Category: The Wealth Counselor

Important Planning Points to Cover with Parents

Life can get hectic for parents when the school year starts. Parents often juggle many different responsibilities, which increase with the number of children they have and activities the children participate in. Most parents feel like they need to be in five places at once! 

It may feel difficult to motivate clients that are parents of minor children to establish a comprehensive estate plan because they feel pulled in so many directions; however, they are a market that need an estate plan. You can educate these clients that a lack of proper planning can result in their children and loved ones being forced to go through complex and emotionally draining legal processes that can easily be avoided.  

Begin the discussion.

As a trusted advisor, you are in a unique position to discuss important aspects of your clients’ lives that they may not feel comfortable discussing otherwise. Most clients with minor children are busy making important day-to-day decisions about their children’s lives, but may have not taken the time to consider what would happen if they were no longer around to make those decisions for their children. 

What will happen at their death?

Speaking with your clients about what would happen if they were no longer living can be a difficult conversation, but you should emphasize to them that they should be proactive in planning so that they can make decisions about who would raise their children and how they should be raised. Every parent has beliefs and values that are important to them, and putting a plan in place can ensure that their children are raised in a way that emphasizes both. 

What are your client’s goals?

As part of your planning process, you have likely already spent time discussing your client’s long-term financial goals. Your clients should not only be considering retirement, but also how to best structure their finances to ensure that their children will continue to be raised how your clients want in the event of their deaths. It is impossible to predict the future or how long we will live, however, you can help your clients develop a plan by calculating the costs of providing for their children at their death under multiple scenarios. This process may begin by asking your clients questions about what they envision for their children, such as whether they want their children to have a private education, attend college, or start a business. As an advisor, you can provide your clients with the financial tools and strategies to develop a plan to make their vision for their children’s future a reality.  

Every client needs a plan.

It is not uncommon for clients to come into your office without an estate plan. Most clients do not start the planning process until they experience losing a loved one. It is important to encourage your clients to connect with a qualified estate planning attorney who can assist them to ensure that the financial plan you have created for them is accompanied by a comprehensive set of estate planning documents to implement and maintain said plan. There will be the clients who have established an estate plan prior to meeting with you; when dealing with these types of clients, it is always beneficial to remind them that their plan should be reviewed regularly to ensure it still serves the purpose it was established for. We would love the opportunity to assist your clients in creating or reviewing their estate plan. 

Not all children are responsible enough to handle a large lump sum inheritance at age eighteen without some guidance. Most children would be tempted to spend it all on fast cars, designer clothes, lavish vacations, or maybe even to quit their job. It is important to educate your clients on the options available to them when it comes to leaving an inheritance to their children. 

How a Continuing Trust Works

A continuing trust is a great option for clients to ensure that the money they worked so hard for lasts to provide their children with the future they envision. A continuing trust holds money for a specific period of time and does not distribute it outright. This type of trust can allow for small distributions when a child reaches certain ages, and then distribute the remainder at a specified age, or continue indefinitely. You should speak with clients to help them decide the ages and amounts that would be appropriate to disburse to their children. The specifics will largely depend on what clients want their children to use the funds for and whether any special circumstances affect their children. 

1. Protecting Minor Children

Continuing trusts can be particularly beneficial for situations in which a child may inherit funds or property while they are a minor. Minor children are unable to own property or inherit an amount over $15,000 in many jurisdictions. If children are set to receive more than $15,000, most states require that a conservatorship or guardianship be put in place until the child reaches the age of majority (eighteen or twenty-one depending on the state). This court process requires additional fees and court filings for the duration of the guardianship or conservatorship. And ultimately, the child would still receive a large lump sum when they turn eighteen or twenty-one (when they may still be immature). Establishing a continuing trust prevents the need for a conservatorship or court-monitored guardianship. 

1. Other Ways a Continuing Trust Can Help

Continuing trusts can also be beneficial in other circumstances. They can help preserve money for adult children who are financially irresponsible and tend to exercise poor judgment when it comes to spending. They can also protect children who suffer from addiction from having a lump sum given to them that could be used to fuel their addiction. Additionally, this type of trust may protect money and property from lawsuits if a child works in a high-risk occupation. 

1. Potential Issues with a Continuing Trust

Continuing trusts provide a lot of benefits, but they can be problematic if not drafted properly. There may be a circumstance in which a child needs a large sum of money that the client would have otherwise given, but without the proper authorization in the trust document, the trustee may be reluctant to make the distribution. Additionally, if a child requires government aid, these trusts may disqualify them if the trust does not contain specific language and provisions to enable the benefits to be preserved. 

