Proper Planning for a Client’s Sports Memorabilia Collection

It is a scenario we have all dreamed about: discovering a hidden treasure trove tucked away in the dusty corners of an attic. 

But it was not gold coins or heirloom jewelry that an Ohio man found in a box that had belonged to his grandfather. It was a collection of vintage baseball cards for legends like Ty Cobb, Honus Wagner, and Cy Young that experts valued at $2 to $3 million.1 

The card owner’s heirs agreed to sell most of the cards at auction and divide the money equally, avoiding a potentially messy legal battle over ownership rights. Things could have gone much differently, though, and they often do when valuable personal property is not accounted for in a client’s estate plan. 

Sports Memorabilia Is a Multi-Billion Dollar Industry

Stories about a father or an uncle grumbling that their mom threw away their baseball card collection that would now be worth millions are something of a trope. But they might actually be true. 

The sports memorabilia market has never been bigger. Collectors’ items like cards, photos, clothing, and tickets, once the domain of hobbyists, are now part of an industry that is valued at more than $26 billion and is expected to top $227 billion by 2032.2 

Sale after record-breaking sale have driven the market for historic sports collectibles to new heights. Individual items, including a Michael Jordan game jersey and a Mickey Mantle card, have recently sold for more than $10 million.3 Many more have eclipsed the $1 million mark. 

According to the Robb Report, the sports memorabilia industry is becoming comparable to the art market, “replete with appraisers, ratings agencies, authenticators, specialized insurance, leased vaults, and elite security systems.”4

Amid the growing interest in, and increased value of, sports memorabilia, a Manhattan man sued his mom for not handing over two baseball cards he claims could fetch $25,000 apiece.5  She contends that her son actually gave her the cards because she was a fan and that according to her will, her grandchildren will be receiving them.6 

How to Handle Valuable Sports Items in an Estate Plan

Assuming that a client-collector’s mom has not disposed of their cherished sports collectibles as many moms do when cleaning out their grown children’s left-behind childhood memories, they will need to be “disposed of”—that is, distributed or transferred, legally speaking—in the client-collector’s estate plan. 

Sports memorabilia is considered tangible personal property, just like jewelry, furniture, and other household items, for estate planning purposes. An estate plan can deal with tangible personal property in a few different ways: 

  • Gift all tangible personal property to a single beneficiary or multiple beneficiaries through a will or a trust. 
  • List specific items in a will or trust and who will receive them.
  • Use a memorandum of tangible personal property that lists who will receive certain items. This document is separate from a will or trust but is usually referenced in the client’s will or trust as providing the instructions for what will happen to the client’s tangible personal property.
  • Donate the collection to charity. 

Because a sports memorabilia collection can also have sentimental, nonpecuniary value to a client, it could fall into the category of estate items that the client may want left to nonfamily beneficiaries, such as a friend who is also into collecting baseball cards. 

Instead of distributing sports collectibles to family members who might not be interested in them—but would not mind inheriting their cash value—another option is to sell the collection and distribute the proceeds to those named in the client’s will or trust alongside other assets as part of the client’s estate. 

Memorabilia can also be gifted during a client’s lifetime so they can see the items enjoyed while they are alive. However, depending on the value of the item, this could trigger a gift tax and would count against their lifetime estate and gift tax exclusion. 

What Can Happen If There Is No Plan for Sports Memorabilia

Due to insufficient planning, a client’s family could end up finding binders and boxes full of sports memorabilia after the client’s death. They may not be sure what the items are worth, what they meant to the client, or what to do with them. 

With or without an estate plan, sports memorabilia can slip through the planning cracks. Consider these potential scenarios for a sports memorabilia collection that is not specifically planned for: 

  • A will could address tangible personal property generally but fail to account for sports memorabilia specifically, so it would get lumped in with other items like clothing, books, and pictures—and could be left up for grabs among several beneficiaries. 
  • If no mention is made of the sports memorabilia in the estate plan, the client’s family may see the items as worthless and either donate or throw them away.
  • When a client does not have a will, their assets—both tangible and intangible—are subject to probate. In this scenario, the probate court distributes a client’s assets in accordance with state succession laws. The law will determine who gets what, how much, and when they will receive it.

Counseling Your Clients on Their Sports Memorabilia Collection

Fans love sports for the drama. To avoid any drama over a client’s memorabilia, however, you should advise them to protect their collection now and in the future by taking the following steps: 

  • Make a detailed inventory of all important sports memorabilia and regularly update it.
  • Consider getting the items appraised and authenticated and potentially insured.
  • Inform their loved ones about where they keep their collection. If any part of the collection is stored in a safe, a safe deposit box, or a storage unit, the client should make sure a trusted loved one will have access to the items after the client’s death.
  • Inform their loved ones about how and where items can be sold in case their loved ones do not want to keep them.
  • Ensure that they have enough insurance to protect the items in case of damage or loss.
  • Understand the tax implications of selling, gifting, and inheriting valuable items. 
  • Create an estate plan that spells out who will receive their memorabilia and other tangible personal property. 

To discuss sports memorabilia estate planning strategies in more detail, please reach out to schedule a meeting.

  1. Ohio Man Finds Batch of Vintage Baseball Cards in Late Grandfather’s Attic, May Be Worth $3 Million, Mass Live (July 10, 2012), https://www.masslive.com/news/2012/07/ohio_man_finds_batch_of_vintag.html↩︎
  2. Sports Memorabilia Collectibles Market Size, Statistics, Growth Trend Analysis and Forecast Report, 2022 – 2032, Market Decipher, https://www.marketdecipher.com/report/sports-collectibles-market (last visited June 27, 2024). ↩︎
  3. The Most Expensive Sports Memorabilia and Collectibles in History, ESPN (Sept. 15, 2022), https://www.espn.com/mlb/story/_/id/34465725/most-expensive-sports-memorabilia-collectibles-history↩︎
  4. Christina Binkley, How Sports Memorabilia Exploded into a Booming Billion-Dollar Business, Robb Report (July 30, 2023), https://robbreport.com/shelter/art-collectibles/sports-memorabilia-raking-in-millions-at-auction-1234865811↩︎
  5. Kathianne Boniello, Man Sues His Mom over Pricey Baseball Cards, N.Y. Post (Jan. 15, 2022), https://nypost.com/2022/01/15/man-sues-his-mom-over-pricey-baseball-cards↩︎
  6. Id. ↩︎

Counseling Clients About Their Vacation Homes 

Residential real estate is the largest asset class in the United States. Beyond its primary function of providing shelter, housing provides a store of wealth and increases individual economic growth. A residence—particularly a vacation property—can also have sentimental value to a family. 

Second homes are traditionally associated with wealthy Americans, but research shows that vacation homes are no longer just a luxury for the rich. This means that more of your clients than you think may benefit from a discussion regarding planning for multiple homes. The finances and feelings tied up in a vacation home can present unique estate planning challenges when a client is making plans to pass the home to the next generation. Family dynamics, ownership structure, taxes, and more need to be considered in the transition.

Vacation Homes: A Source of Wealth—but Not Just for the Wealthy

Andrew Carnegie famously said that 90 percent of millionaires got their wealth from investing in real estate. Those who are already millionaires are increasingly investing in second homes. Having more than one home is now the norm for wealthy Americans. But it is not only wealthy Americans buying second homes. 

