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.

Generational Wealth through Adoption and Dynasty Trusts

Since a dynasty trust is mainly used to create a lasting financial legacy for multiple generations, it is structured to provide for the client’s descendants. This is a common strategy to ensure that wealth is preserved and passed down over many lifetimes and stays within the bloodline. However, if a beneficiary does not have any descendants, other family members may likely inherit. If the beneficiary would like someone else to inherit, they may consider adopting that individual so that they will be considered a descendant. 

The Rights of Adopted Children According to State Law

Under most state laws, adopted children typically have the same legal rights and privileges as biological children. Once the adoption process is complete, adopted children are treated as the biological offspring of their adoptive parents.

Adult Adoptions According to State Law

Adult adoptions are legally permitted in some jurisdictions, but the laws vary and can be very restrictive. In some places, adult adoptions may be allowed for reasons beyond familial relationships, such as inheritance or emotional bonds. 

If the state allows it, your client’s beneficiaries could consider adopting adults to ensure that a loved one receives a share of their inheritance. 

Legal Considerations 

Inconsistencies in trust language can often lead to probate and estate litigation. If a trust does not specifically address the adoption and intent, it can cause problems, as was the case in Morse v. SunTrust Bank, N.A.

In 1967, a multi-generational testamentary trust was created to provide separate subtrusts for each of the decedent’s 13 grandchildren, including any new grandchildren born before or after the grantor’s death. If a grandchild died without any descendants, their subtrust would be divided and added equally to the remaining subtrusts. The decedent did not address whether adult adoptees would be treated as descendants.

One of the decedent’s grandchildren, Molly, never had any children. In 2018, she adopted two adults, ages 34 and 36, admitting that the adoptions were for the purpose of receiving distributions from her subtrust on her death.

Other subtrust beneficiaries objected to Molly’s adopted adult beneficiaries, accusing her of fraud. A trial judge agreed, preventing Molly’s adopted adults from inheriting as descendants.

An appeals court reversed the trial judge, noting that the testamentary trust had failed to place any limits on an adult adoption. Also, Georgia’s adult adoption statute did not include any language that would prevent Molly’s adopted adults from becoming beneficiaries of her subtrust.

Adoptions and Trusts 

It is important for your client to address the potential for adoptions as part of their estate plan. They need to know how adopted individuals (adults or children) will be treated as beneficiaries according to your state law and ensure that their trust clearly expresses their wishes. A trust can contain a definition of a descendant and address the possibility that an adopted individual will become a beneficiary of the trust. Alternatively, provisions in the trust can exclude adopted individuals.

Advising Your Clients

Adoptions are not necessary to transfer your client’s own money and property to those they choose. But trust beneficiaries without children may be able to use adoption to steer trust funds to the person of their choice rather than having the money redistributed to other relatives. However, adoption can backfire if a relationship ends, leaving an outsider with a share of the family fortune or alienating family members. 

It is crucial to consult with other professionals if adoption and estate planning fall out of your scope of expertise. They help ensure that any adoption-related strategies align with state laws and regulations, which define rules for succession for adopted individuals, whether minors or adults. Trust documents should be carefully drafted to account for various scenarios and to provide clarity on how adoptions would affect the distribution of money and property within the trust.

Successful Dynasty Trusts in History: The Rockefeller Family

Dynasty trusts have played a crucial role in preserving wealth and fostering a lasting financial legacy for many affluent families throughout history. One excellent example is the Rockefeller family, whose strategic use of dynasty trusts has made them one of the most prosperous and enduring family dynasties in the world.

Who Started It?

The Rockefeller dynasty trust was established by John D. Rockefeller, the American business magnate and philanthropist who founded the Standard Oil Company in 1870. As the wealthiest individual of his time, Rockefeller developed values and traditions to keep his family together and preserve their wealth over 150 years. In 1934, he established the family’s first trust, which laid the foundation for the creation of the dynasty trust in 1952, both managed by Chase Bank, that would protect the interest of family descendants for generations.