Trusts Can Be Expensive

When counseling clients on the use of continuing trusts, it is important to let them know that in most cases, managing a trust costs money. The amount that it will cost can be quite substantial depending on how long the trust exists. The most common expenses associated with continuing trusts are trustee fees and income taxes. Both should be considered by your clients when determining how long they would like the trust to remain in existence for. There can be provisions that can give the trustee authority to dissolve the trust if it becomes financially impractical to maintain or if the original purpose of the trust is no longer applicable. 

Choosing the Right Trustee Is Crucial

Another important consideration of continuing trusts is that managing a trust takes time. These types of trusts are created to last for a long time and require a trustee who has the time to dedicate to the proper management of the trust. One of the more difficult decisions that clients must make is choosing who should serve as trustee. There are many considerations that go into trustee selection, and the following questions should be asked: How old is the successor trustee? Does this person have the time and capacity to manage a trust? Will selecting this person put them in a position where it could strain their relationship with the beneficiary? Some clients feel it would be better to select an entity rather than a family member; they should ask the following questions: How accessible is this institution? Will they be in business long enough? Is there a minimum trust value requirement? What fees do they charge for management?  

If you are interested in learning more about continuing trusts and how you can discuss them with your clients, feel free to call us to set up a meeting.

There are certain reasons that establishing an estate plan can be of the utmost importance. Having minor children or grandchildren is one of those reasons. Most parents do not have time to keep up with their own tasks, let alone consider what would happen if they died while their children were still minors, but having a comprehensive plan in place for their children is very important. You can motivate your clients by letting them know that a well thought-out and carefully drafted plan can last over eighteen years. Most parents have carefully considered what values they want to instill upon their children, but what many parents may not realize is that establishing a trust can allow them to essentially parent from beyond the grave. In addition, grandparents may want to provide a lasting gift to their grandchildren, but may be unsure of how to make a gift that truly has a lasting impact. Trusts are not a “one size fits all” planning method—in fact, there are different forms of trusts that can help your clients accomplish a variety of goals. 

1. Health and Education Exclusion Trust

Every parent wants to provide their child with opportunities, and grandparents also find great value in contributing to the success of their grandchildren. Education is often a major stepping stone to bigger opportunities. Many times, grandparents will tell their children that they want to leave funds for their grandchildren’s education. Your clients and their parents may be unaware of a health and education exclusion trust (HEET). A HEET could be ideal for clients who want to mitigate financial burdens on their loved ones caused by the rise in tuition and health care. These trusts allow grandparents to set aside funds to be used for their grandchildren’s and other distant descendant’s health and/or education expenses. Your clients will not directly benefit from these trusts, but they receive the ultimate peace of mind in having the trust cover their children’s educational and health care costs. 

HEETs can pay for tuition costs at any education level. These trusts can be particularly beneficial for high net worth grandparents, as they can serve the dual purpose of adding a charity as a beneficiary. Additionally, grandparents can avoid generation-skipping transfer (GST) tax liability on funds transferred to the trust. Further GST (and gift tax) liability can be avoided on funds disbursed as qualified transfers. This is also an opportunity to reduce a grandparent’s taxable estate and therefore save on or avoid estate taxes. Qualified transfers are defined as funds that are transferred directly from the trust to the educational institution or medical provider. 

1. Incentive Trusts

How likely are children to go out of their way to do the dishes, walk the dog, clean their room, or cook dinner? How much does the likelihood increase if they are offered money for completing these tasks? Most parents would agree that incentivizing young children works like magic. How surprised would your clients be to learn that, even if they were not around, they could continue to guide and motivate their children by incentivizing them from beyond the grave? 

Incentive trusts are becoming a popular choice for parents of young children that want their children to achieve certain goals in life. Incentive trusts provide parents with the flexibility to set goals and appropriate rewards through distributions once a child reaches the goal. Parents can set multiple and separate goals for each child. 

There are a variety of goals that can be addressed with incentive trusts. Some of the more common goals are achieving a higher education, receiving good grades, starting a business, and maintaining a paying job. As you can imagine, these goals are best defined by a parent who knows their children’s abilities and limitations. 

Asking your client to imagine not being a part of their young children’s lives can be difficult. However, incentive trusts can offer their children guidance and support if the parents are unable. 

1. Beneficiary-Controlled Trust 

You may have clients that feel that their children are financially responsible and exercise good judgment, and they would like to avoid giving another individual control of the money they leave. Even with strong financial management skills, the money left to children is still vulnerable to creditors’ claims, divorce, lawsuits, or estate taxes. By using a beneficiary-controlled trust, these risks can be reduced while allowing the child some control over their own trust. A beneficiary-controlled trust is much like it sounds, in that a trust can be established for a beneficiary, who can also serve as the sole trustee or a co-trustee. 