According to a recent survey, 4 out of 10 Americans now own vacation homes.1 The National Association of Home Builders puts the national stock of second homes at 7.15 million, accounting for around 5 percent of all housing.2 

Investing in a vacation home can be surprisingly affordable. Most survey respondents reported paying less than $200,000. And the return on investment can be impressive.

Vacation Home Estate Planning Strategies

While real estate often accounts for a large share of a client’s net worth, their second home may also be where family gatherings take place. Estate planning becomes more challenging in situations where a treasured family asset changes hands. This can be doubly true when the “treasure” is both tangible and intangible. 

The first step in formulating an estate planning strategy for a vacation home is to determine the client’s goals. The following questions can help guide your discussion: 

  • Are they ready to pass the vacation home to their loved ones now, while they are alive, or are they planning to transfer it when they die? Their preference may depend on how much time they still spend at the property and whether they think their loved ones are ready to take on the responsibility and expense of managing it. 
  • What is their preferred method for transferring the vacation home? Some options include selling it to a loved one, gifting it to them, passing it down through their will, using a transfer-on-death deed, or placing the home in a trust. Each of these methods comes with different tax savings and liabilities. 
  • Who will have an interest in the property? The more family members who have a right to use the home, the more detailed the planning should be. Without a structure that addresses issues like who is responsible for paying for upkeep, taxes, and insurance, and without defining property usage rules, co-ownership rights and responsibilities could become unclear, leading to conflicts. 
  • Do they want to set any limits on what can be done with the vacation home? The client, for example, should consider whether the vacation home can be used as a rental, if family members have the right to sell the vacation home or their interest in it to people outside the family, and conditions for one family member buying out another’s interest. 

Once you define your client’s goals for the vacation property, you can help them come up with appropriate planning strategies. During your discussion, address the following additional considerations: 

  • If the property is mortgaged, they may need permission from the lender to transfer it.
  • A trust can allow the client to maintain control by enabling the client to set rules about how the property is to be used and maintained. They can also transfer money into the trust to pay for ongoing expenses. The trust can be designed so that the client retains the right to use the vacation home until death, at which point it passes to their loved ones. 
  • Clients can also establish a life estate that allows the vacation home to be transferred at their death while allowing them to continue using it until they die. 
  • A business entity such as a limited liability company (LLC) or family limited partnership (FLP) could be created to own the home and potentially provide some asset protection.
  • Clients need to consult with a tax professional to ensure that federal gift, estate, and generation-skipping transfer taxes; income and capital gain taxes; state-level estate and inheritance taxes; and state and local property taxes applicable to transferring and owning the property are properly considered in the vacation home succession plan. 
  • Vacation homes in another state or country pose additional estate planning challenges and will likely necessitate local counsel or advisors. 
  • If there are children who are not interested in owning the vacation home, the client may want to consider how they will equalize their children’s inheritances if treating everyone equally is an estate planning priority. 

Connect with Our Family of Estate Planning Advisors

It might seem like a simple decision to keep a vacation home in the family. But estate planning is rarely straightforward. Deciding how to handle a property that has served as a past gathering place—and hopefully a future one—can prove to be especially complicated. 

Whether a vacation home has been in a client’s family for generations or just a few years, it needs to be thoughtfully addressed in their estate plan. For advice on counseling clients about vacation home legacy strategies, reach out to our estate planning attorneys.

  1. Andrew Lisa, 40% of People Have Vacation Homes: Where You Can Find One for Your Budget, GoBankingRates (June 16, 2023), https://www.gobankingrates.com/investing/real-estate/where-to-find-vacation-home-in-your-budget. ↩︎
  2. Na Zhao, The Nation’s Stock of Second Homes, Nat’l Ass’n of Home Builders (May 13, 2022), https://eyeonhousing.org/2022/05/the-nations-stock-of-second-homes. ↩︎

Heat Up Your Clients’ Estate Plans: Hot Tips and Cool Strategies

Ballots to Beneficiaries: How Potential Presidential Policies Could Shape the Future of Estate Planning

The 2024 presidential election is only a few months away. As campaign ads ramp up and we enter debate season, the candidates will sound off on their respective positions about a wide range of topics, from the economy, immigration, and education to national security, the environment, and the state of democracy. 

It is probably wise to avoid talking politics with your clients in the current polarizing climate. But you should be paying attention to the presidential front-runners and their stances on estate planning-related issues so you can advise your clients accordingly when the next federal government takes shape. 

Evaluating the Candidates Through an Estate Planning Lens

Leading up to the 2024 election, surveys consistently show that inflation, jobs, and the economy are the most important issues among voters.1 

However, there is significant variance in the way individuals view the economy and the economic issues that are most important to their own financial situation. Presidential candidates are unlikely to use the term estate planning, but they frequently use the language of tax policy to discuss issues that affect a person’s estate value and the inheritance they leave behind. 

Here are some policy terms to pay attention to from an estate planning perspective: 

  • capital gains tax
  • estate tax
  • gift tax
  • income tax
  • tax credit
  • tax deduction
  • tax exemption
  • trust income tax 

Where the 2024 Candidates Stand on Taxes2

Campaign promises set the tone for a potential presidential administration and what a candidate will prioritize if they take office. Here are the publicly stated estate, wealth, and capital gains policies of the 2024 candidates: 

President Joe Biden

If reelected to a second term, President Biden would reportedly tax long-term capital gains and qualified dividends at ordinary income tax rates for taxable income over $1 million and tax unrealized capital gains at death for amounts exceeding a $5 million exemption ($10 million for joint filers).3 

President Biden also proposes a minimum effective tax of 20 percent on unrealized capital gains from assets such as stocks, bonds, and privately held companies; higher top individual income tax and corporate income tax rates; and tighter estate tax rules to reduce wealth accumulation through inheritance.4 

Former President Donald Trump

Former president Donald Trump has said he plans to make permanent the 2017 individual tax cuts that he enacted during his term under the Tax Cuts and Jobs Act (TCJA).5 He also wants to make the expiring estate tax cuts from the TCJA permanent.6 

The unified gift and estate tax exclusion amount is set to expire on December 31, 2025, and revert to pre-TCJA levels that are expected to be around half of what they are in 2024 ($13.61 million per individual/ $27.22 million per married couple). 

Robert F. Kennedy Jr. 

The only major tax policy that RFK Jr. has announced, according to the Tax Foundation, is exempting Bitcoin from capital gains taxes when the cryptocurrency is converted to or from US dollars.7 He has also expressed a desire to make tax code changes to discourage corporate ownership of single-family homes.8 

Chase Oliver

Although the Libertarian Party’s candidate, Chase Oliver, has addressed many issues during his campaign, such as immigration, student loans, and closing regulatory loopholes that reward businesses with close relationships with government officials,9 he has not spoken on too many issues that would impact estate planning. However, the Libertarian Party has traditionally been in favor of limited government, the repeal of the income tax, and the abolishment of the Internal Revenue Service.10

Jill Stein

The Jill Stein 2024 platform calls for raising taxes on the richest Americans. This includes applying the Social Security payroll tax to capital gains and dividends, as well as increasing the estate tax. 11

Cornel West

West’s platform is heavy on economic justice but light on economic policy details. His campaign site says that the candidate would impose a wealth tax on all billionaire holdings and transactions and close all tax loopholes for the “oligarchy.”12

Planning for Tax Law Changes

Whether your clients intend to vote or not, they will be impacted by the next president’s policies on issues related to taxes and estate planning.

