Category: The Wealth Counselor

What Is a Trust Protector?

Traditionally, the three roles that must be filled when setting up a trust are the settlor (also called a grantor, trustor, or trustmaker), the trustee, and the beneficiary. All three roles are necessary to create a trust that functions properly. Although it is relatively common to use trust protectors in foreign asset protection trusts, a trust protector is a fairly new role in trusts drafted in the United States for estate planning purposes. However, as the number of trusts designed to last for generations grows, estate plans need more built-in flexibility. Giving a trust protector, through the terms of the trust, certain powers over the trust, such as removing or appointing trustees, adding or removing beneficiaries, and amending or even terminating the trust, ensures that your client’s intentions for creating the trust are fulfilled despite changing law or circumstances.

How Is a Trust Protector Selected?

A settlor may select as a trust protector any individual or group of individuals, such as family members, business associates, friends, attorneys, accountants, or other professional advisors. The naming of a trust protector may be specific, such as “my neighbor John Doe,” or general, such as “a CPA selected by the majority of the owners of the [ABC CPA Firm].” The settlor provides for and selects a trust protector in the trust agreement.

Who Makes a Good Trust Protector?

Because of the many and varied powers that a trust protector can hold, your client should name a trust protector who has attributes, knowledge, or skills suitable for the responsibilities of the role. For example, if the trust protector has the power to amend the terms of the trust to account for changes in tax law, the selected trust protector should have some understanding of tax law and how it will impact the trust. Perhaps a trusted family member could still serve in this role as long as he/she obtains appropriate tax advice. If a trust protector has the power to veto or direct trust distributions to beneficiaries, the selected trust protector should understand the family history and desires of the settlor. Different powers may require the selection of different trust protectors or possibly a committee of trust protectors.

What Does a Trust Protector Do?

Based on your client’s wishes, the purposes of the trust, and applicable laws, the trust protector can hold many different powers, including administrative powers traditionally held by a trustee, such as the power to make distributions, and judicial powers traditionally held by a court, such as the power to remove beneficiaries. Trust protector powers can include the power to

• remove a trustee or appoint a successor trustee,
• add or remove beneficiaries,
• amend the trust agreement,
• exercise the voting rights of closely held business interests owned by the trust,
• interpret the terms of the trust,
• veto or direct trust distributions,
• terminate the trust, and
• appoint and remove members of a distribution or investment committee.

This list is not exhaustive, and inclusion of any of these or other trust protector powers should only occur after careful consideration of your client’s desires and purposes for creating the trust.

Why Your Client May Want to Include a Trust Protector in Their Trust-Based Estate Plan

There are several reasons why a client may want to include a trust protector in their trust-based estate plan:

• Trust protectors offer increased flexibility and peace of mind. The administration of a perpetual trust that may last for generations can be a daunting task because no one knows what the future may hold. Including trust protector provisions in a trust agreement can ensure that the client’s trust achieves the client’s goals despite changing circumstances and laws.
• Trust protectors can provide additional oversight and support for a trustee. A trust protector can ensure that a trustee is properly administering the trust and carrying out the trust’s purposes. If the trustee is delinquent in its duties, a trust protector may remove the trustee and appoint a better-suited trustee. A trust protector can also help a trustee correctly interpret trust provisions and address changes in the law or beneficiary circumstances.
• Trust protectors provide an easier and less costly means of modifying a trust. If a trust needs to be modified after the settlor’s death, usually the only route is through the court system, a complicated and costly process. Giving a trust protector the power to modify the terms of a trust can prevent the need to go to court to modify the trust.

Can My Client Name a Trust Protector for a Testamentary Trust?

A testamentary trust, usually created through a will, comes into existence after the settlor dies and the will has been probated. A settlor can, and in many cases should, include trust protector provisions in a testamentary trust to ensure that your client’s intent for the trust is properly carried out over time.

Does Every State Allow Trust Protectors?

State law varies in its treatment and classification of, and guidance for, trust protectors and Indiana law permits their use.  Many states have adopted a uniform set of laws governing trust protectors, or a modified version of these uniform laws, while other states have not addressed trust protectors at all. You may be working with clients who are residents of state’s other than Indiana and it is important to consult an attorney familiar with that state’s laws to understand whether trust protector provisions are right for your client’s estate planning goals.  For your Indiana based clients, we are happy to help. 

Feel free to contact us to learn more about whether naming a trust protector makes sense for your clients. We are happy to answer any questions you or your clients may have and help them craft an estate plan that is perfect for them and their loved ones.

If your client has already done estate planning by creating a will or trust, then the client has taken a very important step toward ensuring that if the client becomes incapacitated or dies, the client’s loved ones will know how to help manage the client’s financial and legal affairs. However, simply having a will or a trust and related estate planning documents is often not enough. An inventory of all of the client’s accounts and property is crucial for helping the client’s loved ones manage the client’s affairs effectively.

Most estate planning attorneys have received calls from distressed children who know that a deceased parent had a will or a trust, but have no idea what accounts, insurance policies, or items of real and personal property the parent owned. If an inventory was never prepared and shared with the parent’s attorney, the child likely had to spend countless hours meticulously combing through the parent’s file cabinets, drawers, tax returns, and online accounts to identify what the parent owned. 

Needless to say, this is not something that anyone wants to happen. Even if a client has not started or completed estate planning, there is no need to wait to prepare an inventory of the client’s property until these legal documents are created. In fact, assembling an inventory can be an excellent first step that encourages a client to begin the estate planning process. This preliminary effort will allow the client to walk into an estate planning attorney’s office and almost immediately begin to focus on creating a will or a trust that takes into account each of the client’s items of property and how they should be coordinated with the client’s estate planning goals. With a complete and accurate inventory in hand, there is little doubt that your client’s attorney will be impressed and grateful for the effort.

Even if your client never gets around to creating a will or trust (of course, this is strongly recommended), a complete inventory of the client’s property will at least help the client’s loved ones quickly identify the property the client owns and the next steps they will need to take in order to gain control of the property and distribute it according to state law. This step alone will significantly reduce the time and costs of administering a client’s estate in the probate courts. And anytime that you, as the advisor, can help a family bring order to chaos, you will increase their trust in you and lay the foundation for future business opportunities with the client’s loved ones and those they may refer to you.

How to Create an Inventory

Creating an inventory of a client’s accounts and property need not be terribly complicated. It can be a simple word processing document or even a handwritten list. Many individuals create spreadsheets in software programs like Microsoft Excel, Numbers, or Google Sheets. There are also numerous online services that can help your client create a thorough inventory of the client’s property, store passwords for online accounts, and even store digital copies of a client’s important legal and healthcare documents. Many of these services have features that enable the client to automatically share this information with chosen individuals at a designated time. The bottom line is that any of these above methods can work well—the important thing is that the client prepares an inventory, preferably with your help. Below is an example of an inventory formatted as a spreadsheet with columns and rows:

Of course, this is just an example of what an inventory could look like. The client should include any information that may be helpful to someone who is put in charge of collecting the client’s property after death or disability. The client might also include more details beyond what is shown above, such as where the property is located or even the property’s acquisition value to establish tax basis on the property. For example, if the client keeps certain items of jewelry in a safe, or the client’s boat is stored in dry storage, this would be crucial information to include.