Standard Oil would go on to control 90 percent of US refineries and pipelines, and Rockefeller became the wealthiest man in the world and one of the first billionaires, with a family fortune valued at over $600 billion in today’s dollars. Standard Oil now operates under ExxonMobil and Chevron corporations. 

What Does the Trust Hold?

The Rockefeller dynasty trust encompasses significant and diversified assets, including equities, real estate, energy, technology, private investments, and philanthropic foundations. A strategic approach to protecting resources in trusts has allowed the family to preserve wealth and adapt to economic upheaval and fluctuating markets.

Who Benefits from It?

For over 150 years, multiple generations of Rockefeller family members have benefited from the trusts that successfully passed down wealth to support their financial literacy and education. This in turn allowed them to continue the family’s charitable pursuits in education, healthcare, business, and more.

Other Accomplishments and Philanthropic Initiatives

Beyond the financial aspects, the Rockefeller dynasty trust drives numerous philanthropic initiatives. It utilizes financial resources to encourage a sense of stewardship and philanthropy to shape the family’s financial future and guide each generation to make responsible impacts on society. The Rockefeller Foundation was established in 1913, addressing global challenges such as public health, education, scientific research, and environmental conservation, and still plays a pivotal role in shaping cultural institutions today. 

The Rockefeller Trust Continues to Be a Success

The last surviving grandchild of the Rockefeller patriarch, David Rockefeller, died at age 101 in March 2017. His oldest son, David Rockefeller Jr., 76, continues to protect the family’s financial security and philanthropy. The Rockefeller net worth is currently valued at $8.4 billion, spread out over 170 heirs. Various trusts have helped fund projects ranging from the arts to international trade.

Tips for Clients Considering a Dynasty Trust

If your clients are considering a dynasty trust, you should collaborate with other professionals to help them get started. Since setting up and funding a trust is a complex process, it could take some time to create the right strategy that aligns with financial and family goals. Clients need to understand their options to protect their assets and their family’s future.

If your client chooses to include a dynasty trust in their financial and estate planning, you can explain how this flexible tool is designed to hold, control, and distribute property over many generations. Using a dynasty trust, your client can decide how their money is going to be transferred, to whom, and when. Ask them to think about what they want for their family’s future and help them clearly articulate their goals for the next generations.

Dynasty trusts are powerful tools for those who want to provide a lasting legacy and financial security for future generations. The Rockefeller dynasty is a great example of the enduring success of well-structured and meticulously managed trusts and estate planning strategies. If you have clients who want to make a lasting impact on their families and the world, we can help.

Preserving Your Client’s Legacy with a Dynasty Trust

What Is a Dynasty Trust and Which Clients Should Consider Them?

Advising your clients on the best ways to protect their family and wealth requires considerable financial and estate planning knowledge. Armed with this knowledge, you can help your clients explore all options available to protect their legacy. Depending on a client’s situation, a dynasty trust may be one of the options you present. 

Who Could Benefit from a Dynasty Trust?

An ideal client for a dynasty trust is typically someone with substantial wealth and a desire to create a lasting financial legacy for their family that spans multiple generations. These clients are often concerned about preserving their wealth from erosion due to taxes, potential creditors, lawsuits, or other financial risks while ensuring responsible management and distribution of their money and property. 

High-net-worth individuals may need complex estate planning strategies to achieve these goals. A successful estate plan is not just about transferring wealth to the next generation. It is about sharing their vision for their family’s financial future along with setting certain guideposts for the management and distribution of wealth to ensure responsible financial stewardship.

How a Dynasty Trust Works

Creating and funding a dynasty trust should be done by an experienced estate planning attorney along with other trusted advisors. In working together as a team, these professionals can guide the client in deciding which cash, real estate, investments, or other valuable property should be transferred to the trust. The client may be able to use their lifetime gift tax exemption to successfully transfer these items while minimizing tax consequences for themselves and their heirs in the future. Tax-efficient growth creates an even greater legacy for successive generations.

A dynasty trust is designed to be perpetual or of long duration. Unlike some other trusts that have a limited or fixed termination date, a dynasty trust will likely last for multiple generations and continue to accumulate and grow wealth over time.