Prognostications about election outcomes are challenging, but the candidates present clear contrasts in their visions for America’s economic future. And with nearly $5 trillion of individual and other tax provisions passed in 2017 expiring at the end of 2025—including lower personal income tax rates, higher standard deductions, increased estate tax exemptions, and the expensing of business investment—it is probable that major tax legislation will be a priority for the incoming administration.13 

While you might prefer to wait until after the election to offer any concrete estate planning advice to clients, you can begin discussions now about strategies to lock in the “bonus” estate tax exemption and manage potential capital gains exposure.

To discuss specific estate planning strategies for your clients based on their age, wealth levels, estate sizes, and legacy goals, please reach out to schedule a meeting. 

  1. Kirby Phares, Inflation and the Economy Consistently Rank as Top Issues Among Likely Voters​​—and Here’s Our New Way to Ask Issue Importance, Data for Progress (Mar. 6, 2024), https://www.dataforprogress.org/blog/2024/3/6/inflation-and-the-economy-consistently-rank-as-top-issues-among-likely-voters-and-heres-our-new-way-to-ask-issue-importance. ↩︎
  2. These are potential presidential candidates as identified by CNN. See 2024 Presidential Candidates, CNN Politics, https://www.cnn.com/interactive/2024/politics/presidential-candidates-dg (last visited July 2, 2024). ↩︎
  3. Garrett Watson et al., Details and Analysis of President Biden’s Fiscal Year 2024 Budget Proposal, Tax Found. (Mar. 23, 2023), https://taxfoundation.org/research/all/federal/biden-budget-tax-proposals-analysis. ↩︎
  4. Garrett Watson & Erica York, Proposed Minimum Tax on Billionaire Capital Gains Takes Tax Code in Wrong Direction, Tax Found. (Mar. 30, 2022), https://taxfoundation.org/blog/biden-billionaire-tax-unrealized-capital-gains. ↩︎
  5. Tracking 2024 Presidential Tax Plans: Where Do the Candidates Stand on Taxes?, Tax. Found. https://taxfoundation.org/research/federal-tax/2024-tax-plans/#Candidates (last visited June 27, 2024). ↩︎
  6. Id. ↩︎
  7. Id. ↩︎
  8. Jing Pan, “Robbing Americans of the Ability to Own Homes:” RFK Jr. Has Promised Wall Street Reforms. Here’s His Plan, Yahoo!Finance (May 30, 2024), https://finance.yahoo.com/news/robbing-americans-ability-own-homes-101400283.html. ↩︎
  9. Platform: What Chase Stands For, Chase Oliver, https://www.votechaseoliver.com/platform (last visited July 1, 2024). ↩︎
  10. Platform, Libertarian: The Party of Principle, https://www.lp.org/platform/ (last visited July 1, 2024). ↩︎
  11. Platform: People’s Economy, Jill Stein 2024, https://www.jillstein2024.com/platform (last visited June 27, 2024). ↩︎
  12. Policy Pillars for a Movement Rooted in Truth, Justice, & Love: Economic Justice, Cornel West 2024, https://www.cornelwest2024.com/platform (last visited June 27, 2024). ↩︎
  13. Andrew Lautz, The New Cost for 2025 Tax Cut Extensions—$5 Trillion, Bipartisan Pol’y Ctr. (May 13, 2024), https://bipartisanpolicy.org/blog/the-new-cost-for-2025-tax-cut-extensions-5-trillion. ↩︎

Planning with Life Insurance

Creative Uses for Life Insurance

Slightly more than half of Americans (52 percent) have a life insurance policy, and about 4 in 10 adults say they do not have enough life insurance coverage. That leaves about 100 million Americans uninsured or underinsured when it comes to carrying life insurance. 

Because life insurance provides funds for surviving loved ones upon the insured’s death, it can play an integral part in estate planning. But beyond the traditional uses for life insurance such as paying off debts and replacing lost income, there are other ways policyholders can use life insurance for themselves and others throughout every stage of life. 

Increased Interest in Life Insurance

The COVID-19 pandemic was a wake-up call for many Americans to prioritize their health and prepare for the unexpected. It led to a surge in estate and business succession planning and an increased interest in purchasing life insurance. 

Even as the pandemic fades, interest in life insurance was at an all-time high last year according to survey data from LIMRA and Life Happens, two nonprofit industry trade associations. Younger Americans expressed the greatest desire to buy life insurance coverage within the next year, with 47 percent of Gen Z adults and 49 percent of millennials—representing 53 million adults—saying they either need to purchase life insurance or increase their coverage. 

Lesser-Known Life Insurance Benefits

Clients typically think of life insurance as a tax-free lump sum that goes to their significant other to pay miscellaneous expenses at their death or to provide for minor children. 

While these are the main reasons people purchase life insurance, they can make a policy seem less beneficial, and the payments more burdensome later in life when kids become adults and retirement savings are large enough to absorb financial shocks. 

But life insurance can do more than pay out a death benefit. That benefit can be put to some creative uses as well. Lesser-known ways to use life insurance include the following: 

  • Funding a trust. Naming a trust as the beneficiary of a life insurance policy, rather than naming an individual beneficiary or beneficiaries, can provide added estate planning flexibility. Examples of trusts that can be funded with policy proceeds are a revocable living trust, an irrevocable life insurance trust, a special needs trust, and a pet trust. Trusts can be used to manage payouts to beneficiaries (human and nonhuman) and have the added benefit of avoiding probate. Another potential way to use trusts for life insurance planning is to split the death benefit from the policy between a trust for the surviving spouse and a trust for children from a prior relationship in blended family situations. 
  • Paying taxes and debts. For the most part, your debts do not just disappear when you die. Additionally, death can trigger estate and income taxes that, if not planned for, can impose large burdens on your heirs. Life insurance can be acquired so that the death benefit can be used to pay taxes and other debts of the deceased owed upon death. By using the death proceeds to pay the taxes and debts, the decedent’s accounts and property do not have to be liquidated to come up with the money. If the decedent owned illiquid assets such as valuable collectibles, artwork, a thriving business, or a family farm, having a source of cash to pay the taxes and debts can save the trouble and heartache of parting with these assets just to satisfy a financial obligation.
  • Equalizing inheritances. Sometimes people have illiquid assets (e.g., a family business or home) that they may want to go to a specific child rather than to all the children equally. However, people usually want each child to inherit the same overall value. If there are no assets or few liquid assets in the estate, it may be challenging to divide assets equally without selling them. This challenge can be solved with a life insurance policy that pays beneficiaries who do not receive the specific illiquid asset the amounts necessary to balance their inheritances. 
  • Charitable donations. Many people express regret on their deathbed that they worked too much and did not do enough to help others. Others have been active philanthropists and want to solidify their legacy with one final charitable gift. A new or existing life insurance policy can be used, possibly in combination with a charitable trust, to donate money to charity. However, in each case, it is best to communicate with the charity to ensure all applicable procedures are followed. 
  • Paying final expenses. Outside of taxes and creditor claims, a client should have money set aside to pay for final expenses such as funeral and burial costs, which can easily run $8,000 to $10,000 or more. A specialized type of life insurance policy, known as final expense life insurance, can be purchased to ensure survivors are not faced with unexpected death expenses. 

