Important Dates to Be Aware of in 2023

The new year brings with it important dates that may impact your clients’ financial situations and tax deadlines they may need to meet. By providing them with the following information, you can help them plan ahead to avoid financial trouble and avoid penalties for nonpayment or late payment of taxes.

March 6, 2023, is the deadline under the sixty-five-day rule for trust distributions. Under Internal Revenue Code (I.R.C.) § 663(b), distributions made to beneficiaries of nongrantor trusts (and estates) made within sixty-five days of the end of 2022 may be counted as distributions made during 2022. This could be an important tax savings opportunity for your clients, as a nongrantor trust must pay income tax at the trust level on any taxable income it retains. For 2022, a trust is taxed at the maximum rate of 39.6 percent when its taxable income exceeds $13,451, in contrast to individuals, who reach the top tax rate of 37 percent when their income exceeds $539,900. In some cases, the Medicare surtax (net investment income tax) may also apply, meaning that the trust will have an even higher marginal tax rate. As a result, the overall tax savings may be significant when distributions of trust income are made to a beneficiary in a lower tax bracket. An election to treat the distribution as being made in 2022 must be made by the trustee on a timely filed income tax return for the trust.

April 18, 2023, is the deadline for 2022 individual retirement account (IRA) contributions. Encourage clients who are still working to review their 2022 IRA contributions so they can take full advantage of tax-free or tax-deferred growth, as they are permitted to make contributions for 2022 until April 18, 2023. Due to the high rate of inflation, the limits on contributions to traditional and Roth IRAs will increase from $6,000 in 2022 to $6,500 in 2023. Individuals who are fifty years old or over are permitted to contribute an additional catch-up contribution of $1,000 (unchanged from 2022). In addition, remind older clients to take their required minimum distributions: under the SECURE Act, those who reached age seventy and a half in 2020 or later must take their first required minimum distribution by April 1 of the year after they reach age seventy-two.

April 18, 2023, is tax day. Now that a new year has started, remind your clients to gather the paperwork they need to prepare for filing their income tax returns: W-2s, Forms 1099, records of income from other sources, records of IRA contributions, health savings account contributions, and other items that can reduce their taxable income, as well as documentation that will allow them to take advantage of tax deductions or credits, such as charitable contributions and mortgage interest.

Student loan repayments resume sometime in 2023. To provide relief to students holding eligible federal student loans during the COVID-19 pandemic, the 2020 CARES Act required the US Department of Education to pause loan payments, implement a zero percent interest rate, and stop collection on defaulted loans starting March 13, 2020. The relief was extended by subsequent legislation and administrative forbearance, and in November 2022, the Department of Education instituted another extension of the pause on repayments while Biden’s student loan forgiveness plan is being litigated in the courts. However, in the absence of another extension, the pause on repayments is currently set to end sixty days after the litigation is resolved or sixty days after June 30, 2023, whichever happens first, amid a period of record high inflation. If your clients are among the millions who owe a substantial amount on their student loans, help them create a plan that will enable them to resume payments by helping them determine how much they owe, the size of their payments, how it will affect their budget, and if debt consolidation could be helpful. 

Although the Biden Administration’s plan to forgive up to $10,000 in eligible federal student loan debt for non-Pell Grant recipients and up to $20,000 for Pell Grant recipients was recently struck down by several courts as unconstitutional, if the plan is eventually implemented, be sure to advise your clients that the amount forgiven may be taxable. Although the Internal Revenue Service has indicated that the amount forgiven will not be taxable income at the federal level, it will be taxable in some states.

Your role in helping your clients assess their financial and tax situation and advising them appropriately is critical. If we can help your clients further secure their financial future by creating or updating their estate plan, please give us a call.

New Business Succession Strategy: The Purpose Trust

The beginning of a new year is when many of us reflect on where we have been and what we would like to accomplish in the future. However, business owners are often tempted to succumb to the tyranny of the urgent and fail to take time to consider the future of their businesses. You can provide a great service to your business-owning clients by encouraging them to think about what they would like their life’s work to accomplish in the future. Those who would like to help make the world a better place for future generations should consider a relatively new and perhaps unfamiliar planning tool: the purpose trust.

What Is a Purpose Trust?