A dynasty trust often involves appointing a professional trustee, such as a bank or trust company, to oversee the management and administration of the trust. They must follow specific terms and guidelines, ensuring responsible governance and distribution of resources according to your client’s wishes. These terms may include flexible distribution provisions to provide income to beneficiaries, an option for the trustee to make discretionary decisions based on specified criteria, or permitting the trustee to adjust distributions in response to changing family circumstances.

Why Would Your Client Want a Dynasty Trust?

By placing money and property in a well-structured dynasty trust, your client ensures that the wealth they have worked hard to accumulate remains protected within the family.

Life is unpredictable, and unforeseen circumstances such as lawsuits, creditors, or even divorces can pose threats to the financial stability of your client’s family. Since money and property are legally owned by the dynasty trust rather than any individual family member, they can be safeguarded from creditor claims and legal judgments in many cases. 

Estate taxes can significantly erode the wealth passed down to heirs. Dynasty trusts are structured to minimize the impact of estate taxes over multiple generations. Additionally, the appreciation in value of trust resources while the client is alive will occur outside your client’s taxable estate, allowing for potential growth free from estate tax implications. 

Customized provisions in a dynasty trust can govern how money and property in the trust are managed and distributed. This level of control is particularly beneficial when there are concerns about the financial acumen or spending habits of future generations. Your client can ensure that their wealth is managed responsibly while still providing for their heirs. 

If you have high-net-worth clients seeking to create a lasting financial legacy for their families, help them discover sophisticated planning tools like the dynasty trust. By leveraging the benefits of perpetual duration, tax-efficient growth, asset protection, and responsible governance, your clients can address the unique needs and goals of their families over multiple generations. If you are interested in learning more about dynasty trusts and how we can work together to serve your high-net-worth clients, call to schedule an appointment.

We Are Celebrating International Networking Month

We Can Do Great Things When We Work Together

February is known as International Networking Month. During this month, we can celebrate our professional relationships by building and strengthening our networks. When we work together, we can provide unique solutions for our clients, like our hypothetical couple John and Jane.

Meet John and Jane  

John and Jane are beginning a comprehensive estate planning journey and need your help. John is a 45-year-old software engineer with an annual income of $150,000, and Jane is a 42-year-old marketing manager who makes $120,000 per year. 

Together, they have joint ownership of their primary residence with a current value of $600,000 and a mortgage of $300,000. John has $500,000 invested in a 401(k), $200,000 in various stocks and mutual funds, $50,000 in savings, and about $20,000 in credit card debt. Jane has $300,000 in her 401(k), $150,000 in investment accounts, and $30,000 in savings, with no significant debt. 

John and Jane have a strong financial foundation, but they are aware of the importance of planning for the future of their growing family. They have two young children, Danny (age 11) and Jenny (age 8), and want to ensure their wellbeing in the event of unforeseen circumstances. 

Serve as Their Financial Advisor

John and Jane need professional advice to address retirement savings and investment goals. If their investments are optimized, their estate can grow. A financial advisor can help them develop a strategy to 

  • maximize their investment portfolios, ensuring their funds grow efficiently and can fund their long-term goals;
  • create a comprehensive retirement plan, ensuring they are saving enough so they can maintain their lifestyle once they retire; 
  • assess and mitigate potential risks, providing a financial safety net for major life events; and
  • help ensure their investments are funded into their trust, if a trust is part of their estate plan.

Meet With a Tax Professional

A tax advisor can ensure that John and Jane’s estate plan is tax-efficient, preserving more of their wealth for future generations by

  • ensuring John and Jane are aware of available exemptions, deductions, and credits that can minimize potential tax liabilities during their lifetime;
  • discussing tax consequences when gifting money and property to their children or other loved ones;
  • evaluating real estate, potentially reducing capital gains taxes for heirs upon the sale of inherited property; and
  • keeping John and Jane informed about tax law changes. 