How to Fit Life Insurance into a Client’s Plans

When addressing a client’s goals and needs, it can be a mistake to silo financial planning, retirement planning, wealth management, and estate planning. Viewing them as fitting into a comprehensive plan can unlock creative strategies that work synergistically to provide greater value to clients and new revenue streams for advisors. 

The 100 million Americans facing a life insurance coverage gap points to a large unmet advisory opportunity. Whether a client is buying coverage for the first time, purchasing new or additional coverage, or looking for more value from a policy they bought years ago, life insurance can benefit clients of all ages, lifestyles, and circumstances.

Please contact us to discuss uses for life insurance beyond a simple lump sum payment to beneficiaries and how life insurance can fit into an estate plan. 

Who Should Your Client Name as a Beneficiary?

Americans pay hundreds of billions of dollars in life insurance premiums per year. Most policyholders will never see a payout themselves. Instead, it will go to their loved ones to provide for them when the policyholder dies. 

Life insurance benefits and claims totaled $797.7 billion in 2022, including more than $88 billion in death benefits, according to the Insurance Information Institute. The typical life insurance payout is approximately $168,000. 

If a policyholder designates a beneficiary on their life insurance policy, the death benefits are not typically part of a decedent’s estate that goes through the probate process because they pass directly to beneficiaries. However, the potentially large cash value it can provide makes it central to estate planning and requires careful consideration about how to structure the beneficiary designation. 

Naming a Spouse or Children as Beneficiaries

The most common beneficiaries of a life insurance death benefit are a surviving spouse and/or children. 

Life insurance death benefits are typically protected from creditor claims for policyholders’ debts. But once the designated beneficiary receives the death benefits, the beneficiary’s creditors can go after the funds to satisfy the beneficiary’s debts—even debts owed jointly with the deceased policyholder (for example, an outstanding loan or credit card debt where the policyholder and the spouse are co-signers). This is true whether the beneficiary is the policyholder’s spouse, child, or other loved one.  

The death benefit of the life insurance policy may also be open to claims of the named beneficiary’s spouse. If a surviving spouse beneficiary remarries or a child beneficiary divorces, for example, the death benefit proceeds received by the beneficiary and put into one of their accounts or investments could end up being categorized as marital assets and, therefore, subject to equal division in the event of a divorce. This outcome could countermand the intention of the policyholder. 

If no beneficiaries are named on an insurance policy or if the beneficiary named is the policyholder’s estate, then a probate estate will likely need to be opened to administer and transfer the death benefit to the policyholder’s heirs or beneficiaries. Once the probate estate has been opened, the deceased policyholder’s creditors may have an opportunity to claim the death benefit before the funds are distributed to the heirs or beneficiaries of the estate. 

Minor child beneficiaries present challenges as well. Insurance companies cannot pay insurance proceeds directly to minor children. An adult will usually have to be appointed to manage the funds until the child reaches the age of majority. Depending on your state, this may involve a court proceeding and annual reporting requirements that cost money and can delay the payout. 

Some life insurance policies allow a custodian to be assigned to a minor child beneficiary without needing a probate court appointment. A custodian manages the money for the minor child until they reach legal adulthood, when the assets are turned over to them. 

Naming a Charity as Beneficiary 

A life insurance policy can be a way to make a charitable gift at the end of life. This option might appeal to a client who purchased a policy to protect a spouse or children who no longer need it, to complete payment of a mortgage, tax, or other debt that is no longer a concern, or to cover some other contingency that no longer requires the funds a life insurance policy would have provided. 

A life insurance policy can also be purchased for the express purpose of charitable giving. In addition to taking out a new policy to benefit charity, a charitable recipient can be named as a beneficiary on an existing policy to receive all or part of the policy proceeds. Other options include transferring ownership of a policy to a charity and gifting dividends from a life insurance policy to a charity. 

Each of these options can provide tax benefits. Depending on how a life insurance gift is made, the cash value of the policy, the cost of premiums paid, or the value of dividends may be deducted. 

Creating a Trust for a Loved One

Naming individuals as life insurance beneficiaries can provide convenience and flexibility for beneficiaries because the money passes to them quickly and easily outside of probate. The beneficiaries only need to file a claim with the life insurance company and select how they want the death benefit to be paid (usually in periodic payments or a lump sum). 

However, there are downsides to setting up a death benefit in this way. The policyholder ultimately loses control over how the insurance proceeds are used. They may have intended to protect their loved ones financially—but if they are deceased and the funds are in the hands of their beneficiaries with no controls or restrictions, can they ensure that the benefit is used in accordance with their wishes?  

They can. Policyholders can control the death benefits of their life insurance policy by naming a trust they have set up as the policy’s beneficiary and allowing a trustee to manage the death benefit on behalf of trust beneficiaries, such as a spouse or children. This arrangement allows the client to provide instructions about how the money should be used and managed. 

A trust can be useful for leaving money to underage or special needs children. It can also ensure that a disabled beneficiary remains eligible for government assistance or keep a young adult from spending the funds all at once. Insurance proceeds held in trust are also protected from creditors and exempt from probate. 

Advising Clients on Life Insurance 

About 90 million American families rely on life insurance for financial protection and retirement security. However, recent survey data indicates that more than 100 million Americans are facing a life insurance coverage gap, presenting an opportunity for advisors to steer them toward these products. 

As a value add, advisors can explain how life insurance fits into an estate plan and walk them through the different options for naming beneficiaries. These discussions could open new revenue streams, such as establishing trusts and charitable donations. 

Please contact our team for a primer on life insurance and estate planning and how our practices can benefit each other. 

Common Life Insurance Mistakes in Estate Planning

With few exceptions, almost every client should have life insurance, just as everyone should have an estate plan. 

But simply having a policy—and a plan—is not enough. Both life insurance policies and estate plans are prone to mistakes or oversights that can undermine their effectiveness. And those mistakes or oversights can be compounded when life insurance is part of a client’s estate plan. 

Mistake #1: Not Having Enough Coverage

The need for life insurance in the United States grew to a record-high level in 2024, with 102 million adults saying they need—or need more—life insurance, according to an annual survey from LIMRA and Life Happens, two nonprofit industry trade associations. 

Survey results from a prior year indicated that 44 percent of households would encounter major financial difficulty within six months if the family lost its primary wage earner. Life insurance coverage should be sufficient to sustain a household’s current living standard. Household spending varies by age group and tends to drop with age, but it does not consistently decline until after age 65. Many households see a jump in spending at around age 55. 

Life insurance calculators can roughly estimate how much coverage is needed. However, there is no substitute for a comprehensive review of a client’s situation, insurance needs, and estate planning goals by all the client’s trusted advisors. By collaborating, we can make sure that our mutual clients are getting the coverage they need to meet their unique situations and goals.

Mistake #2: Relying on Employer or Group Insurance

While group life insurance offered through work or a professional organization is often cheaper than an individual policy, it may not provide enough coverage for most families. There is also the risk that the policyholder will lose their policy if they quit their job, retire, are fired, or sever ties with the sponsoring organization. 

Clients should be encouraged to take advantage of a group insurance policy if offered but cautioned not to rely on it exclusively. As part of your discussion with the clients, consider asking them about the maximum death benefit of their group policy so you can determine the coverage gap amount. 

Mistake #3: Not Listing a Beneficiary

Life insurance policies with a designated beneficiary are not governed by a client’s will (unless the beneficiary is the policyholder’s estate). It is up to the clients to name a policy beneficiary (or beneficiaries) to whom they want to receive the death benefit. 

