to help you create a trust, business entities, and other liquidity strategies.
 
Takeaways for Business Owners and Others
Like farmers and ranchers, you may have unique circumstances that require specialized estate planning solutions.  You need to assemble a team of professionals to help you create and maintain a plan that will preserve your legacy.  We are experienced with helping farmers, ranchers, and others achieve their estate planning goals.  Please call us if you have any questions and to arrange for a consultation. 

Estate planning is not only about having a plan in place to deal with what happens at your death, it is also about having a plan in place to deal with what happens if you become mentally incapacitated.  In this issue you will learn:  

• What happens without an incapacity plan.
• The essential documents for managing finances during incapacity.
• The essential documents for making health care decisions during incapacity.
• How to choose the right person for managing finances and making health care decisions during incapacity.
• The importance of keeping your incapacity plan up to date.

If you have any questions about incapacity planning or whether you need to make updates to your incapacity documents, please call our office now.
 
Court-Supervised Guardianship or Conservatorship:  How to Lose Time, Money, and Control During Incapacity
Mental incapacity caused by an accident, injury, or illness means you will be incapable of making informed decisions about your finances and well-being.  Without a comprehensive incapacity plan in place, a judge can appoint someone to take control of your assets and make all personal and medical decisions for you through a court-supervised guardianship or conservatorship.  You and your loved ones could lose valuable time, money, and control until you either regain capacity or die. 
 
Planning Tip:  You may believe you are protected if you become mentally incapacitated because you hold your assets in joint names with your spouse, a child, or another family member.  While a joint account holder may be able to access your bank account to pay bills or access your brokerage account to manage investments, a joint owner of real estate will not be able to mortgage or sell the property without the consent of all other owners.  Aside from this, adding names to your accounts or real estate titles may be deemed a gift for gift tax purposes.  In addition, if a joint owner is sued, your property could be seized as part of a judgment entered against them.  Only a comprehensive incapacity plan will protect you and your assets from a court-supervised guardianship or conservatorship and the misdeeds of your joint owners.
 
The Essential Documents for Financial Management During Incapacity
There are two essential legal documents for managing finances that must be in place prior to becoming incapacitated:
 
1.      Financial Power of Attorney.  This legal document gives your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document.   Financial Powers of Attorney come in two forms:  “Durable” and “Springing.”  A Durable Power of Attorney goes into effect as soon as it is signed, while a Springing Power of Attorney only goes into effect after you have been determined to be mentally incapacitated.
 
2.      Revocable Living Trust.  This legal document has three parties to it:  The person who creates the trust (the “Trustmaker” or “Grantor” or “Settlor” – they all mean the same thing); the person who manages the assets transferred into the trust (the “Trustee”); and the person who benefits from the assets transferred into the trust (the “Beneficiary”).  In the typical revocable living trust situation you will be the Trustmaker, the Trustee, and the Beneficiary of your own trust.  However, if you become incapacitated, then your Successor Trustee will step in and manage the trust assets for your benefit.
 
Planning Tip:  To be part of an effective incapacity plan, your Revocable Living Trust should contain provisions to determine your mental status through a private process (i.e., a disability panel, an attending physician, the opinion of two physicians, or some other method) instead of a public court process.  In addition, the trust agreement should contain specific instructions about how to take care of you if you are declared mentally incapacitated.  
 
The Three Must-Have Documents for Health Care Decision-Making
There are three essential legal documents for making health care decisions that must be in place prior to becoming incapacitated:
 
1.      Medical Power of Attorney.  This legal document, also called an Advance Directive or Medical or Health Care Proxy, gives your agent the authority to make health care decisions for you if you cannot do so because you have become incapacitated.
 
2.      Living Will.  This legal document gives your agent the authority to make life-sustaining or life-ending decisions if you become incapacitated.
 
3.      HIPAA Authorization.  Federal and state laws dictate who can receive medical information without the written consent of the patient.  This legal document gives your doctor or other health care provider the authority to disclose your medical information to the agent selected by you.
 
Planning Tip:  Your loved ones may be denied access to medical information during a crisis situation and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years).  Without these three documents, a judge may also appoint a Guardian or Conservator of the Person to oversee your health care, thereby adding further expense and hassle to your court-supervised guardianship or conservatorship. You should have these three documents examined and updated frequently to ensure they accurately reflect their wishes.
 
How to Choose the Right Agents for Your Incapacity Plan
There are two very important decisions you must make when putting together your incapacity plan:

1. Who will be in charge of managing your finances during incapacity; and
2. Who will be in charge of making your medical decisions during incapacity.

Factors you should consider when deciding who to name as your financial agent and health care agent include:  

• Where does the agent live?  With modern technology, the distance between you and your agent should not matter.  Nonetheless, someone who lives close by may be a better choice than someone who lives in another state or country.
• How busy is the agent?  If your agent has a demanding job or travels frequently for work, then they may not have time to take care of your finances and medical needs.
• Does the agent have expertise in managing finances or the health care field?  An agent with work experience in finances or medicine may be a better choice than an agent without it.

Planning Tip:  Choosing the wrong person to serve as financial or health care agent will result in an ineffective incapacity plan.  You can pick different people to fill each role, that is, one person in charge of health care decisions and someone else in charge of financial matters. In order to create an effective plan, you need to carefully consider who to choose as your agent and then discuss your decision with that person to confirm that they will in fact be willing and able to serve. 
 
Is Your Incapacity Plan Up to Date?
As time passes by and your life changes, your incapacity plan will become stale and outdated.  It is important for you to have your incapacity plan reviewed every few years or after a major life event (such as a divorce or a death) to insure that the plan will work the way you intend it to work if it is ever needed.
 
Please contact our office to discuss your questions about incapacity planning and to schedule your plan review.

This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.