A typical trust is an agreement involving several parties: the grantor, the trustee, and the beneficiary. After the trust is created, the grantor funds it with money or property, and the trustee is responsible for managing those assets as specified in the trust for the benefit of specific named beneficiaries. One exception recognized under the law is a charitable trust that is created for a charitable purpose but has no specific beneficiaries. In recent years, however, some states have enacted statutes that allow the establishment of noncharitable purpose trusts (generally known as purpose trusts). In some states, they can be established only to care for pets or maintain a grave site. However, other states (for example, Delaware, New Hampshire, South Dakota, Utah, and Wyoming) allow purpose trusts for most lawful purposes, as long as they are reasonable, attainable, and do not violate public policy. Because there are no beneficiaries to ensure that the trustee is carrying out the purpose of the trust, the grantor must designate an independent trust “enforcer” who can petition the court if the trustee fails to perform its duties under the trust. The same or a different party could also be appointed as a trust protector who can modify the trust if necessary, for example, to add beneficiaries if the purpose of the trust has ended, change the situs of the trust, or even terminate it. The goal of a purpose trust is different from that of more common estate planning tools in that it is not aimed primarily at minimizing taxes or transferring wealth efficiently (although it may achieve those goals) but instead at ensuring that the grantor’s stated purpose is carried out.

The Patagonia Purpose Trust

In September 2022, Yvon Chouinard, the founder of Patagonia, a $3 billion clothing company, transferred the voting stock of the company to a purpose trust designed to further his lifelong goal of fighting the environmental crisis. In a message from Chouinard on Patagonia’s website, he explained that his desire was for the company to continue to pursue its stated purpose: “We’re in business to save our home planet.” After learning that his children were not interested in running the business, he considered his options. Although he could have sold the company and donated the proceeds to other organizations that would continue to pursue the company’s goals, he worried that a new owner of Patagonia would have different values and that his employees would not have job security. The voting stock of the company was transferred to the Patagonia Purpose Trust, which, guided by the family and their advisors, will ensure that the company’s values are pursued and that its profits further their goals. All of the nonvoting stock was contributed to a 501(c)(4) nonprofit organization that will be funded by Patagonia’s dividends, worth an estimated $100 million a year, which it will use in its efforts to protect the environment. Because the business interests were not donated to a charity, the gift will be subject to an estimated $17.5 million in gift tax, and no charitable deduction will be available to Chouinard. However, he will avoid $700 million in capital gains taxes, and when he dies, Chouinard’s estate will avoid substantial estate tax liability.

Why Would a Client Want to Transfer Their Business to a Purpose Trust?

There are a number of reasons why clients who own profitable companies may be interested in a purpose trust as they consider business succession planning. Like the Chouinard family, they can ensure that in addition to providing job security for their employees, the values underlying their business continue to be pursued for many decades into the future. If they do not have children who are interested in running the business, or if their children do not share their values, they can use a purpose trust to require future management to adhere to the purposes set forth in the terms of the trust. Transferring the business to a purpose trust will also ensure that it remains a private company and that the pursuit of profits will never replace the owner’s cherished values as its main goal.

As your client’s financial advisor, you know them well and are aware of their goals for the future of their business and whether they have a desire to use the wealth they have acquired for the benefit of others. You can do a great service for civic-minded clients by informing them about the planning opportunity presented by a purpose trust. Give us a call if we can help you and your clients determine if this opportunity is one they would like to explore.

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1 Yvon Chouinard, Earth Is Now Our Only Shareholder, Patagonia, https://www.patagonia.com/ownership/ (last visited Dec. 12, 2022).

2 David Gelles, Billionaire No More: Patagonia Founder Gives Away the Company, N.Y. Times (Sept. 14, 2022), https://www.nytimes.com/2022/09/14/climate/patagonia-climate-philanthropy-chouinard.html.

3 Patagonia Billionaire Ducks $700 Million Tax Hit by Giving It Up, Bloomberg L. (Sept. 16, 2022), https://news.bloombergtax.com/daily-tax-report/patagonia-billionaire-ducks-700-million-tax-hit-by-giving-it-up.

Will 2023 Be a Good Year for Your Clients?

Inflation Has Hit the Estate Planning World

The rate of inflation has reached a historic high, but it has also created estate planning opportunities that some of your clients may not have anticipated. Both the annual gift tax exclusion and the lifetime gift and estate tax exclusion amounts are adjusted for inflation each year, so when the rate of inflation is higher, the increases in these amounts are also greater. Now is a great time to remind your clients of the opportunity to take advantage of these tax-saving opportunities.