Contact an Insurance Agent

A professional insurance agent can advise John and Jane on the right amount of insurance coverage to provide liquidity in an emergency. Integrating risk management strategies into their estate plan provides a safety net for their family by

  • ensuring life insurance death benefits are sufficient to cover outstanding debts, ongoing living expenses, and the future needs of the surviving spouse and children;
  • choosing term life, whole life, or universal life policies for different situations;
  • considering long-term care insurance so John and Jane can access quality healthcare in an emergency; and
  • reviewing policies and beneficiary designations as needs change.

Reach Out to a Spiritual Leader

John and Jane may also consider advice from their spiritual leader about the legacy they want to leave their children and future grandchildren. Discussing the important lessons that they want to impart to Danny and Jenny and their future children can allow John and Jane to 

  • reflect on the legacy they want to leave to their children, not just in terms of money or property but shared principles, traditions, and giving back to the community; and
  • consider their end-of-life wishes to ensure that their spiritual and cultural beliefs are respected, from their desired treatment and care to funeral or memorial arrangements.

Take Valuable Advice to an Estate Planning Attorney

Advisors’ contributions paint a complete picture for John’s and Jane’s estate planning attorney, whose job is to prepare a strategy that aligns with their goals and needs.

An estate planning attorney can guide John and Jane through hypothetical scenarios based on their current situation to determine what would happen if they could not make their own decisions due to incapacity or death. They will need to

  • name trusted decision-makers in their powers of attorney for financial and medical emergencies; 
  • decide and document their wishes regarding life-sustaining treatments, organ donation, and funeral arrangements in their healthcare directives;
  • choose a guardian and backup guardians to care for Danny and Jenny in the event of their incapacity or passing;
  • create a plan to distribute and protect their wealth with a will or trust;
  • identify beneficiaries;
  • discuss any specific bequests or charitable intentions; and
  • explore strategies to preserve money and property for their loved ones.

Share the Love Through Networking

A team of advisors can provide expertise in various ways, resulting in a comprehensive estate plan that is legally sound but also deeply rooted in John’s and Jane’s values and preferences. From developing trusts that protect their life savings to transferring property and personal belongings equitably to both children, John and Jane will have peace of mind that their children will not suffer unnecessary tax consequences, issues with creditors, or complications when the time comes. Let’s work together to help ensure that all of our clients will have a successful and comprehensive plan like John and Jane.

Top 3 Questions to Ask Your Clients About Their Estate Plan

As a trusted advisor, you provide expert guidance to your clients regarding many financial planning matters. It makes sense that you will come across clients who ask about estate planning. Even if they do not ask, you can start the conversation by inquiring if they have thought about what would happen to their money and property if something were to happen to them. 

You do not need to be an expert in estate planning to help a client get started. However, you should refer them to an attorney after your initial discussion and encourage them to develop a comprehensive plan that contains the right legal tools to meet their goals. You can lay the groundwork by explaining how important it is to have a comprehensive estate plan.

Clients who already have an estate planning attorney may only see them once every few years to review their plans, while others may not have spoken to their estate planning attorney since they first created their estate plan many years ago. You may see the client more often and know of changes in their life, investments, and beneficiaries that can greatly affect their estate and long-term goals. You can remind your clients that they may need to visit their estate planning attorney due to changes you have discovered or discussed.

1. Does your client currently have a will or trust?

Many people procrastinate about creating a will or trust, often thinking they do not own enough to need an estate plan or wanting to avoid what they think will be a complex, expensive process. You can address these misconceptions so they can move forward with protecting themselves and their loved ones. 

If your client has not done an estate plan, remind them that the state has an estate plan for them—the intestate law for those who die without a will or trust—and that plan may not be what they want, especially if they have a blended family. There is a hierarchy that the state follows when determining which family members receive a person’s money and property and how much they will receive. In most cases, these laws do not account for stepchildren or unmarried partners. If the client wants to determine who will receive their money and property, they need to proactively plan with the assistance of an experienced estate planning attorney. 