If an individual policyholder does not name a beneficiary, the death benefit proceeds could become part of the policyholder’s estate—possibly subjecting the beneficiary to the delays and expenses of probate court. 

For group insurance policies with no named beneficiaries, the terms of the policy may include an automatic beneficiary order, such as the policyholder’s spouse, followed by children, parents, and the estate. Not naming a beneficiary and relying on the terms of the life insurance policy could result in the proceeds being distributed to the predetermined beneficiaries, which may not be in line with the policyholder’s estate planning goals. This is also true if the death benefits fall to the policyholder’s estate and the policyholder dies without a will. If the policyholder had a will or a trust, the distribution of death benefits from the estate follows the plan established in their estate plan. 

As a practical note, we advise all clients to inform the people they designate as beneficiaries of their life insurance policies and, ideally, give them contact information for the claims department of the plan provider. Life insurance proceeds sometimes go unclaimed because the family has no idea a policy exists. 

Mistake #4: Naming a Minor Child or Special Needs Beneficiary

Life insurance death benefits can be a lifeline for minor children and special needs beneficiaries. However, naming a minor or disabled beneficiary can work counter to the goal of providing them with financial security. 

Life insurance companies cannot pay death benefits directly to minor children. To avoid any legal complications and delays that can arise from this obstacle, a client can name a trust with a trusted adult, such as a spouse or partner, to act as the trustee of the trust, to manage the death benefit for the child according to the client’s wishes. The court may have to get involved if the client names a minor child as a beneficiary. 

Two main issues with naming a disabled or special needs beneficiary on a life insurance policy are that they may not have the capacity to manage the funds responsibly, and the death benefit amount could disqualify them from means-tested government assistance programs. A third-party special needs trust can be created to hold insurance death benefits for those with disabilities. This type of trust will help the special needs beneficiary retain their public assistance eligibility while covering expenses not covered by programs like Medicaid or Social Security. 

Mistake #5: Not Updating Beneficiaries

Out-of-date beneficiary designations are a common—and potentially costly—life insurance mistake. 

Clients should update beneficiaries anytime there is a major life event, such as a marriage, divorce, birth, or death. Remind them that the insurance beneficiary forms take precedence over their will

Some states have “revocation upon divorce” statutes that automatically revoke a spouse as a beneficiary in the event of a divorce. In such states, contingent or successor beneficiaries become primary beneficiaries automatically without the policyholder needing to update their beneficiary form. But if the policy does not name a contingent beneficiary—or the successor beneficiary has predeceased the policyholder—the insurance proceeds could pass to the estate and go through probate, subjecting the proceeds to unnecessary and sometimes substantial costs. 

Both primary and secondary beneficiary designations should be reviewed every three to five years to ensure a death benefit goes to the right person. Absent a major life event, the client could just change their mind, for personal reasons, about who should benefit from the policy. They might also decide to switch the beneficiary from an individual to a charity or a trust. Also, there are times when insurance plan providers are bought by or merged with new plan providers or when an employer may change the company that provides their group plan life insurance policy. In these situations, the original beneficiary designations may be wiped out, requiring the policyholder to designate their beneficiaries anew.

Changing a beneficiary designation is usually a simple process. Still, community property states may require the policyholder to name their spouse as the primary beneficiary, designated to receive at least 50 percent of the benefit. In these states, written spousal consent may be required to name somebody other than the spouse as a beneficiary. 

Enhance Your Advisory Services with Estate Planning 

Our job as advisors is to remind clients that planning is not a one-time event. It is a continual process that needs to be revisited and refined over the years. 

It is no different for our practice area. The more we learn from each other, the more we can offer cross-disciplinary services that address all aspects of our clients’ futures. 

Please contact us to set up a time to discuss specific estate planning strategies and how they can fit into your current offerings. 

Lessons We Can Learn from Famous Mothers and Their Estate Plans

Gloria Vanderbilt: No Trust Fund Kids for Her

A tenet of the American dream is that children grow up to earn more and have a better standard of living than their parents. Traditionally, upward mobility in America is achieved through hard work and the growth of the economy. Intergenerational wealth transfers are also widespread, with around 2 million households each year receiving an inheritance or a substantial gift, according to a Federal Reserve report.1 Those transfers are set to grow over the next couple of decades as baby boomers pass down $84 trillion to the next generation in what is being called “The Greatest Wealth Transfer in History.” 2

But not all parents are committed to leaving an inheritance to their children. Some, including Gloria Vanderbilt, believe that kids should make their own money and earn their own success in life. 

Vanderbilt Heiress Makes Good on “No Trust Fund” Promise

Gloria Vanderbilt, the great-great-granddaughter of railroad and shipping tycoon Cornelius Vanderbilt, inherited a trust fund worth an estimated $2.5–$5 million in 1925 (close to $35–$70 million today). She was worth an estimated $200 million at the time of her death in 2019. 

In a 2014 radio interview, Gloria’s son, CNN host Anderson Cooper, said she made it clear to her three children that they should not expect a trust fund from her. Cooper called inheriting money a “curse” and an “initiative sucker” and questioned whether he would have been so motivated if he felt like there was a “pot of gold waiting for me.” 3

It is a fair question to ask, given his family history. Cooper’s grandfather, Reginald Vanderbilt, was a reputed gambler who had squandered most of the family fortune by the time he died in 1925 and left the remainder to Gloria. 

Yet as Cooper pointed out, his mom, who had a successful career in the fashion industry, made more money than she inherited. Gloria started a denim business in the 1970s that was reportedly worth $100 million. In a 1985 interview with the New York Times she said, “I’m not knocking inherited money, but the money I’ve made has a reality to me that inherited money doesn’t have.”4

Although Cooper ended up receiving $1.5 million from Gloria’s estate, his net worth prior to his inheritance was thought to be more than $100 million, so he can hardly be labeled a trust fund kid. But while he did not inherit a fortune, he does appear to have inherited his mother’s work ethic. In addition to her denim line, she worked as a model, an actress, and an artist—all while balancing her duties as a mom. 

“We believe in working,” Cooper said when discussing his mother’s trust fund stance.5

Lessons Learned from the Vanderbilt Heiress

Gloria Vanderbilt did not go the route of super-rich parents like Warren Buffet, Bill Gates, Mark Zuckerberg, and Michael Bloomberg, who have vowed to donate their fortunes to charity. However, she did make good on her promise of not leaving a trust fund to her kids, which studies suggest can be a wise choice. 

Research from the Williams Group wealth consultancy found that 70 percent of wealthy families lose their wealth by the second generation, and 90 percent lose it by the third generation.6 A survey by U.S. Trust found that only 42 percent of high-net-worth individuals have a high degree of confidence that the next generation is financially responsible enough to handle an inheritance. 7

The Vanderbilt family presents an interesting case study—and counterpoint—to this familiar narrative of heirs squandering the family fortune. 

By the time the Vanderbilt fortune built by Cornelius, a man richer than Bill Gates in his day, reached Gloria four generations later, it was nearly gone. But despite receiving a trust with enough remaining funds to live comfortably on, her inheritance did not dull her drive for hard work and achievement. Gloria’s son Anderson Cooper also had a strong work ethic from a young age. He interned at the CIA while studying at Yale and went on to become one of the most recognizable faces in media. 