These trusts grant the beneficiary a considerable amount of control over their inheritance while still allowing parents to place certain restrictions on its use. When a beneficiary acts as sole trustee, they can be allowed to make distributions based on an ascertainable standard—for example, distributions for the beneficiary’s health, education, maintenance, and support (HEMS). In circumstances in which the beneficiary acts as sole trustee, under many states’ laws, most creditors cannot reach the beneficiary’s interest or compel a distribution when the trust contains the HEMS standard. However, once a distribution has been made to the beneficiary, it may be susceptible to the beneficiary’s creditors. 

A beneficiary-controlled trust may be ideal for clients who want to save on administration costs, because the costs of administration are often reduced when the beneficiary serves as sole trustee. 

It is important to tell your clients that while there are many ways to establish trusts, the best way for them to ascertain which structure best addresses their goals is to work with a qualified estate planning attorney. 

Just as spending a day under the summer sun without proper protection can leave you with a painful sunburn, a poorly crafted or out-of-date estate plan can inflict harm on your clients and their loved ones. In this newsletter, we explore the importance of creating a comprehensive estate plan to protect your client’s legacy and ensure a smooth transition to future generations. 

Why Your Client’s Relationship with Their Parents and Children Is Important

Your client’s relationship with their parents and with their own children is important for several reasons, including developing an effective estate plan. Simply maintaining a loving relationship with a parent does not necessarily guarantee inheritance rights. A legal right to inherit depends largely on the legal relationship between a child and that child’s parent, the existence of a valid estate plan, or if no estate plan exists, the applicable laws of intestacy in a given jurisdiction. Generally, children can inherit from their parents whether their parents are biological or adoptive, but in most jurisdictions, there is no legal right for a child to inherit unless they are a minor or it can be shown that they were accidentally left out of a parent’s estate plan. In some jurisdictions, if there is no estate plan, a child may be entitled to a percentage of the parent’s estate. 

Any discussion with your client about estate planning concerns should include a review of the legal relationship between parents and children. In what manner is your client a “child” of their parents? Are your client’s children their biological children? Or are they legally adopted? Are they stepchildren? Or is their relationship something else altogether?

When it comes to a child’s legal ability to inherit from parents, there is no difference between adopted children and biological children—they are considered equal in the eyes of the law. However, situations involving stepchildren or presumed parents can be more complicated. 

Stepparents. A stepparent is typically someone who is married to or in a civil partnership with one of the biological parents of a child. With few exceptions, stepparents have no legal obligation to provide any legacy to a stepchild or stepchildren. And unless they were legally adopted, stepchildren have no legal right to expect an inheritance from their stepparent. The ability of stepchildren to inherit from stepparents can depend on the laws of the jurisdiction where the parents are located and that jurisdiction’s laws of intestacy. Stepparents can choose to provide for stepchildren in their estate plan, and in that case, the stepchildren would benefit in the same manner as any other beneficiary. If a stepchild is included in a stepparent’s estate plan under their will or trust, that stepchild can inherit money or property in the same manner as your client’s biological or adopted children under the same instrument. However, if there is no provision made for stepchildren under your client’s estate plan, they will likely not be entitled to any share of your client’s estate.

Presumed parents. In some cases, a person may be considered a presumed parent, which means that they are legally recognized as the parent of a child, even if they are not the biological or adoptive parent. Legal recognition for presumed parents is based on public policy that certain individuals should be treated as parents because of their relationship with a child and the role they assume in that child’s life. 

The criteria for being a presumed parent can vary by jurisdiction, but they often include the following: 

1. Biological connection. In some jurisdictions, a person who is the biological parent of a child is automatically considered a presumed parent, regardless of their marital or relationship status.
2. Birth or adoptive parent. A person who has legally adopted the child (with their consent) or given birth to the child is considered a presumed parent.
3. Marriage or domestic partnership. If a person is married to or in a legally recognized domestic partnership with the child’s biological or adoptive parent at the time of the child’s birth or conception, they may be presumed to be a parent.
4. Intent to parent. If an individual openly and actively takes on the role of a parent and demonstrates their intent to parent the child, they may be considered a presumed parent. This can include factors such as receiving the child into their home, providing financial support, making important decisions regarding the child’s upbringing, and establishing a parent-child relationship.
5. Length of time and stability. The length of time the person has been involved in the child’s life and the stability of their relationship with the child may be considered when determining presumed parenthood. 

The relationship between a parent and child can take many forms. It is therefore important that you discuss with your clients the need to have an estate plan that clearly identifies their intended beneficiaries and the legal relationship of those beneficiaries to your client. Your discussion should also examine relationships with any individuals who may not be immediate or obvious family members. Your client will appreciate your thoroughness, and you can rest assured that your client’s wishes regarding inheritance will be clear and properly documented so they can be legally enforced.