Probate and Your Property

As your client creates the inventory and discovers how each item is titled or who is named as the beneficiary on certain accounts, the client will be able to identify those items of property that will have to go through probate. Probate is the court process that appoints an executor or personal representative to inventory a deceased person’s probate property and distribute it according to state law or the terms of the deceased’s will, if there is one. Generally speaking, any account or property that meets the following conditions will have to go through the probate process: (a) is owned only in the client’s name, (b) is not owned jointly with another person, (c) is not titled in the name of a trust or business entity (like an LLC or partnership), and (d) does not have a named pay-on-death (POD) or transfer-on-death (TOD) beneficiary associated with the property. 

As I am sure you are aware, if your client designates beneficiaries on accounts, those beneficiary designations need to be carefully coordinated with the client’s overall plan. For example, the client’s estate planning documents may create trusts for children to provide asset and divorce protection. But, if the client names a child directly, those assets will never flow into that trust, no asset or divorce protection will be achieved, and the client’s goals will not have been met.

Probate can add to the expenses when someone dies, can be time consuming, and is a public process that many people would rather avoid. This is why preparing an inventory well before a client’s death can alert the client to those items of property that will require a probate so that the client can take steps, while still able, to transfer ownership or retitle them in a way that helps the family avoid probate. This might include making sure a beneficiary has been named or establishing a trust into which certain property can be transferred.  Again, care needs to be taken to coordinate this with the client’s overall goals and the client should not just blindly list beneficiaries merely to avoid probate.

Additional Benefits of a Complete Inventory

A detailed inventory can help a client’s loved ones understand the next steps to take control of the client’s property for management and distribution. Certain items and accounts, such as the following, may be distributed according to the unique legal aspects of that type of property:

• Property owned in joint tenancy with rights of survivorship (such as real estate or bank accounts) will pass automatically to the surviving joint owner.
• Some bank accounts may have POD or TOD designations that allow for those accounts to skip the probate process.
• Life insurance proceeds typically will not have to go through probate if the client has properly completed the beneficiary designation form by naming loved ones, a trust, or a charitable organization as beneficiaries on the policy. 
• Accounts and property titled in the name of a trust can be distributed outside of probate according to the terms of the trust.
• Retirement accounts usually require the listed beneficiaries to file a claim with the account custodian before benefits will be paid out. Probate courts and trusts usually have no control over retirement accounts.
• Vehicles will typically need to be transferred through the local department of motor vehicles, which requires an affidavit along with a death certificate and the physical car title.
• Items of personal property (e.g., furniture, jewelry, art, collections, etc.), if above a certain value as determined by state law, must usually pass through probate, unless they are transferred into a trust before death.

What to Do with the Inventory Once Created

After creating an inventory, do not let the client forget to store a copy where the client’s loved ones will be able to easily access it should something happen to the client. Suggest the following locations as options:

• an estate planning portfolio or binder that is easily accessible to family or friends
• a file folder that is clearly marked and easily accessible
• the client’s file with the client’s estate planning attorney 
• an electronic document format that can be shared online with trusted loved ones
• a clearly labeled USB drive in a safety deposit box or safe (as long as the client lets loved ones know what to look for and where to find it)
• the client’s file with you and other professional advisors in the event you are the first one the family calls after your client’s death

Once your client has created and shared the inventory, the client should create a plan for updating. Over time, accounts get closed or consolidated with other accounts, property is sold, stocks get converted to cash, and retirement accounts get depleted. If a client fails to regularly update the inventory, there is a chance that an old inventory could create confusion and send you or the client’s loved ones down rabbit holes as you try to handle your client’s affairs. Assisting your client with this process can also help you discover accounts and assets that you could help them manage, consolidate, and simplify, thereby benefiting both you and your client.

Some people find it helpful to choose a specific date each year when they will review and update their inventory and also their estate planning documents. Whatever will work best for the client should be a part of the plan. The client should then implement the plan and stick with it. 

Helping your client understand the great value that can be created through a simple but critical inventory will be a significant value-add that you can provide to the client and the client’s family. And when clients and their families benefit from such effort on their behalf, you can be confident that your business will continue to grow and prosper for years to come as multiple generations seek your professional advice. If you have any questions about how you can help your clients create and maintain an inventory, feel free to give us a call.

For most people, it is perfectly natural to think about estate planning only in terms of planning for death. While it is certainly important for clients to make a plan for their eventual death, if that is all they plan for, their planning will be woefully inadequate. As medical knowledge and technology have improved over the decades, so too has modern medicine’s ability to keep people alive for much longer. It is no accident that in many areas of the country, long-term care facilities such as assisted living centers and nursing homes are being built at record pace.  

At first blush, staying alive longer would seem to be a good thing. However, longevity coupled with incapacity can be extremely challenging if a client has failed to make arrangements for someone to assist the client with financial and legal affairs during that period. On the other hand, with proper incapacity planning, your clients can rest assured knowing that their financial affairs are in good hands, out of the public eye, and being handled without the expense of lawyers, courts, and unnecessary complications.

What Is Incapacity?

Before we discuss how to plan for incapacity, let me clarify what it means to be incapacitated. Each state has its own method for determining legal incapacity, and most states have enacted laws that define incapacity. For example, in states that have adopted the Uniform Probate Code, an incapacitated person is typically defined as follows:

“Incapacitated person” means an individual who, for reasons other than being a minor, is unable to receive and evaluate information or make or communicate decisions to such an extent that the individual lacks the ability to meet essential requirements for physical health, safety, or self-care, even with appropriate technological assistance.

Although some states have defined incapacity more broadly or more narrowly, in most states, this is a common definition of legal incapacity. From a purely practical perspective, however, incapacity can be described as an ongoing condition where you simply do not have the mental ability to take care of routine tasks for yourself without assistance from someone else. Such tasks might include paying your bills, cooking your meals, bathing, grooming or dressing yourself, taking your medications, or being able to protect yourself from financial or physical exploitation.

Why a Will Alone Will Not Cut It

Almost all estate plans created in this country include a will. A will is a legal document that allows a person to memorialize the person’s wishes for what he or she would like to happen after his or her death. For example, among other things, a will allows a client to 

• authorize someone to handle the client’s final affairs after the client’s death (an executor or personal representative),
• name who will receive the client’s accounts and property and how much, and
• name the guardians of the client’s minor children.

Did you notice a theme in the list above? They are all things that must be handled only after a client has died. That is an important point. A will only becomes effective once the will maker is dead.

So does a will help a client if the client becomes incapacitated? The short answer is no. A will is not any help if the client becomes incapacitated. To provide some level of incapacity protection in a will-based estate plan, the client must obtain additional legal documents, including at least a financial power of attorney and an advance directive. 