Experts say the main reason why fortunes are squandered is because those who create the initial wealth do not pass on detailed instructions or impose guidelines on how heirs should spend it. Attitudes towards wealth need to be shaped and inculcated. This can be done informally—say, by teaching kids sound money habits and providing a good example—and formally, such as through trusts that specify how and when the money can be used. 

Arguably, not leaving an inheritance can be a great motivator for loved ones to find their own path forward. Money cannot buy happiness, and having a trust fund or substantial inheritance does not guarantee that heirs will be successful. 

Parents know their children best. They also know that what is good for one kid may not necessarily be good for the others. While one child may manage their inheritance independently without issues, another may need safeguards and incentives. 

Wealth management and estate planning go hand in hand. When advising your clients how to achieve their financial objectives for the next generation, you may suggest that they could benefit from advice about how to structure a plan in ways that help preserve generational wealth. To collaborate with our estate planning attorneys on a wealth management strategy for your clients, please get in touch. 

Aretha Franklin: Too Much Estate Planning

Aretha Franklin was a larger-than-life figure to her many adoring fans during a music career that spanned nearly 60 years. Over that time, she put out 38 studio albums and 6 live albums. The Queen of Soul also penned two wills that became the subject of considerable controversy after her death and showed that no matter how famous you are, your final wishes could come down to state law if you are not proactive about estate planning. 

Two Wills Are Not Better Than One

Aretha Franklin, the commanding voice behind such hits as “Respect” and “Think,” was thought to have passed away in 2018 without voicing her views on how her estate should be divided among her four sons, seemingly leaving it up to state law and a judge to decide. 

But when Franklin’s niece agreed to serve as personal representative of the estate and began going through the singer’s Michigan home, she discovered not one but two handwritten wills—one from 2014 found in the couch cushions and a second from 2010 found in a locked cabinet. 8

The documents contained key differences about the division of real estate, personal property, and music royalties among her sons, and the sons disagreed over which version should control the estate. Further complicating matters, both wills had detailed lists of assets, but neither was prepared by a lawyer or listed witnesses. 

Her sons ended up squaring off in probate court over which of the discovered wills expressed their late mother’s true intentions at the time of her death. Following a two-day trial, a jury put the five-year—and at times combative—controversy to rest when it determined that the 2014 document should serve as the will. 

Lessons Learned: R-E-S-P-E-C-T the Estate Planning Process

Aretha Franklin avoided dying intestate (meaning without a will) by handwriting a will. But her estate planning errors led to a situation that was just as complicated—and just as easily avoided. 

Clients can learn these valuable lessons from Franklin about what to do—and not do—when creating an estate plan: 

  • Let loved ones know where documents are located. A will must be presented to the court and verified before it can take effect. If it cannot be located, it is essentially useless. Clients need to make sure loved ones know where their will, along with their additional estate plan documents like trusts, powers of attorney, and life insurance policies, can be found. Ideally, they should be kept somewhere secure, such as a bank safe deposit box, a fireproof safe, or a filing cabinet, or online in an encrypted cloud. Anyone needing access to the documents should also be given access codes. Document copies can be given to the estate planning attorney, local probate court, executor, or a trusted friend or family member as a fail-safe. 
  • Do not keep more than one version of documents. Only one will is admissible to probate. The most recent version of a will or other estate planning document typically prevails over an older one, as it did in Franklin’s case. If new documents are created, clients should consider destroying the old ones to alleviate confusion. 
  • Handwritten wills may be okay but are not ideal. Handwritten wills are considered valid in more than half of the states, including Michigan. However, they must meet certain criteria, such as bearing a signature and setting forth the material issues (what the person owns and the individuals they want to receive those accounts and property) in the person’s own handwriting. Some states, including Indiana, still require witnesses even on handwritten wills. Disputes over a handwritten will’s validity can be avoided by working with an attorney who can ensure that the document is legally prepared and executed. 
  • Make your intentions clear. Having more than one will raises questions about which should take precedence. But in some cases, even a proper will can be superseded by, for example, a beneficiary designation on a retirement account or property owned together by two or more people in joint tenancy. To prevent discrepancies, confusion, and conflicts, paperwork should be in alignment across estate planning documents. 

How We Can Help You Help Your Clients

It cannot be emphasized enough that estate planning is not just for the rich and famous. You may convey a similar message to your clients when discussing an asset management plan. In our celebrity-driven culture, figures like Aretha Franklin can serve as a cautionary tale about what can happen when a plan is left to the last minute or not completed under the guidance of an experienced estate planning attorney.

One of the best gifts a client can leave their family is a professionally prepared estate plan that leaves nothing to chance or speculation. Clients should know that a missing, incomplete, or unclear estate plan can lead to conflicts between heirs that necessitate court intervention and drain estate assets.

The more you understand estate planning and how it fits into a wealth management strategy, the more you can build client trust and earn repeat business. To begin a collaboration with our estate planning attorneys, please reach out to schedule a meeting. 

Lucille Ball: Dangers of Being the First to Die

I Love Lucy star Lucille Ball passed away 35 years ago. Decades after her death, important lessons can be learned from a court battle over some cherished heirlooms between Ball’s daughter and the widow of Ball’s second husband. 

Remarriage can pose emotional as well as legal challenges. When a client remarries, they need to carefully consider whom they are leaving their personal property to, especially if the personal property at issue is from a previous spouse. While monetary inheritances can be valuable, personal property is often invaluable to surviving family members and can spark fierce disagreements over who is the rightful heir. 

No Laughing Matter: The Legal Fight over Lucille Ball Memorabilia

Actress and comedy icon Lucille Ball had two children with actor Desi Arnaz: Lucie Arnaz and Desi Arnaz Jr. 

The couple divorced in 1960, and Ball married comedian Gary Morton in 1962. Following her passing in 1989, her estate was split between Lucie, Desi Jr., and Morton. 

After Lucy died, Morton married professional golfer Susie McAllister. They remained married until Morton’s death in 1999, at which point McAllister inherited items that had belonged to Morton and Ball, including love letters, photos, and a Rolls Royce. McAllister also ended up in possession of several of Ball’s personal items. Among them were her personal address book, portable backgammon boards, and lifetime achievement awards. 

Ten years after Morton’s death, McAllister put the items up for auction as she prepared to remodel her home. And that is when the trouble started between McAllister and Lucie. 9

Lucie asked that certain items be returned to her and threatened legal action to stop the sale if they were not. McAllister then sued Lucie and sought a judge’s ruling allowing the auction to proceed. In another twist to the case, the two women agreed that the possessions were left to Lucie in Ball’s will, but McAllister contended in her lawsuit that Lucie never claimed them from Ball’s estate, so they passed to McAllister. 

A judge ultimately ruled in favor of Lucie and said that the auction could be stopped—but only if Lucie posted a $250,000 bond. Lucie could not afford it, but her legal team reached an agreement with the auction house to have the lifetime achievement awards returned. The other items went up for sale. 10

Lessons Learned from the Lucille Ball Estate Kerfuffle

It is unclear why Lucie might have abandoned the personal possessions her mother allegedly left to her. There do not appear to be any media reports disputing this claim by McAllister. But if true, it raises the first takeaway from the legal battle: your clients need to claim any assets left to them as an estate beneficiary. Unclaimed inheritances pass to the next beneficiary in line—in this case, presumably Gary Morton, who then passed the forfeited items to McAllister following his death. 