If your client already has a will or trust, ask when it was last reviewed or updated. Explain why estate planning is not a one-and-done project. Changes in family dynamics and life events will affect their estate plan. Over time, people change their minds, get married or divorced, have children and grandchildren, and buy and sell investments and property. These changes can impact who the client chooses as their trusted decision-makers, who they want to receive their money and property, and how much they want certain people or charities to receive. The client’s estate plan needs to evolve with the client to ensure that their wishes are carried out.

2. Does your client have people they trust to make financial or medical decisions for them in emergencies?

If your client has not chosen people to make financial and medical decisions for them, if they are unable to make their own decisions, they need to think about who they would want to do so. When choosing trusted decision-makers to serve as agents under a financial or medical power of attorney, your client must consider whether a person has the necessary qualities and skills to handle the role, whether they are willing to accept the role, and whether they understand their responsibilities. 

If your client has chosen people to serve as decision-makers, it is important that these people understand your client’s wishes should they need to step in and act. Your client can communicate their wishes by having a conversation with the decision-makers, providing their wishes in writing, or stating their wishes in a video. Your client should also periodically evaluate whether the people they have chosen are still the right people for the job. 

If your client is unable to make decisions for themselves and they have not properly named someone to act for them under financial and medical powers of attorney, a judge will have to decide who will make the financial and medical decisions on the client’s behalf. It can be time-consuming and costly for family members, as well as emotionally overwhelming, particularly in a medical emergency. In addition, the judge may appoint someone whom the client would not have chosen.

3. Does your client have minor children?

If your client has minor children, the client must nominate temporary and permanent guardians to care for them in the event the client and the other parent are unable to care for them. If the client has already nominated someone to serve as a guardian, they should review this selection and make sure the person is still able and willing to care for the children should something happen. If your client does not nominate someone, the state will choose a person to care for the children. If no family members are available, it could be a professional guardian who is a stranger. 

Starting your client on their estate planning journey offers them the incredible opportunity to preserve their legacy and protect their loved ones. Reminding your clients to review their existing estate plan ensures that their loved ones and legacy will continue to be protected. We are happy to work with any of your clients who have questions about creating or updating their estate plans.

Rules to Follow When Working With Referral Sources

Attorneys are bound by many different sets of rules regarding how they interact with clients, prospects, and referral sources. To properly represent a client, an attorney may need to refer the client to another attorney or advisor for their specialized expertise, such as a financial professional, tax advisor, or insurance agent.

To ensure that all parties have a mutually beneficial relationship, the following are some American Bar Association model rules that attorneys must adhere to when working with other professionals.

American Bar Association Model Code of Professional Conduct Rule 7.2: Communications Concerning a Lawyer’s Services

The American Bar Association’s rules of conduct protect attorneys, clients, and referral sources. Lawyers can establish reciprocal referral relationships with other attorneys and nonlawyer professionals as long as those referral relationships are not exclusive. For example, if our estate planning client needs assistance from a financial advisor, we must recommend a few different advisors. In selecting who to refer to the client, we must also ensure that our recommendations do not interfere with our professional judgment and the client knows about the arrangement. This ensures transparency and allows the client to make informed decisions when looking for other professionals. 

As a matter of ethics and integrity, lawyers cannot receive financial incentives or compensation in exchange for referrals. However, referrals can express appreciation through nominal gifts of little monetary value as a gesture of gratitude. This rule prevents conflicts of interest that may arise from financial arrangements between attorneys and other professionals.

American Bar Association Model Code of Professional Conduct Rule 1.6: Consent for Involvement of Non-Clients

Attorney-client privilege protects confidential communications between a lawyer and their client. Rule 1.6 protects this privilege and the client’s privacy. Clients must consent before an attorney can share privileged information with referral sources, other professionals, or the client’s family members. Your clients may want their advisors involved in the estate planning process because they have relevant information to share (e.g., bank account balances, policy information, prior tax filings) and can offer helpful insight. 

We welcome the opportunity to work with you to better serve our mutual clients. To make sure that we fulfill our ethical obligations, we may have the client sign a third-party waiver form that grants us permission to share relevant information with you or to have you be part of the planning session we have with the client.