Financial Power of Attorney

A financial power of attorney (POA) is a legal document that the client signs well before the client becomes incapacitated that allows the client to appoint a trusted individual to act as the client’s agent (meaning the appointed individual can act on the client’s behalf). In this document, the client spells out what an agent may do: a general POA allows an agent to handle most of the client’s financial affairs, whereas a limited POA restricts an agent’s actions to certain things or for a limited amount of time. Legally, an agent must act in the client’s best interests when handling the client’s property and legal affairs. A POA can, and in many cases should, grant the power to take the following actions:

• handle deposit, investment, and banking accounts
• withdraw funds from, and contribute funds to, retirement accounts
• enter into legal contracts for goods or services on behalf of the client
• collect a client’s mail
• apply for and collect certain government benefits
• deal with various insurance companies, pay premiums, and collect benefits
• make investment decisions
• sell, mortgage, lease, and manage real property or personal property

The client can also determine when the agent is allowed to act. It can be restricted to only after the client has been deemed incapacitated (a springing POA) or take effect as soon as the client signs the document (an immediate POA). When planning for the client’s incapacity, it is important that the POA be durable, which means that the client’s incapacity will not affect the validity or effectiveness of the document.

If the client has a will-based estate plan and no financial POA (or an invalid one), the client’s loved ones will have to go to court to have someone appointed to take care of these matters for the client through the process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for the client’s loved ones during a stressful and emotional time.

Advance Directives

An advance directive is a document or set of documents in which a client can appoint an individual to act on the client’s behalf regarding medical decisions and, if authorized under state law, also memorialize some of the client’s medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is one kind of advance directive that allows a client to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on the client’s behalf when the client is unable to communicate the client’s wishes (i.e., if the client is unconscious, even temporarily). 

Another kind of advance directive is a living will, which is a legal document in which the client can specify the kinds of end-of-life decisions that the client wants doctors or the client’s healthcare agent to make on the client’s behalf. In some states, an advance healthcare directive will contain both a power of attorney and end-of-life instructions; other states require separate legal documents. Regardless of the format, these documents are a critical component of making a client’s estate plan incapacity proof. By naming someone the client trusts to make healthcare decisions for the client, similar to the decisions the client would have made if the client could still communicate his or her wishes, a client can ensure that he or she receives the care and medical treatment that is most appropriate.

If a client does not have an advance healthcare directive, a client’s loved ones will be forced to go to the court and have a judge decide who can make medical decisions for the client if the client is not able to make or communicate his or her wishes.

Trust-Based Estate Planning and Incapacity

For those who want to make their estate plans truly incapacity proof, a revocable living trust can be a powerful legal tool. This type of trust has become the foundation of many well-constructed estate plans in this country. A living trust is a legal agreement between a trustmaker (a person with the money and property) and a trustee (the person charged with managing, investing, and handing out the money and property). For most revocable living trusts, the trustmaker changes the ownership of the trustmaker’s accounts and property from the trustmaker as an individual to the trustmaker as the trustee of the revocable living trust. The trustee agrees to manage and protect the money and property for the benefit of beneficiaries. In a revocable living trust, the trustmaker is also the beneficiary during the trustmaker’s lifetime. Holding the property in this type of legal structure creates a great deal of flexibility to deal with incapacity issues as they arise.

For example, if your client created a trust, named the client as the trustee, and transferred most of the client’s property into the trust, the client could continue to use and enjoy the client’s property just as the client does today. But if the client suddenly became incapacitated, a successor trustee (named by the client beforehand, in the trust document) could quickly and seamlessly step into the client’s shoes as the trustee to continue to manage the trust property for the client’s benefit throughout any period of time that the client remained incapacitated. All of this could be accomplished outside of the courtroom, maintaining the client’s privacy and eliminating burdensome court and attorney fees in the process. Then, upon the client’s death, the successor trustee would have the authority to continue to manage the trust property or distribute it for the benefit of the client’s successor beneficiaries (typically, the client’s loved ones or charitable organizations named in the client’s estate planning documents). Again, this can be done completely outside of the court system, thereby eliminating significant cost, delay, and invasion of the client’s privacy.

This incapacity planning is only as good as the individuals chosen by the client to serve in these roles. If the person or people named can no longer fulfill their responsibilities, your client will need to change the client’s legal documents as soon as possible to ensure that the best possible people are serving in these crucial roles.

Finally, it is important to remember that a trust-based plan should still include a will, financial POA, and an advance directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.

By encouraging your clients to carefully craft each of these legal documents with the help of an estate planning attorney, your clients can feel confident that their loved ones and the property that they have worked their whole lives to obtain will be in good hands if incapacity strikes. We are here to help you and your clients think through and implement each decision that goes into making their estate planning truly incapacity proof. Give us a call today.

This year is quickly coming to a close. For many of us, December 31 cannot come soon enough, as 2020 has been anything but a walk in the park.

The first quarter of 2020 brought a worldwide pandemic. Not only did this raise concerns about everyone’s health and safety, but it also fundamentally changed the way we all live. Many people found themselves either working from home or out of work. Additionally, the pandemic created market volatility that impacted many people’s investment and retirement accounts. Along with the pandemic, many areas of the country experienced severe natural disasters such as hurricanes, earthquakes, and fires, leaving many without homes. Lastly, the 2020 presidential election proved to be just as unprecedented, with many states taking days after the election to count all of the votes. 

While there is reason to be optimistic that 2021 will bring a COVID-19 vaccine and the promise of returning to some level of normalcy, there is no way this return to normalcy will occur on January 1, 2021. In the meantime, life marches on. Clients are just as busy as ever supervising kids attending school and other activities (in-person or virtually), moving their families to different cities and states to pursue new employment opportunities, or adapting to new work environments, and adjusting their approach to their investments. With so much going on in their lives, your clients need helpful reminders that with the close of the year, there are certain steps that should be taken, or at least considered, to help them prepare for whatever 2021 may bring.

Maximize Contributions to Retirement Accounts

This year brought plenty of employment disruptions for many clients. These disruptions may have resulted in clients changing jobs and establishing new 401k accounts with new employers, or they may have caused some clients who were making regular paycheck contributions to their retirement accounts to alter or even cease their contributions with the uncertainty in the job market. As a result, many clients may not have maximized their annual contributions to their retirement accounts in 2020. Depending on their current employment status, it is quite possible that they failed to restart making such contributions and will miss out on the opportunity to maximize annual contribution limits. 

Tax Return Preparation

December is the perfect time to remind clients to pull together tax records in preparation for filing their 2020 tax returns. The sooner that clients begin to get a sense of what their tax bill is going to be for 2020, the sooner they can prepare to write a check to the IRS or carefully plan how to use their refund if entitled to one. In either case, a gentle reminder to your clients to prepare now for tax season can be an easy but effective way to add value to your professional relationships with them. 