Annual Gift Tax Exclusion

Clients who are interested in making an outright gift to a loved one can take advantage of the annual gift tax exclusion, which was increased to $17,000 for 2023 (up from $16,000 in 2022), to make tax-free gifts of money or property up to the exclusion amount directly to as many loved ones (including nonfamily members) as they wish. Married couples can each give $17,000 per recipient; for example, they can provide tax-free gifts of $34,000 to each of their children. Annual exclusion gifts do not count against your clients’ lifetime estate and gift tax exemption amount, and the recipients will not owe any income or gift taxes on the amount they receive. Remind your clients that their gifts of money or property must be of a present interest, that is, they must transfer full title with no limitations to avoid disqualifying the gift from eligibility for the annual exclusion. Annual exclusion gifts are a use-it-or-lose-it opportunity each year and do not accumulate from year to year, so the gifts must be made by the end of 2023, or the chance to use the 2023 annual exclusion will be lost.

Lifetime Gift and Estate Tax Exclusion Amount

The basic exclusion amount for decedents dying in 2023 and the generation-skipping transfer tax exemption amount for 2023 is $12.92 million (up from $12.06 in 2022). The increase in the basic exclusion amount means that an individual will be able to transfer an additional $860,000 ($1.72 million for married couples) free of transfer tax liability in 2023. Gifts exceeding the annual exclusion amount will be counted against their lifetime exemption amount. These gifts are considered taxable gifts, but your clients can simply file a gift tax return and use part of their exemption amount as a credit, so they will not owe any gift tax unless the total value of all gifts made exceeds their remaining basic exclusion amount. The lifetime estate and gift tax exemption amount is set to be cut in half in 2026 in the absence of a change in the current law, so time is of the essence for clients who are interested in taking advantage of the current high exemption amount.

Remember the Anti-clawback Regulations

Under 2019 regulations issued by the Internal Revenue Service (IRS), a special rule was adopted allowing an estate to compute its estate tax credit using the greater of the basic exclusion amount (BEA) applicable during a taxpayer’s lifetime and the BEA applicable on the taxpayer’s date of death, ensuring that taxpayers will not be adversely impacted if they take advantage of the increased BEA by making lifetime gifts and then die in a year with a reduced BEA. The final regulations also clarified that the increased BEA is a use-or-lose benefit, available only to the extent that a taxpayer actually uses it by making gifts during the period in which the increased BEA amount is available. 

Proposed regulations released in April 2022 deny the benefit of the special anti-clawback rule to completed gifts that are treated as testamentary transfers for estate tax purposes and are included in the donor’s gross estate (includible gifts). The exception to the special rule, which requires the estate tax credit to be calculated using the BEA applicable on the taxpayer’s date of death (and thus a lower exemption amount after 2025), is likely to apply to grantor retained annuity trusts, qualified personal residence trusts, promissory note transactions, and possibly preferred partnership techniques. However, the anti-clawback rule would continue to apply to transfers includible in the donor’s gross estate where the taxable amount is 5 percent or less of the total amount of the transfer valued on the date of the transfer. The proposed regulations would also claw back gifts into a decedent’s estate made by the decedent less than eighteen months prior to the death of the decedent. 

We Can Help

No one is happy about the high rate of inflation, but you can help your clients turn lemons into lemonade by strategic gifting. Please contact us if we can help your clients determine if they should take advantage of the estate planning opportunities provided by the historic increases in the exclusion amounts, especially in light of the sunset of the doubled gift and estate tax exemption amount at the end of 2025. 

Are Your Clients Ready for 2023?

Set them up for success.

Advantageous Gift Ideas for Your Clients

Many Americans associate December with holiday gift-giving, so it is a great time for you to remind your clients of a valuable planning opportunity: year-end gifts. In making lifetime gifts, your clients will experience the pleasure of immediately benefitting their loved ones while helping to shape their legacies, for example, by funding a loved one’s education or continuing a family tradition of charitable giving. A much larger proportion of your clients can benefit from year-end giving, as the doubled gift and estate tax exemption amount will sunset at the end of 2025, returning to $5 million adjusted for inflation in the absence of legislative action. The following are several advantageous ways for your clients to make year-end gifts.

1. Direct payment of medical expenses. Your clients can make an unlimited number of tax-free gifts by paying their loved ones’ medical expenses. These gifts should be made directly to the medical providers rather than to your clients’ family members or friends. In addition, it is important to verify that the payments are for expenses that would qualify as deductible itemized medical expenses on the tax return of the individual receiving the healthcare. 