Morton, however, is not blameless in this situation. He left items to McAllister that were originally intended for Lucie. While he may not have explicitly known the intentions of his late wife regarding her prized possessions, he probably should have known that they were better off in the hands of his stepdaughter. 

According to the auction house, McAllister kept the items for more than ten years out of respect for Ball and Morton. But she can hardly be blamed for wanting to eventually clean house and be rid of them. 

The second takeaway from this legal battle, then, is that if your client has remarried and has personal property from a previous spouse, they need to give due consideration to who should inherit it. Morton might have asked himself what McAllister would do with love letters between himself and Ball other than sell them, or why his new wife would want Ball’s personal address book or backgammon boards. The whole messy legal battle could have been avoided had he asked himself a few simple questions during the administration process. 

Advisors Help Clients Avoid Common Mistakes

Part of being a good advisor is knowing what questions to ask your clients. This perspective is honed through years of hands-on experience, trial and error, and learning from the mistakes of others. 

Advisors working in different specialties that overlap can also learn from one another, synergizing their knowledge to deliver the best possible client experience, to the mutual benefit of all parties. 

Schedule a meeting with our estate planning attorneys to find out how we can help you provide more value to your clients.

  1.  Laura Feiveson & John Sabelhaus, How Does Intergenerational Wealth Transmission Affect Wealth Concentration?, FEDS Notes (June 1, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/how-does-intergenerational-wealth-transmission-affect-wealth-concentration-20180601.html.
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  2.  Jennifer Wines, How Might the Great Wealth Transfer Change Society?, Kiplinger (Dec. 5, 2023), https://www.kiplinger.com/retirement/how-might-the-great-wealth-transfer-change-society.
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  3.  Michelle Singeltary, Gloria Vanderbilt Reportedly Did Not Leave Her Heirs Much Money. Maybe You Should Follow Her Lead., Wash. Post (June 24, 2019), https://www.washingtonpost.com/business/2019/06/24/gloria-vanderbilt-is-reportedly-not-leaving-her-heirs-much-money-maybe-you-shouldnt-either.
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  4.  Carol Lawson, Gloria Vanderbilt: Fortunes Good and Bad, N.Y. Times (Apr. 20, 1985), https://www.nytimes.com/1985/04/20/style/gloria-vandrbilt-fortunes-good-and-bad.html.
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  5.  Singeltary, supra note 3.
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  6.  See ​​Rhymer Rigby, Disinheriting Your Children Might Be for Their Own Good, Fin. Times (Oct. 14, 2019), https://www.ft.com/content/eb4a390a-d926-11e9-9c26-419d783e10e8.
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  7.  U.S. Trust, U.S. Trust Insights on Wealth and Worth: The Generational Collide 14 (2017), https://www.truevaluemetrics.org/DBpdfs/ImpactInvesting/UST-BoA-Wealth-Worth-Overview-Broch-2017.pdf.
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  8.  Ben Sisario & Ryan Patrick Hooper, Four Pages Found in a Couch Are Ruled Aretha Franklin’s True Will, N.Y. Times (July 11, 2023), https://www.nytimes.com/2023/07/11/arts/music/aretha-franklin-will-couch.html.
    ↩︎
  9.  Lucille Ball Memorabilia from the Estate of Gary Morton—Including Love Letters, Rolls Royce, Awards and Artwork—at Auction in Beverly Hills, Heritage Auctions (July 6, 2010), https://news.cision.com/heritage-auctions/r/lucille-ball-memorabilia-from-the-estate-of-gary-morton—including-love-letters–rolls-royce–awards-and-artwork—at-auction-in-beverly-hills,g502294.
    ↩︎
  10.  Jason Pham, Here’s Where Lucille Ball’s Kids Are Now & How Much They Inherited after Their Mom’s Death, Yahoo! Fin. (Mar. 7, 2022), https://finance.yahoo.com/news/where-lucille-ball-kids-now-133309434.html.
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Assisting Clients in Decoding the Generation-Skipping Transfer Tax  

Optimize Generational Wealth Transfers with These Insights 

Generation-Skipping Transfer Tax 101 

Many of you are likely familiar with estate and gift taxes. However, dealing with the generation-skipping transfer (GST) tax comes up less often since it usually only affects ultra-wealthy clients.   

Estate planning attorneys, financial planners, and tax advisors must understand the GST tax and learn how to avoid it to help affluent clients accomplish effective planning. Explaining the GST tax to clients is easier if you share examples of how it might impact their particular situation. It is also vital to consider unique family dynamics, financial goals, and values when recommending the best tax strategies to distribute generational wealth. 

What Is Generation-Skipping Transfer Tax? 

The government collects federal estate taxes to generate revenue when wealth is passed down to subsequent generations. When people die, they usually leave their money first to their spouses, then to their children, then to their grandchildren, and then to more distant relatives. At each passing of generational wealth, the government collects an estate tax.  

Wealthy families found a way to avoid estate tax by skipping a generation and transferring wealth directly to grandchildren and great-grandchildren, allowing them to pass down more wealth to future generations. Estate taxes were avoided when the skipped generation (in our example, the children) died because the children never owned the money or property.  

The government responded with legislation in 1976 and again in 1986, attempting to eliminate the transfer tax advantage of skipping a generation by imposing a GST tax when a skip occurs, ensuring that large estates still pay estate tax at each generation.   

The GST tax rate is currently 40 percent (the same as the highest federal estate and gift tax rate) so the tax burden on high-net-worth individuals can be substantial. Luckily, there is a GST exemption amount of $13.6 million for individuals in 2024 (the same as the federal estate and gift tax exemption) that can be used when clients want to make gifts or leave an inheritance that would otherwise be subject to the GST tax. This means that only large estates are truly impacted by the GST tax. 

Who Are the Parties Involved in a Generation-Skipping Wealth Transfer? 

There are typically three parties involved in a generation-skipping wealth transfer: 

  • The transferor: the person making the wealth transfer to an individual or a trust  
  • The skip person: the person receiving the money or property, who must be two or more generations removed from the individual making the transfer or is at least 37 ½ years younger than the transferor; a skip person may also be a trust in some instances 
  • The non-skip person or the skipped person: the generation between the individual transferring wealth and the one receiving it 

Why Should Clients Be Mindful of This Tax? 

Clients with substantial estates who are considering making sizable gifts or bequests to skip persons need to work with experienced professionals so they understand the tax consequences of these gifts or bequests, and so they can develop a strategy to properly utilize their GST tax exemption. 

The earlier you can get your client started, the better the results. It will take time and collaboration with other professionals to ensure the best possible outcome. Additionally, as with any type of estate planning, you will need to remind the client about regular reviews for updates to their plan due to changing circumstances. 

Partnering with Professionals to Align Legal and Tax Planning Strategies 

Working together, we can provide our clients with comprehensive advice, ensuring that legal, financial, and tax implications are all considered in their estate planning strategies. This will enhance the overall quality of the service and expertise your clients receive. We welcome the opportunity to partner with you to develop strategies to assist our mutual clients.

Let’s Do the Math: How Does the Generation-Skipping Transfer Tax Work? 

The generation-skipping transfer (GST) tax, is a tax assessed on gifts from one person to another person in two or more generations younger, or someone who is at least 37 ½ years younger (also known as a skip person). Although not everyone will have to address this as part of their estate plan, if you have clients who are looking to make a large gift or leave a large inheritance to a skip person, it may be beneficial to see how the math works in this type of situation.