Clients can begin gathering the following information and documentation in preparation for filing their tax returns:

• Social Security numbers and birthdates for everyone who will be listed on tax returns
• W-2 forms, any 1099 forms, bank or financial institution tax statements, miscellaneous income records (e.g, gambling or lottery winnings)
• Property tax payment records
• Charitable donations
• Receipts for medical expenses and health insurance coverage records
• Business expense records
• Mileage records
• Home office expenses

Last-Minute Gifts

Clients frequently forget that they can gift money or property up to a certain amount per person each year ($15,000 in 2020) without incurring any gift tax liability and without the need to file a gift tax return. This annual gift tax exclusion amount is noncumulative, so it is a use-it-or-lose-it tax benefit. Because the pandemic has caused financial hardship for many people, utilizing the annual gift tax exemption may be a great way for clients to financially assist their families and friends without incurring a tax liability. And despite some of the recent presidential election drama, it appears increasingly likely that Joe Biden will be inaugurated as the forty-sixth president in January, which presents a distinct possibility that the lifetime unified gift and estate tax exclusion amount will be decreased in the near future. 

Clients who have significant wealth should consider leveraging this annual gift tax exclusion in 2020 as a part of an ongoing strategy for reducing the size of their estate and thereby avoiding future estate taxes. Although writing a check for $15,000 to each child or grandchild annually is one way to use this tax benefit, it may not be the best way. Forming a trust can add significant benefit to this kind of gifting strategy.

For example, forming an irrevocable life insurance trust continues to be a highly effective way to leverage the annual gift tax exclusion by using the annual cash gifts to purchase life insurance on the individual making the gift. At the trustmaker’s death, the life insurance passes income tax-free to the trust and can then be managed and used on behalf of the trust beneficiaries in a much more protective and strategic manner.

Even if your clients are uncertain about using a trust for such gifts, they will undoubtedly be grateful for the reminder to consider using this annual gift tax exclusion before the year ends if it makes sense for them to do so.

Is It Time to Review Your Client’s Estate Plan?

This year also brought significant changes to the law surrounding retirement accounts and how to coordinate them with a client’s estate planning. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in late December 2019, had a major impact on estate planning for those clients with significant savings in tax-deferred retirement plans. No longer can required minimum distributions from an inherited IRA be stretched out over the lifetime of the person inheriting the IRA. Unless a beneficiary is a spouse or otherwise qualifies as an Eligible Designated Beneficiary, the retirement account must now be paid out within ten years of the plan owner’s death. Although this received some attention in the media early in the year, it paled in comparison to the COVID-19 pandemic coverage, so it is not surprising that many clients are still unaware of these changes and how they could impact their estate planning. 

With all of the changes that 2020 has brought, it is more critical than ever to remind clients to review their estate planning documents. If it has been a few years, the client should make sure the plan still reflects the client’s wishes. We are happy to meet with clients to do a review, especially if the client or the client’s loved ones have experienced any of the following life changes:

• Marriage or divorce
• Birth or death in the family
• Moving
• New job
• Retirement or loss of employment
• Acquiring new accounts or property

For clients with a trust-based plan, performing a thorough review of the clients’ financial accounts before the end of the year to determine how the accounts are titled and how the beneficiary designations have been made can not only help catch mistakes and accounts left out of a living trust, but also underscore the importance of consolidating accounts and management of those accounts. You can become a truly valuable resource to your clients as you consolidate the management of their financial accounts and maintain the necessary coordination with their estate planning for years into the future.

Beyond these changes, there remains a great deal of value that you can bring to the professional relationship you have with your clients by gently reminding them to review their estate plans to ensure that the decisions made years ago still reflect their current wishes.

After several days of counting ballots, Joe Biden has been declared the winner of the 2020 Presidential election by many major news outlets. Although we await the official certification of the election by each state, an official concession by President Trump, and the outcome of several pending lawsuits–which could take us into December or even January–the 2020 election and its aftermath promise significant changes in how our clients will be taxed. While it is unlikely that every proposal discussed during President-Elect Biden’s campaign will become the law of the land, we can still glean essential details from all the campaign rhetoric to help us prepare to weather these possible changes.

Proposed Policy Adjustments under a Biden Presidency

Here is what we know so far about some of President-Elect Biden’s key proposals that are most relevant to our clients’ estate planning:

Estate, Gift, and Generation-Skipping Transfer (GST) Taxes

For 2020, the estate and gift tax exemption is set at $11.58 million (indexed for inflation), with any wealth over that amount being taxed at a 40 percent rate as it passes to heirs. This exemption amount is scheduled to be lowered in 2025 to $5 million (also indexed for inflation) unless new legislation is passed before then.

President-Elect Biden suggested during his campaign that he would support legislation that would reduce both the estate and GST tax exemptions to $3.5 million per individual and would lower the lifetime gift tax exemption to $1 million. Other proposed legislation that President-Elect Biden has discussed, favorably proposed by Senator Bernie Sanders, aims to place annual, aggregate donor limits on gifts to certain types of entities such as irrevocable life insurance trusts and certain pass-through entities such as family limited partnerships.

In addition to reduced transfer tax exemption amounts, several Democratic tax reform proposals have suggested returning estate tax rates to historical norms. What does that mean? In the 1940s, the top estate tax rate was 77 percent, and under 2001 federal tax law, it was as high as 45-55 percent. As a result, we may well see an upward adjustment in the estate and gift tax rates.

Capital Gains Taxes

Our current law taxes capital gains as regular income if those gains are realized on property held for less than one year. For long-term capital gains (gains on property held for a year or longer), there is a graduated tax rate depending upon the tax filer’s income level (0 percent, 15 percent, or 20 percent). For individuals and couples who earn more than $200,000 and $250,000 per year respectively in net investment income, there is an additional 3.8 percent surtax added to their capital gains tax rate.

In addition, the current law allows for a step-up in basis of appreciated property if the property is held until the owner dies. This allows for inherited property to be sold or liquidated shortly after the owner’s death, with little to no capital gains taxes assessed on the property’s sale.

Today’s law also allows for like-kind exchanges of appreciated property such as artwork and rental properties. This allows clients to reinvest the gains that they earn on appreciated property into similar types of property without ever having to pay capital gains taxes when the property is sold. If the client keeps making such like-kind exchanges on appreciated property until the client’s death, the capital gains built up in that property will be erased by the basis step-up rules.

Proposed changes under a Biden presidency would either (1) eliminate the step-up basis rule for inherited property and impose a carryover basis rule for inherited property or (2) impose recognition of gain on property at the owner’s death. Additionally, the Biden tax plan proposes eliminating like-kind exchanges and imposing a 39.6 percent long-term capital gains tax rate on individuals earning more than $1 million per year. And if the 3.8 percent surtax on net investment income remains in place, the effective federal tax rate on long-term capital gains could exceed 43 percent.

If these changes are implemented along with the changes to the estate tax laws discussed above, many estates could see significant tax bills at the death of the estate owner.

What to Do in the Meantime

Although it may be too early to know exactly what the tax laws will look like in 2021, we can nevertheless provide some concrete guidance to our clients while we wait for answers. Tax issues, while certainly important, should not overshadow the need for clients to get their affairs in order in case of an untimely death or disability. If it has been some time since your clients have reviewed their estate planning documents such as their wills, trusts, powers of attorney, and healthcare directives, now is a great time to have them do so. Providing an encouraging reminder to clients to review these important planning elements can go a long way to helping them find peace and security in these uncertain times. And that is the kind of value that fosters long-term loyalty from clients. We would be happy to help your clients and if they want, you can attend that meeting, whether in person or by video, to help add valuable input in the planning process.