2. Direct payment of tuition. Similar to paying medical expenses, your clients can pay for their loved ones’ tuition. There is no limit on the amount of tax-free gifts or restrictions on who can benefit from them, but payments must be made directly to the educational institution, not to the parents or students themselves. The payments must fall within the Internal Revenue Code’s definition of “tuition,” which is not limited to college or graduate school tuition, but also includes private school tuition for younger students. It does not include payments for living expenses, books, or other fees, however. 

3. Charitable gifts on behalf of or in honor of a loved one. For clients who are charitably inclined or who want to honor a loved one by donating to their favorite charity, a year-end contribution to a qualified organization will also enable clients to claim a charitable deduction. Remind clients that they must keep records of any contributions, and they may need to obtain written acknowledgment from the charity to deduct a cash or noncash contribution. There are additional requirements for larger noncash gifts. Your clients can claim their charitable deductions during their lifetime or at death, depending on the strategy they use.

Your Help Is Crucial

As your clients’ trusted advisor, you can provide essential guidance by helping them determine when is the best time for them to make a gift, how large the gift should be, and what type of gift they should make. It may be more advantageous for your clients to give certain property or accounts over others, and you can help them evaluate what type of gift will work best for them and their recipients. You can also inform clients about the tax consequences of their gifts and assist them in making sure the relevant tax forms or other paperwork are completed and submitted to the Internal Revenue Service (IRS). Please contact us if your clients would like to integrate their lifetime gifts into a comprehensive estate plan.

How the 2022 Midterm Election Will Impact You and Your Clients

On Tuesday, November 8, United States elections for the year 2022 were held. During this important midterm election, more than one-third of the seats in the Senate and all 435 seats in the House of Representative were contested. Now that the results are in, we know that Republicans will control the House and Democrats will retain control of the Senate come January. What does this mean for you and your clients?

With a Republican-controlled House and a Democratic-controlled Senate, it seems likely that any legislative action, outside of must-pass legislation such as funding the government, will come to a screeching halt. And negotiations on even the must-pass legislation will likely be factious, with each party seeing it as their only opportunity to pass policy.

GOP power in the House means Republicans will likely bring congressional investigations of certain people, policies, and corporations. For example, congressional hearings for the Justice Department’s handling of the Trump Mar-a-Lago investigations and telecommunications companies that cooperated with the January 6 committee seem likely. Republican members of the House have also signaled support for probes into Hunter Biden, the White House’s handling of the southern border, and President Biden’s withdrawal from Afghanistan. Some far-right members have also said they would try to launch impeachment proceedings against President Biden, although this effort would likely not get far because the Senate, which has sole power to conduct impeachment trials, is controlled by Democrats.

The Republicans’ agenda will likely include putting an end to Build Back Better, and they may also attempt to get spending cuts as concessions from the White House when the time comes to raise the cap on government spending in 2023.

On the other hand, Democrats will focus on what they can do with the Senate’s power: confirming federal judges and executive branch appointments. Since only a simple majority in the Senate is required to confirm judicial nominees for district courts, circuit courts, and even the Supreme Court, a Democratic Senate will be able to confirm more of President Biden’s choices.

The Democrats’ retention of a majority in the Senate also means that they can determine legislative priorities—Senate Democrats can set their own floor agenda and reject bills approved by the Republican-controlled House. They can also ensure that hearings and committee time are not used on investigations of President Biden and other members of his administration.

In reality, at this point all we can do is speculate until the new congressional session begins. With such uncertainty, it is important to make sure we are meeting with clients and keeping them up to date. Life events such as marriage, divorce, birth, and death can have a major impact on our clients’ lives and necessitate a review of their estate plan. It is up to us to remind our clients that comprehensive planning is not a one-and-done event. Although it appears that there are no substantial legal changes impacting our clients’ financial and estate plans today, we pride ourselves on being your source for relevant estate planning information and look forward to working with you into the next year.IRS Extends Late Portability Election

The IRS recently issued a new procedure (Revenue Procedure 2022-32) that extends the time an estate has to elect portability to five years after the decedent’s date of death. Since portability is probably not top of mind for you or your clients, let us take a minute to review what portability is and why this news could be very useful information.

What is the portability election?

In its simplest terms, portability is a procedure that allows spouses to combine their estate and gift tax exemptions by allowing a surviving spouse to use their deceased spouse’s unused exclusion (DSUE) amount. The surviving spouse then has their own exemption from estate and gift tax plus the unused exemption of their deceased spouse.

Example: Spouse 1 dies in 2022 when the exemption amount is $12.06 million. Spouse 1 used $2 million of their exemption amount to make gifts during their lifetime, leaving a DSUE amount of $10.06 million. Spouse 2 can elect portability to combine Spouse 1’s $10.06 million unused exemption amount with their own exemption amount.