Generation-Skipping Transfer Tax Rate  

The federal GST tax rate matches the highest federal estate tax rate, currently set at 40 percent. For high-net-worth individuals, effective GST tax planning is crucial in managing combined estate, gift, and GST tax burdens. 

Generation-Skipping Transfer Tax Exemption  

Individuals can transfer a specific value of money and property to skip persons, either during their lifetime or after death, before triggering the GST tax. This exemption equals the federal estate and gift tax exemption amount ($13.61 million in 2024). Be aware, there is no portability for the GST tax exemption. Therefore, clients need to use it or they lose it.   

Exceptions to the Generation-Skipping Transfer Tax  

Your client may already have a trust. If so, certain irrevocable trusts established before September 25, 1985, are grandfathered and exempt from the GST tax provisions in section 26.2601-1(b)(1) of the Treasury Regulations. Modifications or additions to these trusts can jeopardize the exception. Additionally, gifts for educational or medical expenses to skip persons, such as health and education exclusion trusts (HEET), are excluded from GST tax application. 

Applicable Fractions and Inclusion Ratios 

To understand how the GST tax will affect your client’s estate, you need to do some math. The GST tax calculation relies on the inclusion ratio, indicating the extent to which a transfer is subject to GST tax. This ratio is determined by the applicable fraction, considering the individual’s GST tax exemption. An inclusion ratio of one means the direct skip or trust is fully taxable. Any number between zero and one indicates the transfer is partially subject to GST tax.  

The amount of the GST tax exemption allocated to the transfer is divided by the value of the property involved in the transfer. The fraction is rounded to the nearest one-thousandth (.001) and looks like this:  

The next step is determining the inclusion ratio by subtracting the fraction from the number one. Depending on the ratio, the trust is either fully exempt, fully taxable, or partially taxable.  

Fully Exempt Trust 

Let’s say your client creates an irrevocable trust for the benefit of a grandchild and their descendants in 2024, when the entire GST tax exemption of $13,610,000 is available and allocated to the trust.  

If your client transfers $13,610,000 (or less) to the trust, the inclusion ratio would be zero: 

1 – (13,610,000 / 13,610,000) = 1 – 1.000 = 0 

The trust would be fully exempt from GST tax. 

Fully Taxable Trust 

Now, let’s assume that your client had previously used their GST tax exemption and there was none available to allocate to the grandchild’s irrevocable trust, the inclusion ratio for this transfer would be one: 

1 – (0 / 13,610,000) = 1 – 0 = 1 

The trust would be fully subject to GST tax. 

Partially Exempt Trust 

Partially exempt trusts have a portion of money or property subject to the GST tax, while another portion may qualify for an exemption.    

If your client puts $15,500,000 in the irrevocable trust, and their entire exemption is available, the inclusion ratio would be: 

1 – (13,610,000 / 15,500,000) = 1 – .878 = .122  

The applicable fraction is .878, and the inclusion ratio is .122. The trust would be partially subject to GST tax. When distributions are made to the grandchild, there will be a tax due. To calculate how much will be owed, we first must know what the tax rate is at the time of the distribution. For example, if the rate is 40 percent, 

40 percent x .122 = 4.88 percent

If the grandchild receives a taxable distribution from the trust of $125,000, the GST tax would be $6,100.

For gifts or bequests made directly to the skip person, the formula works similarly, the inclusion ratio is multiplied by the GST tax rate in effect at the time of the transfer.

It Takes a Team 

We understand that the GST tax can be complicated at times. By working as a team, we can assist our clients in planning and carrying out their wishes.

What You Need to Know about the Generation-Skipping Transfer Tax Returns 

If you have clients with significant wealth, things like estate, gift, and generation-skipping transfer (GST) taxes need to be discussed. If a client wishes to make a gift or leave a large inheritance to a grandchild (while their child is still alive) a more in-depth conversation surrounding the GST tax needs to be addressed. As an advisor, it can be helpful if you understand the basics of the GST tax, the impact it can have on a client’s estate plan, and additional steps that may occur during the administration process at the client’s death.    

Several different returns involve the GST tax and we will touch on a few of them in this article. The appropriate form that needs to be filed with the Internal Revenue Service (IRS) will depend on the situation.

What Is Form 709?

This form would be used when a client decides to make a gift to a skip person during their lifetime. Form 709 is used to report transfers that are subject to federal gift and certain GST taxes. This also includes the allocation of lifetime GST exemption to property transferred during the transferor’s lifetime. The IRS has provided instructions for the transferor to complete the form.

What Is Form 706-GS(D-1)?

Form 706-GS(D-1) is used for trustees of a trust to report distributions from a trust to a beneficiary that are subject to the GST tax. For additional assistance, the IRS has published instructions for completing the form.

What Is Form 706-GS(D)?

Form 706-GS(D) is used for skipped persons to report tax due on distributions made from a trust to them, that is subject to the GST tax. Like the other forms from the IRS, some instructions walk through the completion of the form.

What Is Form 706-GS(T)?  

Form 706-GS(T) is used for trustees and any other entities or responsible parties to calculate taxes and report what is due from certain distributions and trust terminations subject to the generation-skipping tax. There are instructions for tax computation and separate sections for required information for the transferor and the trust.   

You can help affluent clients create a detailed list of documents and information required to determine the value of the money and property transferred to their trust or given outright as a gift or part of an inheritance. Understanding the complex calculations is critical.  

The amount of the GST tax exemption allocated to the transfer is divided by the value of the property involved in the transfer. The fraction is rounded to the nearest one-thousandth (.001) and looks like this:  

The next step is determining the inclusion ratio by subtracting the fraction from the number one. Depending on the ratio, the trust is either fully exempt, fully taxable, or partially taxable. 

Completing the Forms 

To fill out the applicable forms, individuals need to gather a significant amount of information. Here is a list of some of the information that may be needed: 

  • The legal name of the trust and its federal tax identification number 
  • Name and Social Security Number (SSN) or Employer Identification Number (EIN) of theindividual making the GST 
  • A list of all beneficiaries, including their names and relationships to the transferor 
  • The generation of each beneficiary in relation to the transferor (skip person or non-skip person) 
  • Name and address of the trustee(s) responsible for managing the trust 
  • A detailed list of all assets held within the trust, including values at the time of the GST 
  • Appraisals of assets to determine their fair market values 
  • Information about any other gifts or transfers made by the transferor during their lifetime that could be subject to the GST tax 
  • Indication of how the transferor’s GST tax exemption will be allocated among the trusts 
  • Allocations to skip persons, including any direct skips, indirect skips, or taxable terminations 
  • Details aboutthe transferor or any beneficiary who is deceased 
  • Copies of the trust agreement and any amendments 
  • Any legal documents relevant to the GST 
  • Specific dates of GSTs 

Filing Deadlines 

Generally, these forms must be filed by April 15 of the year following the calendar year when the gift, distribution, or termination occurred. Help your client organize and prepare their information. Maintaining clear records and staying informed about any updates to tax laws will streamline the process of completing the filing on time.   

Collaborative Opportunities 

Working with other professionals outside of your area of expertise can help ensure accuracy and compliance with the GST tax rules. When we work together, we can provide the best possible service to our clients. Give us a call to learn more about ways we can collaborate.