We Are Here to Help

No one knows for sure what the future holds for our country. However, what is certain is that we will continue to monitor the latest tax law developments closely and keep you updated as they unfold. In the meantime, if you have any questions or concerns, or think your clients could benefit from a meeting with us, please do not hesitate to contact us. We are here for you and your clients.

October is one of the most popular months for couples to tie the knot in the United States. While wedding planning most often includes tuxedos, dresses, rehearsal dinners, guest lists, and the honeymoon, an overlooked part of pending nuptials is estate planning.

For younger couples beginning a life together and getting married for the first time, estate planning may not be a terribly complicated endeavor. With minimal property and savings, simple wills, financial powers of attorney, and healthcare directives may be sufficient and prudent planning for the first years of marriage.

The age at which couples are getting married for the first time continues to creep upward, however. It is therefore common for individuals to accumulate significant amounts of property, savings, and investments during their single years. When couples with property beyond the most simple items marry, estate planning becomes much more urgent. It is even more crucial when children are born into the marriage or when entering a second or third marriage, perhaps creating a blended family.

If your clients are considering marriage or have recently tied the knot, reviewing the following information with them can help them tackle the critical task of planning for the management and distribution of their property should either of them become unable to manage their affairs or die sooner than expected.

Challenge Their Assumptions

An all too common mistake that married clients make when approaching estate planning is assuming that their spouse sees things the same way they do. The following questions should be asked of each spouse:

• How do you feel about the necessity of purchasing and maintaining life insurance?
• Do you feel that the other spouse could handle the family finances on their own if you were to die suddenly or become unable to manage your own affairs?
• Who should care and raise your minor children if you both die?
• To what extent should the money and property left to each other be protected from future creditors or new spouses?
• Who is best prepared to make end-of-life decisions for you should you become critically ill and unable to communicate your wishes?
• Do you expect that all of your wealth should be left to your spouse?
• Do you want to leave any money or property to aging parents, children from another marriage, or to a charity or other important cause?
• How should your property be left to your spouse or your children or grandchildren? Do you believe that inheritances should be distributed outright (no strings attached) or should it be left to beneficiaries in trust (with specific instructions as to when and how the inheritance is to be used)?

The answers to these questions regularly surprise couples. These questions should be discussed sooner rather than later, especially if you sense that your clients are not sure of how each would answer. Couples who communicate and challenge their assumptions will be far better prepared to successfully complete their estate plan.

Joint or Separate Estate Plans

The decision to jointly engage an attorney to assist with an estate plan may not be as simple as it would seem at first blush. Depending upon the clients’ circumstances, it may be advisable for a couple to engage separate legal counsel to assist with the estate planning process. If any of the following circumstances apply to your clients, you should advise them to give serious thought to hiring separate counsel for their estate planning:

• Does either spouse have children from a prior marriage or relationship? If yes, is there any tension between the spouses when they discuss how they would want the accounts and property divided upon the death of one or both of them?
• Did one spouse bring far more money or property into the marriage?
• Does one spouse have something in the estate plan that the spouse wants to keep hidden (for example, is there a child from outside the marriage that the spouse does not want revealed)?
• Do your clients have very different ideas about philanthropic goals in their estate planning?
• Do your clients have a prenuptial or postnuptial agreement?
• If so, do your clients now desire to change the terms of that agreement through an amendment or estate plan?

There may be other reasons to seek separate counsel in estate planning. A good rule of thumb is that if there are aspects of one spouse’s financial or family relationships that will likely breed contention and misunderstanding between the couple, the clients should consider using separate counsel to help them carefully negotiate and resolve the legal and estate planning issues that intersect with these problem areas.

On the other hand, for those clients who are willing to communicate and resolve the differences discussed above, it may be possible to assist them with their estate plan. One advantage of joint legal counsel is that the attorney can act in some ways as a mediator and educator, helping clients identify and craft creative solutions to challenges that may arise during the estate planning process. Additionally, jointly hiring legal counsel tends to be a less expensive solution and communication tends to flow much more freely when fewer individuals are involved.

Elective Share Laws

It is important to understand that even if clients do separate estate planning, the United States has elective share laws that are designed to ensure that a married individual cannot completely disinherit a spouse or minor child from another marriage. The reason for these types of laws is that traditionally, lawmakers felt that these family relationships deserve to be protected from financial ruin by an individual who perhaps would unwittingly or unwisely attempt to disinherit a spouse or child dependent upon that individual for support.

These elective share laws allow a disinherited spouse or child who is still dependent upon the deceased individual to legally claim a percentage share of the deceased individual’s accounts and property regardless of what the will or trust provides.

If spouses have agreed to leave their entire estate to someone other than the surviving spouse, they will likely need to sign a prenuptial or postnuptial agreement in which the disinherited spouse waives elective share rights. Such a waiver must meet certain requirements to be valid, which can vary by state. For example, most state laws require that the disinherited spouse must have been represented by independent legal counsel when negotiating the waiver in the marital agreement.

Unmarried Couples

Marriage today is less common than it was a few decades ago, with more couples choosing to live together without the legal consequences of marriage. Suppose your client is in such a relationship, but feels a deep financial commitment to the client’s partner. In that case, the client may be in even greater need of a carefully crafted estate plan depending upon the client’s goals.

In nearly every state, intestacy laws that govern how an individual’s property is to be managed when that individual is unable to manage their own affairs or dies without a valid will or trust typically do not allow for an unmarried partner to receive the individual’s property. To ensure that property passes to a partner, certain legal steps must be taken:

• Jointly titling property (such as bank accounts and real estate) with the partner so that it passes to the survivor automatically at the deceased partner’s death
• Naming the partner as the payable-on-death or transfer-on-death beneficiary of certain financial accounts
• Naming the partner as the beneficiary on an IRA, 401(k), 403(b), or another retirement plan
• Drafting a will or a trust and naming the partner as a beneficiary
• Naming the partner as the beneficiary on a life insurance policy
• Drafting a financial power of attorney naming the partner as the trusted individual to make financial decisions on the client’s behalf
Each of these methods of leaving property to a partner has pros and cons. For instance, jointly titling a home with a partner may be an easy way to ensure that the partner will inherit the shared home when your client dies. However, if your client and the partner split, the former partner will continue to jointly own that property and can force the sale of the property to liquidate the partner’s share. Additionally, there may be gift tax consequences to adding a partner to the title of a banking or investment account, which could affect your client down the road. Even worse, jointly titling property with a partner can subject it to the partner’s lawsuits or creditor claims in the future even though your client’s intent was merely to allow the partner to inherit that property upon the client’s death.
An unmarried client should also consider drafting a healthcare power of attorney and living will (also called an advance healthcare directive) naming the partner as a medical decision maker should the client be unable to make or communicate the client’s medical wishes.
Estate Planning When the Marriage Is on the Rocks
Sadly, many marriages ultimately end in divorce. If a couple is in the process of divorcing, it is important to consider the implications of any current estate plan in place should something suddenly happen to your client. Some decisions that the client might want to change immediately include the following:
• The person named as the client’s medical decision maker. Choosing a different decision maker can usually be done at any time. Most people would not want their soon-to-be-ex to be in charge of making life and death decisions on their behalf.
• The person appointed to make the client’s financial decisions. Depending upon the type of financial power of attorney prepared, the ex might be authorized to act when the client is no longer capable of handling the client’s own financial affairs (a springing power of attorney)—or is currently able to act on behalf of the client (immediate power of attorney).
• The guardian for the client’s minor child from a prior relationship or marriage, if the client would no longer want the soon-to-be ex-spouse to be the guardian.
• The person named in the client’s will as personal representative or as trustee of the client’s trust (if the client has a separate trust from their spouse).
However, there are some things that may not be changed until after the divorce is finalized. For example, when a divorce case is pending in court, the couple is legally prevented from changing the following:
• Beneficiary of a will or trust
• Legal title to bank accounts, real estate, and other types of investments
• Beneficiary designations on retirement accounts
• Beneficiary designations on life insurance
• Ownership of personal property such as vehicles, art, furnishings, etc.

Once a divorce has become final and the property division is memorialized in the divorce decree, the client has the right (and should not delay) to revise the client’s estate plan in whatever manner the client wishes, keeping in mind any requirements imposed by the divorce decree, elective share laws for child support, or continuing spousal support obligations.

As you can see, it can be critically important for clients with spouses, partners, or children to obtain solid legal estate planning counsel. Without careful planning, a client is almost guaranteeing that their loved ones will experience frustration, expense, and delays when it comes to the management and distribution of their accounts and property if something happens to them. Conversely, a carefully crafted estate plan can provide significant peace of mind for your clients and their significant others for years to come. Call our office today for a virtual or in-person meeting to discuss how, together, we can help your clients achieve their important estate planning goals.

Conversations with family, friends, and colleagues can sometimes wander into the topic of lawsuits, divorces, bankruptcies, and other threats that put one’s property at risk of loss to a creditor. Such conversations often leave people shaking their heads, asking what the world is coming to, and feeling vulnerable and frustrated. However, an important tool has become increasingly available to even those of modest means to protect their property from such threats at a reasonable cost and with relatively few hoops to jump through.

The Domestic Asset Protection Trust

A domestic asset protection trust (DAPT) is a legal structure into which a client (as the grantor or trustmaker) can transfer accounts and property such as a home, cash, stocks or other investments. Once transferred into the DAPT, the property is legally protected from future lawsuits, divorcing spouses, bankruptcies, and similar threats. Although the client has transferred these accounts and property to the trust, the client can continue to enjoy the benefit of this property in the DAPT with only minor limitations.

DAPTs work on the legal principle that someone cannot take away from you something that you no longer own. When the client transfers property into a DAPT, the client is actually making a gift of it to the trustee (the person or entity the client chooses to manage, invest, and use the accounts and property) on behalf of the irrevocable trust. The trustee is then under a legal obligation to use the property for the client’s benefit, or for the benefit of those the client has named in the trust.

How a DAPT Works

To create a DAPT, the client signs a trust document and permanently gifts some of the client’s property into the trust. The trust is irrevocable, meaning the client cannot change it. The trustee can make distributions to the client, thereby allowing the client to continue enjoying some benefits of the property in the trust. However, the trustee in most cases needs to be an independent trustee (someone who is not related or subordinate to the client or any other beneficiary and will not inherit anything from the trust) in order to preserve the asset protection properties of the trust. Still, many states allow for a grantor to be a co-trustee and exercise authority with respect to the investment decisions of the trust.

Which States Have DAPT Laws?

Currently, the following states have legislation that authorizes the creation of a DAPT: Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

It is important to remember that DAPT laws can vary significantly by state. Residency requirements of the grantor or trustee of a DAPT vary from state to state, as does the required connection of the grantor with the DAPT state. In some instances your client can live in one state but have a DAPT in a different state. Some DAPT laws are better than others, and their effectiveness may depend upon the location of the property that a client plans to gift into the trust. Given these considerations, it is critical that your client speak with an experienced attorney when setting up a DAPT. Key differences in state law that can have a significant impact on the effectiveness of a DAPT include the following:

• how a DAPT must be set up
• who can serve as the trustee
• how much of a client’s property can be placed in the trust
• which creditors will be blocked from reaching the trust property
• what additional powers (if any) the grantor can exercise over the trust
• how much time must pass before the property placed in a DAPT is protected from creditors

What Kind of Creditor Protection Does a DAPT Provide?

In general, a DAPT allows a client to shield accounts or property owned by the DAPT from any creditor claims that arise after the DAPT is funded and after any applicable time periods or notice requirements imposed by state law have been met. In many states, this protection can even include future claims of a current or future spouse, child, or creditor. It is important that the client consult an experienced attorney regarding the protections the client’s state’s DAPT statutes offer, as these can vary by state.

Despite the protection offered by a DAPT, some creditors will still be able to reach the property owned by the DAPT regardless of which state law the client uses. Currently, no state’s DAPT laws allow a DAPT to be used to

• spend down or qualify a grantor or the grantor’s spouse for Medicaid eligibility;
• defeat state or federal reimbursement claims or rights of recovery for Medicaid benefits paid to the grantor or the grantor’s spouse; or
• defeat creditor claims if property is transferred to a DAPT with the intent to prevent, hinder, or delay a known or present creditor from reaching the property.

Most states’ DAPT laws also provide the following exceptions to the creditor protections:

• taxes (state and federal tax claims must still be paid from trust assets)
• family support obligations such as alimony and spousal support (state laws differ significantly on this topic)
• medical bills of a beneficiary (certain states allow access to the trust property to pay these bills)

Who Is Likely to Need a DAPT?

Not everyone will need a DAPT because not all people face the same kinds of risks. However, there are certain professions and circumstances for which clients may want to consider using a DAPT as part of their estate planning.

• High-risk occupations. Lawsuits are increasingly common against those in certain professions, such as doctors, accountants, lawyers, real estate developers, builders, architects, and business executives. Creating a DAPT to protect a portion of the property owned by clients in these occupations can be an effective shield against risks associated with lawsuits.
• Owning a business. Owning a business can put a client at a higher risk of lawsuits. Using a DAPT can protect the client’s home and other personal property against claims brought against the business.
• Personal injury and accidents. Unfortunately, accidents happen to everyone. Moreover, it is common today for even innocent accidents to lead to litigation and potential loss of personal wealth. A tool such as a DAPT can be a critical part of protecting clients’ property for their families both now and in the future.