What was the prior deadline, and why did the IRS issue a new deadline?

Prior to Revenue Procedure 2022-32, for estates not required to file an estate tax return, the deadline to elect portability was two years after the decedent’s death. (For estates required to file an estate tax return, the due date for the return is nine months after the decedent’s death, or if an extension has been obtained, the last day of the extension period, regardless of whether the estate elects portability.) However, the IRS was receiving a significant number of requests for private letter rulings from estates that did not meet the two-year deadline, placing a considerable burden on the IRS’s resources. The IRS observed that many of these requests were from estates where the decedent had died within five years of the request, thus prompting issuance of Revenue Procedure 2022-32, which extends the election period to five years after the decedent’s death.

Why might your client be filing late?

Because many couples own property jointly, when the first spouse passes away, the surviving spouse becomes the sole owner of their deceased spouse’s property by operation of law; thus, they often do not consult with any advisors at the first spouse’s death. If the value of the surviving spouse’s money and property is greater than their individual exemption amount, or if the value of their money and property increases after the death of the first spouse, then the surviving spouse’s individual exemption amount alone may not be enough to avoid the payment of estate taxes.

Example: Spouse 1 and Spouse 2 own property worth $10 million. Spouse 1 dies in 2022 when the estate tax exemption amount is $12.06 million. Because everything was owned jointly, all property automatically passes to Spouse 2 as the sole owner. Spouse 2 does not file an estate tax return to elect portability at Spouse 1’s death and does not have to because Spouse 1’s assets were worth less than Spouse 1’s remaining estate tax exemption amount. When Spouse 2 passes away in 2026, the exemption is approximately $6 million, and Spouse 2’s property is now worth $14.06 million, meaning that estate taxes will be owed on the $8.6 million not covered by Spouse 2’s exemption amount. If Spouse 2 had used the extended five-year period for electing portability to claim Spouse 1’s unused $12.06 million exemption amount, the entire estate could have been shielded from estate taxes (($14.06 million – $12.06 million) – $6 million = no estate tax due).

As an advisor, you have the critical role of analyzing the financial and tax situation of your surviving spouse clients to see if it would be beneficial for them to file a Form 706 to elect portability. We are here to assist you in that analysis should you have any questions.

Is Your Client Giving a Trick or a Treat?

What Happens If Asset Ownership Does Not Match an Estate Plan?

Has your client been lulled into a false sense of security because they have “done” their estate plans? Unfortunately, a threat to your clients’ estate plans may be lurking in the shadows, if the way your client owns their property is inconsistent with their estate plan. This could end up making their estate plan a meaningless relic. How can you help your clients defeat this peril, so that their estate plan will work the way they anticipate when the time comes?

First, take time to either review your client’s estate plan yourself or have your client explain what their estate plan entails, including whether it is will-based or trust-based. This will help reaffirm your understanding of what your client’s estate plan is and identify gaps in your client’s estate plan and their knowledge of their estate plan. Differentiating between a will, trust, and other estate planning documents may seem straightforward and commonplace to you, but for clients who do not deal with these documents regularly, it can be confusing. Do not hesitate to walk your client through a refresher course on their estate plan or encourage them to do so with an experienced estate planning attorney.

Next, review account ownership to ensure that all of your client’s accounts and property are correctly titled. If something is supposed to be part of their trust at their death, is it owned by the trust or is the trust named as the beneficiary? Or, if the account or piece of property is supposed to be controlled by a will, is the account or piece of property owned solely by the client, or is there a co-owner that will automatically inherit the client’s interest? Many clients do not thoroughly understand that how they own their money and property will determine whether their will or trust, or neither, controls who will receive the money and property. You can educate your client so that they understand that, regardless of what their will or trust may say, the terms of those documents will not apply if the client or trust does not hold title to the property properly.

As their trusted advisor, you can help your clients avoid giving their loved ones a trick when they intend to give them a treat by ensuring that their account and property ownership matches their estate plans, so that they will work the way clients expect when the time comes.

Your Role in a Client’s Summertime Family Gathering

Along with warmer weather and lazy days spent at the pool, summertime also often includes a family gathering, such as a Fourth of July barbecue, a family vacation, a reunion, or time spent at a family cabin or lake house. Whatever the form, in our always-on-the-go society, getting the whole family together is a rare occurrence. Clients should take advantage of this time together to discuss their estate and financial wishes with their families. As an advisor, you can help facilitate and encourage this discussion in the following ways.