To help ensure that our clients have a comprehensive estate plan, we sometimes need to assemble a team of trusted professionals who can contribute their expertise to achieve incredible client outcomes. We appreciate working with you and look forward to working with you more in the future. 

Clients Who Need to Think about Estate Tax Changes

You want to ensure the efficient financial management and transfer of your clients’ wealth from one generation to the next. For people with significant wealth, successful strategies include minimizing the impact of estate taxes. The Tax Cuts and Jobs Act (TCJA), passed in 2017, introduced considerable changes to the estate tax law. Many of these changes will sunset at the end of 2025, potentially reversing the estate tax exemption of $13.61 million to somewhere between an estimated $6.4 and $7 million. This means that more people will likely be subject to the federal estate tax.

Certain clients, including business owners, farmers, and those with large investment portfolios, may need to reevaluate their estate plans this year.

Estate Tax Planning for Business Owners

Business owners should be acutely aware of the impending sunset of the TCJA tax exemption provisions. Many family-owned businesses may not be subject to federal estate tax at the current exemption amount. However, if these exemptions revert in January 2026, it may become necessary to revisit business succession planning strategies. If your client is not prepared, a significant estate tax bill may require a payment plan with the Internal Revenue Service (IRS). It could also result in liquidating or selling the business, leading to income loss for the owner and job loss for family employees and others.   

Start by reevaluating the business and property, including equipment, inventory, liabilities, earnings, and projected earnings. Encourage your business owners to consider options such as gifting or using family limited partnerships to minimize their business and estate for tax purposes.

Estate Tax Planning for Farmers

Farmers often have much of their wealth tied up in land, and the sunset of the TCJA tax exemption provision can significantly affect their estate planning. While the increased exemption limits currently protect many farmers from federal estate tax, the sunsetting of the high exemption amount in January 2026 may change this. Like with other business owners, it may be necessary to reevaluate their succession plan. Planning ahead could help the farmer’s loved ones avoid being hit with a monstrous estate tax bill, requiring an IRS payment plan, potential sale of the farm, and lost jobs. 

Work with your high-net-worth farmers to explore options like land valuations, gifting strategies, and structuring irrevocable trusts to protect their farmland, crops, equipment, equity, and retirement funds. As with other businesses, entity formation such as family limited partnerships or limited liability companies could also be beneficial in mitigating estate taxes, depending on the circumstances. 

If your client is getting ready to sell their farm, talk to them about deferring capital gains by structuring an installment sale or creating a related-party trust for the benefit of kids or grandkids. 

Estate Tax Planning for Clients with Large Investment Portfolios

In preparation for the potential sunset of the TCJA provisions, clients with large investment portfolios should revisit their allocation of stocks, bonds, and other investments. They should take a closer look at basis planning and ways to minimize capital gains tax liabilities for heirs.

Clients with substantial investment portfolios should consider revising their gifting strategies. While the higher exemption limits are in place, they can gift items to loved ones or create trusts to shelter money and property from estate taxes. The 2024 gift tax limit is $18,000 per individual.

One of the most common and effective strategies for high-net-worth estate planning is establishing trusts for complex situations, such as protecting savings for future generations. If your clients are relying on their portfolio to support their loved ones after the clients’ death, you may need to evaluate how quickly items in their portfolio can be transferred or liquidated in case of an emergency. 

Charitable giving can be another effective way to reduce estate tax liability. Help your clients explore options like charitable remainder trusts (CRTs) or charitable lead trusts (CLTs) to support both charitable causes and estate planning goals.

Educating Your Clients

As the sunset of the TCJA at the end of 2025 approaches, you should proactively guide your clients through options for changing estate tax strategies with the worst-case scenario in mind—reduction of the exemption amount. Business owners, farmers, investors, and high-net-worth professionals all need to reassess their estate planning strategies and investigate the tax implications for heirs when redistributing property.

Many clients who are currently exempt from federal estate taxes may face significant tax liabilities in the future. The key to successful estate planning is flexibility, adaptability, and staying ahead of regulatory changes to achieve your clients’ goals effectively.