Deciding If a DAPT Is Right for Your Client

Deciding whether to use a DAPT should not be undertaken without good legal advice. The following factors, among others, need to be carefully considered with the help of a qualified estate planning attorney:

• How much of a client’s property should the client place in the DAPT?
• What kind of access to trust property will your client need in the future?
• Who will serve as the independent trustee responsible for making distributions to the client?
• Who, besides the client, will be a beneficiary of the DAPT?
• In which state will the DAPT be formed?
• What types of creditors are of most concern to your client, and do the relevant state’s DAPT laws protect the client against such creditors?

Once these questions are answered, you will have a much better sense of whether a DAPT is a tool that will work for your clients. If you have additional questions about DAPTs, please give us a call. We would love to visit with you or any of your clients about this topic, either in person or virtually.

COVID-19 has deeply impacted the economy in the United States and will likely continue to do so for some time. While most would agree that this pandemic is not a positive development, there are nevertheless some silver linings. One such silver lining is the significant drop in the federal funds rates. Many experts predict that these historically low rates will remain low for a while as the economy recovers. With such low rates, certain powerful estate planning strategies have become much more attractive and feasible. The following planning strategies are a few that warrant renewed consideration for affluent clients with potentially taxable estates.

1. A Grantor Retained Annuity Trust (GRAT) is a tool that can be created by an experienced estate planning attorney to help a client transfer significant wealth at reduced transfer tax cost. This strategy requires a grantor (the person creating the trust) to transfer property into a carefully drafted irrevocable trust. The trust is designed to pay the grantor a stream of income at least annually and over a specific term of years. At the end of the specified term, the payments end and any money or property left in the trust not already paid to the grantor is transferred tax-free to a remainder beneficiary. This beneficiary is usually a child or descendant of the grantor.

A GRAT is typically structured so that the present value of the annuity payable to the grantor over the specified term of years roughly equals the amount initially transferred to the GRAT. In other words, by using the Internal Revenue Service’s (IRS) published rate of return (the Section 7520 rate) as the assumed rate of growth on the assets, the present value of the annuity payment back to the grantor over the term of the GRAT is designed to be close, if not exactly the same, as the value of the gifted assets at the creation of the trust. The goal, however, is for the actual rate of return on the accounts or property placed into the trust to ultimately be well above the locked-in Section 7520 rate. If this occurs, the assets remaining in the GRAT are transferred to the remainder beneficiaries free of gift taxes.

The following factors can impact the effectiveness of a GRAT:

• The health of the grantor and whether the grantor can be expected to live beyond the GRAT term
• The Section 7520 rate for the month in which the accounts or property are transferred to the GRAT
• The nature of the accounts or property being contributed to the trust and their growth potential
• The remaining lifetime gift tax exclusion amount available to the client

It is also important to note that the creation of a GRAT will require the filing of a gift tax return to report the gift. With deliberate planning, however, the amount of the gift to be reported can be negligible.

2. A Charitable Lead Trust (CLT) can also offer significant tax savings for those clients who intend to make charitable giving a part of their estate plan. This is particularly true in today’s low interest rate environment. Similar to a GRAT, a CLT is an irrevocable trust that makes payments out of the trust to a beneficiary over a specified period and is tied to the IRS Section 7520 rate. The period can be a set number of years or for the lifetime of the grantor. Unlike a GRAT, however, a CLT names a charity as the payee of the annuity or unitrust amount over the trust term. Upon completion of the trust term and payments, the assets remaining in the trust pass to the grantor’s chosen beneficiaries, free of gift and estate tax. The value of the gift reported on the grantor’s gift tax return for the year in which the gift was made is calculated as the difference between the amount of the initial gift and the present interest of the annuity or unitrust amount payable to the charity. Because the present interest value is calculated using the currently low Section 7520 rate, the aim is for the assets in the CLT to grow at a higher rate, allowing more of the growth of the assets to be transferred tax-free to the remainder beneficiaries at the end of the trust term. In addition, a CLT can provide valuable income tax deductions to the grantor depending upon how it is structured.

It is important to remember that the payments to the charity must be made each year regardless of the performance of the trust assets. Poor performance can result in a need to distribute trust principle to cover the required charitable payments.

3. Intrafamily loans are another often overlooked strategy to transfer additional wealth to family members without unnecessarily using up a client’s gift and estate tax exemption amounts. These kinds of loans can be an excellent way to help family members recover from low credit scores or eliminate certain high interest commercial home loans, consumer debt, business loans, or education loans, all while keeping interest payments within the family rather than enriching commercial lenders.

In a low interest rate environment like we have today, a client could loan a family member money using the Applicable Federal Rate (AFR) as the interest rate over the term of the loan. The loaned money could then be invested by the borrower in assets that are likely to grow faster than the AFR built into the loan. The difference between the AFR payable to the lender and the realized rate of growth of the invested loan proceeds would accrue to the benefit of the borrower and outside of the estate of the lender. Thus, the lender can indirectly transfer this growth to family members without the need to report that “transferred” amount as a gift to the IRS.   

As a reminder, even though these are intrafamily loans, this does not mean that they can be informal. Such loans must be properly documented with executed promissory notes and, where appropriate, secured as if they were arm’s-length transactions so that the IRS cannot reclassify all or part of the loan as a gift.

Getting the Family Involved

There are several other strategies beyond those mentioned that can be used to help your clients take advantage of historically low interest rates. Now is a great time to discuss these strategies with your clients and help them leverage low interest rates in their estate planning. Doing so can help them maximize their wealth even in these economically challenging times. Further, you can demonstrate to succeeding generations of family members the value that you, as the family’s professional advisor, bring to the table. Give us a call today so we can discuss, in person or virtually, the best ways to utilize these strategies.