Meet Your Client’s Trusted Decision Makers Now

You can encourage a client to discuss their estate and financial plans with their family by offering to meet with your client and their trusted decision makers now. Clients often select adult children to act in trusted decision-making roles, such as a successor trustee, executor or personal representative, or agent under a financial power of attorney. By meeting these trusted decision makers now before they are needed, you can begin to develop a relationship with them and be an advisor that the family feels comfortable turning to for guidance when needed. Summertime, when family comes to visit, is the perfect time to have this meeting.

As part of this meeting, you can review the client’s important documents with the trusted decision makers so that they know what the client’s wishes are and how they should be carried out when the time comes. You can also answer any questions the client or the decision makers have about the client’s plan or their roles.

Have a Family Meeting

Another way you can help your client have a family discussion about their estate and financial plans is to offer to meet with your client’s entire family and conduct a family meeting. Clients often feel that they lack the skill set or knowledge to explain the sometimes complicated legal and financial concepts involved in their plans. After all, it is one thing to understand a concept when it is explained to you but quite another to try to explain the concept to someone else.

A client may also feel uncertain about how their family will react to their estate and financial plans. Having their advisor, an unrelated and objective party, there to explain the client’s plans and the benefits of those plans and answer any questions or concerns that their family members may have can remove some of the emotional upset or criticism that could emerge.

By offering to attend and conduct a family meeting, you can reduce or eliminate your client’s fears about explaining their estate and financial plans to their family. You can also be invaluable in helping the client determine the best format for this family meeting. For example, should the family meeting be siblings only, or should in-laws also be included? Should the family meeting include grandchildren? Your knowledge of your client’s family dynamics and plans will be extremely useful in determining the best format for the family meeting.

Summertime is a common time for families to get together. Encourage your clients to take advantage of this time to discuss their estate and financial wishes with their families by offering to meet with their trusted decision makers or to conduct a family meeting. Doing so is a great way to provide added value to your clients. Please reach out to us if you need assistance discussing these ideas with your clients or hosting a meeting.

Three Things You Can Do to Help Clients with National Moving Month

The month of May means not only the end of the school year and the beginning of summer but also the beginning of the busiest moving season of the year. That’s why May is National Moving Month. Your clients have a lot to think about when moving: along with organizing and packing up all of their belongings, there is also starting and stopping utilities, mail forwarding, updating voter registration, and so on. While the ever-growing number of items on their moving to-do list may be overwhelming, there are three important things you can do to help any client in the process of moving: (1) make sure they know where their important documents are, (2) help them set a moving budget, and (3) continue as their advisor, or connect them to a new advisor.

Make Sure They Know Where Their Important Documents Are

In all of the chaos of moving boxes and packing tape, it is easy for things to get lost in the shuffle or even thrown out during a move. Yet certain important documents, such as birth certificates, social security cards, passports, financial statements, and estate planning documents, should not be packed up and put on the moving truck along with the client’s dishes and shoes. You can help your client keep their important documents safe and accessible during their move and ensure that these items do not get thrown out by accident.

One idea you can suggest to your clients is that they purchase a portable file box with an attached lid and a secure latch. Purchasing a brightly colored one can make it more easily identifiable. Then, they should place this file box in a secure and easily accessible location. If they are moving locally, a logical place might be at a family member’s or friend’s home. If they are moving a longer distance, then that place might be the trunk of their car.

It is also wise for them to make electronic backup copies of all of their important documents. This could take the form of taking pictures of their documents and saving them to their smartphone, a password-protected removable flash or external hard drive, or storing them in the cloud. Then they will at least have a copy of these important documents in case they cannot locate the original. You can let your client know if you, as their advisor, have also made and stored copies of any of these important documents.

By helping your client with this simple step in the moving process, you will save them a lot of time and headache when, for example, they are not having to run around searching through unpacked boxes for their children’s birth certificates so that they can register them for their new school.

Help Them Set a Moving Budget

One of the pressing questions associated with a move is how much it will cost. Although the final calculation of cost will depend on factors such as the size of the client’s home, the distance the client is moving, and the client’s willingness to take on DIY projects, encourage clients to reach out to you or their financial advisor to help them set a moving budget that aligns with their long-term financial goals.

Continue as Their Advisor or Connect Them to a New One

Finally, you should discuss with your client whether you will be able to continue being their advisor after their move. In situations where it is not possible to continue being their advisor, such as when a client is moving to a state where their current estate planning attorney is not licensed to practice, then the advisor can help make the client’s transition easier by connecting them with a competent attorney in their new home town.

For example, a will or trust created in one state should generally be valid in the client’s new home state. However, some documents, such as a financial or medical power of attorney, can be state-specific. Because estate planning laws vary by state, it is highly recommended that they have their estate planning documents reviewed to ensure their validity in the client’s new state. Their estate planning attorney can review their documents or you can connect them with an attorney in their new state who can review them.

If the client is married, their out-of-state move may have additional estate planning implications if they are moving to or from a community property state. Currently, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Moving from a community property state to a noncommunity property state (i.e., a common law state) or from a common law state to a community property state raises questions about whether community property remains or becomes community property. For example, if a couple acquires a home in California during their marriage and then moves to Nebraska and purchases a new home in Nebraska with the proceeds from the sale of their home in California, is the new Nebraska home community property? The client’s estate planning attorney can help answer these questions.

There is a lot to think about when moving, but it will ease the client’s burden if (1) they know where their important documents are, (2) they have a moving budget, and (3) they know they will continue to receive great advice from their advisor team after their move. If you need any assistance with a client who is moving, give us a call.

What Will Happen If Your Clients’ Loved Ones Become Disabled?

We all plan for “just-in-case” scenarios. When packing for our week-long vacation, we throw in a rain jacket even though the weather forecast is sunny—just in case. When helping clients plan for the future, it is also important to consider what will happen just in case one of our clients’ loved ones becomes disabled.

We tend to think that disability is something that affects other people. But approximately 61 million adults in the United States live with a disability—that is one in four adults. And more than one in four twenty-year-olds will become disabled before reaching retirement age. Disability is unpredictable, and accidents or serious physical or mental conditions, such as cancer or mental illness, can happen to anyone at any age. 

As helpful as it would be when advising our clients, no one has a crystal ball to see into the future. We do not know when a client will pass away, and we do not know what position a beneficiary will be in at the time of a client’s death. So even if our clients do not currently have a loved one who is disabled, it is critical not to overlook the question of what will happen if a client’s loved one becomes disabled at a future time.

If a loved one becomes disabled, they may need to rely on financial assistance from government programs such as Medicaid or Social Security Disability Insurance. Unfortunately, a monetary gift or inheritance may disqualify a person from receiving these public benefits. In this situation, a client’s well-meaning gift could become more of a curse than a blessing.

Standby Supplemental Needs Trust

To avoid the possibility that a disabled loved one will lose government benefits because they have too much money, a client may want to consider setting up a standby supplemental needs trust as part of their estate plan. The terms of a supplemental needs trust provide that the trust’s money and property are only available to “supplement” the government benefits a beneficiary may be receiving. Therefore, the trust’s money and property are not included as available resources when determining a beneficiary’s eligibility for government needs-based benefits. A “standby” supplemental needs trust does just what its name implies: the supplemental needs trust is not created automatically but is on standby and comes into existence only if a beneficiary is disabled at the time of the client’s death or, depending on the applicable state’s eligibility rules, becomes disabled at a later date but before the trust has been fully distributed. If the disabled beneficiary is receiving public assistance at the time of the client’s death, the inheritance the beneficiary receives in a properly drafted supplemental needs trust will not disqualify them from the public assistance benefits but instead can be used to supplement the benefits they are receiving from the government and enhance the beneficiary’s life.

When advising our clients about planning for the future, we provide great value by helping them think through the what-if scenarios. Failing to help them think through what would happen if a loved one became disabled could result in trust assets being completely consumed by a disabled beneficiary’s care instead of wisely invested and used to enhance their life. Further, such failure could be viewed as professional negligence. 

Since no one knows what the future holds, nearly every client could benefit from including standby supplemental needs trust provisions in their estate plan. If the standby supplemental needs trust is not needed at the time of the client’s death, then the trust will not come into existence. But it does not hurt to include it—just in case.

Presidential Estate Planning Lessons You Can Use to Advise Your Clients

February 21 is the day on which we celebrate several US presidents who made noteworthy contributions to our country. As with any discussion that involves politics, a discussion about US presidents risks generating a variety of opinions about which reasonable minds can disagree. However, politics is not the focus of this month’s newsletter. Instead, our aim is to examine a few of the important lessons we can learn from the estate planning of some of our country’s most famous political leaders. Armed with these important lessons from history, you can help your clients make better decisions for their own estate planning.