Changes in the federal transfer tax laws over the last few decades, as well as the economic volatility brought on by a global pandemic, have called into question the wisdom of making large lifetime gifts for estate planning and tax purposes. In today’s economic and tax environments, many professionals remain uncertain about whether advising clients to make lifetime gifts still makes sense. Given the large estate and gift tax exemption amounts, and the decreases in value of many types of accounts and properties caused by COVID-19, it may be a perfect time for clients to make significant gifts to family members or loved ones. Helping clients understand the tax consequences and other issues surrounding gifting is critical, however, so they are informed before making large gifts. Annual Gifting and Gift Taxes In 2020, an individual can make tax-free gifts of up to $15,000 per person per year using the annual federal gift tax exclusion. A married couple can give up to $30,000 per year to each child without needing to file a federal gift tax return. Such gifts can be made by each spouse individually, or one spouse can make the entire $30,000 gift from separate assets and attribute half of that gift to the other spouse through the practice of “gift-splitting.” When gift-splitting, the couple must file an Internal Revenue Service (IRS) Form 709, Gift (and Generation-Skipping Transfer) Tax Return, which notifies the IRS that half of the gift should be allocated to the spouse. Gift-splitting can be very useful when a couple wants to gift property that is titled in the name of only one spouse such as stock, business interests, or real property. It is important to note, however, that once a married couple elects gift-splitting on a gift tax return, the IRS will consider all gifts made during the year by either of them to be split evenly between the spouses regardless of whether the couple wants this outcome. The Lifetime Gift Tax Exemption If an individual makes an annual gift to someone in excess of $15,000 per person per year, an IRS Form 709 must be filed to report the excess gift. Every gifted dollar over $15,000 made to an individual is subject to federal transfer taxes (at an approximately 40 percent tax rate). Even though a gift may be subject to the gift tax, this does not necessarily mean that the client will have to pay the tax. In addition to the annual gift tax exemption, each U.S. citizen currently enjoys a historically high $11.58 million lifetime estate and gift tax exemption to apply against any gift or estate tax that may be due. Under current law, this exemption amount will continue to increase, indexed with inflation, through the end of 2025. This exemption is like a coupon that can be used against gift taxes that would otherwise be due.  Once all $11.58 million of the exemption has been used, the client will then be required to pay gift taxes on gifts that exceed the annual exemption amount. If your client is looking to do a lot of gifting, it may be advisable for these gifts to be made prior to 2026, as the IRS released final regulations in November 2019 providing that taxpayers who take advantage of the higher gift and tax exemption applicable between 2018 and 2025 will not lose the tax benefit of the higher exclusion amount upon their subsequent death on or after January 1, 2026, when the exclusion is set to decrease to the pre–tax reform level. Outright Gifts Not all gifts are created equal, and a client should understand this before making a gift. Each type of gift has its own tax and other consequences that should be considered before the client ultimately turns over ownership of any money or property. Outright gifts of cash, stock, real estate, or any other form of property are easy to make. However, although outright gifting may be the simplest way of making gifts, once the gift is made, the property can no longer be controlled or protected by the donor. With full control and ownership, the donee is free to use the gift in any way the donee chooses. This could include spending, selling, encumbering, or otherwise using the gift. The gift could also be seized by any creditors of the donee or considered in a divorce proceeding. Gifts to Irrevocable Trusts Risks posed by creditors, lawsuits, divorce, and irresponsible management of assets associated with outright gifting cause many individuals to consider making gifts to irrevocable gifting trusts. Such trusts enable clients to make gifts that qualify as gifts for transfer tax purposes, and also to better control and protect the gift for the person receiving it based on the terms of the trust and the directions given to the trustee for using the gift. Gifts of Family Business Interests Another important and useful method for making gifts is for the donor to contribute assets such as real estate or stocks to a family limited partnership (FLP) or family limited liability company (FLLC). The donor can then make gifts of membership interests in that business entity to family members. Gifting in this manner can provide important methods of control over the assets in the business entity by the majority owner (often the donor). This method of gifting also allows the donor to reduce the value of the assets, for gift tax purposes, in the business entity through the use of valuation discounting. Such reductions allow for the transfer of more property at a lower tax cost than would be possible through outright gifts. Income Tax Considerations Clients are often surprised by the potential negative tax consequences that accompany gifting. Other than cash, most accounts and property carry a tax basis that results in some level of capital gain when the account or property is sold or converted to cash. When accounts and property appreciate and are then gifted, the tax basis of the gifted account or property carries over to the gift recipient. As a result, if the recipient later sells the account or property, some portion of the increase in value could be subject to capital gains tax. On the other hand, if an individual waits to transfer an account or property to someone through a testamentary instrument like a will or revocable living trust, the account or property would get a stepped-up basis, meaning that any gains on that property based on the date of death value of the property would be effectively erased. The new tax basis for the recipient of the testamentary gift would be the date of death value of the property, decreasing the amount of capital gains tax due. Deciding Whether to Gift Now Because of the historically high gift and estate tax exemption, many advisors feel that in certain cases, it makes sense for some clients to aggressively use their gift tax exemption now because of the risk that Congress will reduce the exemption amount in 2026, leaving clients with a missed opportunity. Additionally, gifting during life can provide the donor with the certainty that the donee has in fact received title to the gift, and the donor can ensure that any future growth of the gifted account or property takes place outside of the donor’s estate, further reducing estate taxes at the donor’s death. In addition to tax benefits, clients can gain significant nonmonetary benefits from seeing their donees enjoy and use their gifts while the client is still alive. Observing how a donee uses (or in some cases, squanders) a lifetime gift could provide the client with valuable information for structuring the remainder of the client’s estate plan with regard to that donee. Why Gifting Makes Sense For You You can play an important role in your clients’ decisions to make gifting a part of their estate planning strategy. Whether it is an outright gift or one made in trust, a gift tax return has to be filed. This is an extra return preparers can add to their existing services. Additionally, if an irrevocable trust, FLP, or FLLC is created, an additional yearly income tax return may need to be filed for those entities. If an account is being gifted, you have the ability to gain a new client by discussing the benefits of keeping the money in the account as opposed to liquidating it. Lastly, if the client is choosing to make a substantial gift to one person, the client may need a way to equalize gifts among multiple donees. Life insurance can be a great way to provide liquidity to the client so that in the end, all beneficiaries receive the same value. Tap into Your Client’s Team As you can see, there are many considerations when advising a client on whether to make large gifts. Legal, tax, and financial considerations should all be weighed carefully in decisions like these. A team approach that includes a client’s tax advisor, financial advisor, and legal counsel can provide crucial information to help clients make informed decisions. We encourage you to let us know if you or your clients are considering making significant gifts. We are here to help. Please call us today to set up a virtual or in-person meeting so that we can assist you. This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.

Are You Prepared?

If you are like most parents you are concerned about being allowed to get information, and make decisions, about your young adult college student in case of a medical emergency. Without the correct written authority, you may be unable to get information about your child because of the medical privacy laws. You see, your child is now an adult in the eyes of the law and his/her information is private unless your child authorizes a medical provider to share that information. Obviously, that can become a big problem if your child cannot give authorization due to some emergency.

The good news is that our team at the Like Law Group has created the College Student Protection Plan™ which will ensure you legally will be able to get information and make decisions for your college age student in any situation. Take this time while your student is at home, or before your recent high school graduate heads off to college this fall, to get this important planning done.

Our Process

We have a process that will make this easy for both you and your student.  Here is what to do. First, call our Practice Manager, Jennifer Price @ 812-323-8300 or email her jennifer@likelawgroup.com to set a phone or video appointment to get started. Second, we will help guide you and your child on the decisions that are needed which will also allow us to prepare the documents. Third, we will get your child the completed legal documents with instructions on properly executing them, or they can come to our office for us to oversee the proper execution.

What’s Included

Included in this plan will be the legal documents to ensure you can get access to all needed information and be able to make important health care and financial decisions if the need arises, all without the stress and expense that might be incurred if a court had to be involved.  We will include a medical power of attorney, HIPAA medical privacy authorization, living will, and financial power of attorney, as well as detailed instructions on how to execute these documents. If you chose, we can oversee the execution and provide the needed witnesses and notary.

Not Just for College Students

And, by the way, even though we are calling this the College Student Protection Plan™, this applies to all young adults regardless of whether they are in school or not. So, if you have a young adult child give us a call.  We can help.

Please Share this Information

Finally, if you know someone that has young adult children please pass this along to them. We would love to help them too!