George Washington

Washington was arguably the most universally beloved and revered US president. Volumes have been written about this man and what he accomplished during his life. One significant achievement that few people know about is the care Washington took to ensure that his final affairs were in order and that those who relied on him were cared for to the best of his ability. Washington’s last will and testament, widely available online in its entirety, shows that he thought carefully about his final affairs and about those who depended on him; he also remembered many individuals by making very thoughtful decisions and gifts of items of personal property or specific bequests. 

It is worth mentioning that Washington had a rather nontraditional family situation and had to carefully consider how his estate should be distributed among his loved ones. At age twenty-six, Washington married a widow, Martha Custis, who had two children of her own from her previous marriage, whom they raised together. After his stepson, John Custis, died during the war from an infection, Martha and George Washington raised John’s two youngest children as their own.  As a result of his blended family, Washington carefully crafted the language of his will to provide very specific bequests to each of his surviving family members to ensure that they were well cared for long after he was gone.

Washington provides an excellent example in the level of thought and care with which he crafted his estate planning. Even if we do not have the wealth that Washington died with, we can still be very deliberate and thoughtful when it comes to how much, and to whom, we leave our wealth and meaningful items of personal property. By spending sufficient time and effort to think about and memorialize how we want to leave our possessions to our loved ones, we can leave a real legacy that has the potential to benefit generations.

Thomas Jefferson

While equally as famous as George Washington, Thomas Jefferson’s financial situation was far less favorable than Washington’s upon his death. Despite being a brilliant intellectual and the principal author of the Declaration of Independence, Jefferson nevertheless struggled to manage his financial affairs during life. In addition, he was saddled with both debts inherited from his family and that he had assumed by cosigning on a loan for a friend who died prematurely. When Jefferson passed away, he still had significant debts that his family had to repay. Because Jefferson had valuable real property but very little liquid cash with which to pay his debts, his executor ultimately had to sell the family land at depressed market prices to raise enough cash to pay his debts. The unfortunate result of these circumstances was that very little of Jefferson’s property was able to be passed down within his family.  

Many families today face similar problems with illiquid or insolvent estates. This issue arises most often when a business or farm owner has significant wealth tied up in their business or land but little cash in reserve to settle debts or pay transfer taxes at death. This can cause the families left behind to feel intense pressure to sell the business or the land at significantly less than they might otherwise be able to sell it for under better conditions in order to raise the cash necessary to pay the debts or taxes that will shortly come due.

Life insurance is an important estate planning tool often used to provide sufficient cash to pay a deceased individual’s debts or transfer taxes. With the proper type and amount of life insurance, and by using certain estate planning tools such as irrevocable life insurance trusts, an individual can prevent a “land rich, cash poor” situation like that experienced by Thomas Jefferson’s family. 

Abraham Lincoln

Another well-known and beloved US president—a lawyer, no less—very surprisingly died without a will or any other type of estate planning in place. Lincoln, like so many of us, quite possibly believed that he had many more years to address this important task. His tragic murder at the hands of a political malcontent plunged Lincoln’s family into a confusing and completely unfamiliar situation as they attempted to settle his affairs with no knowledge of where to begin. His oldest son, Robert, reached out to US Supreme Court Justice David Davis to take charge of Lincoln’s affairs. Justice Davis generously stepped away from his duties on the court to assist the Lincoln family with the local court process for settling Lincoln’s estate. His estate was divided between his wife and his living sons, most likely according to the default laws of the jurisdiction. However, it remains unclear whether this is how Lincoln would have wanted to see his property divided.

A key lesson is that no one knows when they will pass away. Even someone as important and well-versed in the law as Abraham Lincoln was caught unprepared for his untimely demise, sadly leaving others to guess what his wishes would have been with respect to his property. The family undoubtedly experienced significant distress and frustration by not having a clear understanding or plan in place for handling Lincoln’s final affairs. Had Lincoln put some basic planning such as a will or a trust in place prior to his death, perhaps he could have helped ease his family through a very challenging time when he was no longer available to them.

Learning from These Presidents

There is a great deal more that could be discussed and learned from the experiences of these and other US presidents as it relates to estate planning. As you discuss some of these lessons with your clients, we hope that you will be able to help them think about their own estate planning and what they might want to do differently going forward. If any of your clients have circumstances similar to those discussed above and you would like to learn more about how to craft an estate plan that is designed specifically for their unique situation, give us a call. We would be more than happy to visit with you or your clients and discuss these matters further. Until then, Happy President’s Day!