As summer approaches and open waters beckon, it is important to consider a unique aspect of estate planning that can often be overlooked by your clients—their boats and watercrafts. These vessels bring your clients joy and unforgettable memories, but they also warrant special attention when it comes to safeguarding your clients’ legacies as part of a comprehensive estate plan. 

There are several estate planning strategies that can be tailored specifically to boats and other vessels or personal watercraft. By implementing these strategies, your clients can ensure a seamless transition of ownership, mitigate potential tax burdens, avoid family squabbles, and pave the way for future generations to enjoy the pleasures of being out on the open water.

One planning strategy is to use a trust structure for boat ownership. Setting up a trust can enable your client to maintain control over their boats while simplifying the transfer process. A revocable living trust allows clients to retain enjoyment during their lifetime while designating beneficiaries who will inherit the boats upon their passing. This approach helps bypass probate, ensuring a smoother transition for managing and distributing the boat after your client’s passing and potentially minimizing costs. It is important to note, however, that holding a boat in a trust may not be ideal from a liability perspective. In case of accidents or damages that result in injury or death, trial lawyers may try to pursue damages beyond liability insurance coverage limits based solely on the fact that the boat is owned by a trust. Additionally, transferring the boat to a trust could potentially incur state or local taxes at the transfer and may increase insurance premiums.

Another planning strategy involves gifting and lifetime transfers by your client. For clients who wish to pass on their boats during their lifetime, gifting or lifetime transfers can be viable options. By transferring ownership of a boat to family members or loved ones, your client can experience firsthand the joy of gifting them while also potentially reducing estate taxes by removing the boat from their taxable estate. The downsides to this approach are that your client may need to file a gift tax return, the boat may become subject to the gift recipient’s creditors, and your client will not have any further control over the boat once the gift is completed.

A third planning strategy that is becoming more popular with boat owners is the use of a limited liability company (LLC). Establishing an LLC can offer significant benefits when it comes to managing and transferring boat ownership. By placing a boat into an LLC, your client could use a trust to own the membership interest in the LLC. This approach may provide personal liability protection by separating the boat’s ownership from personal accounts and property. However, it is essential to understand not only how changing ownership will impact insurance premiums but also any other legal and financial considerations specific to your client’s jurisdiction. For example, securing adequate insurance coverage is essential for your client to protect their boat and ensure a smooth transition in the event of an unexpected loss. 

Whichever planning strategy your clients employ, it is important to remember that each client’s situation is unique, so they should work closely with a qualified estate planning professional who can tailor these strategies to their specific needs and goals. By proactively addressing the complexities of boat ownership in a client’s estate plan, you can help them sail through life’s adventures with peace of mind.

Friction between family members can escalate during a scorching summer heatwave. Likewise, a flawed estate plan has the potential to breed conflict, mistrust, and financial turmoil among your client’s beneficiaries in several ways.

Lack of a plan. If your client fails to create an estate plan altogether, it can lead to significant disputes and confusion among their family members. Without clear instructions, loved ones could argue over what the client’s intentions were, and state laws will dictate the distribution of accounts and property in a manner that could be inconsistent with your client’s wishes. This can result in some individuals feeling left out or receiving less than they anticipated.

Vague or generic plan. If your client’s estate plan lacks specificity or fails to address important questions, it can open the door for interpretation and disagreement among your client’s beneficiaries. Detailed instructions and provisions in the plan can help prevent disputes and provide clarity as to how your client prefers different situations to be handled. Without clear instructions, disputes may arise regarding distribution of the client’s accounts and property, guardianship of minor children, or your client’s intentions. This uncertainty can lead to protracted legal battles, strained relationships, and irreparable family rifts.

Outdated plan. Circumstances change over time, and your client’s plan may no longer align with their current wishes or family situation. For example, if a beneficiary named in the plan predeceases your client, it is crucial to have contingencies in place. Financial institutions may also be hesitant to accept outdated estate planning documents such as a financial power of attorney. Regularly reviewing and updating the estate plan helps ensure its relevance and effectiveness.

Unequal treatment of beneficiaries. While your client has the right to distribute their money and property as they see fit and in the manner they think best, treating beneficiaries unequally can create tension and hurt feelings among family members. Open communication and discussing the reasoning behind such decisions ahead of time can alleviate stress, help manage expectations, and minimize conflicts.

Unclear wishes regarding care and decision-making. Apart from money and property, your client’s plan should also address their wishes for medical and financial decision-making if they become incapacitated. If your client fails to provide clear instructions, it can lead to disagreements among family members who may have different opinions about the client’s care. To prevent conflicts, it is important that your client appoint reliable decision-makers and clearly communicate their wishes.

Conflicting decision-makers. Conflicts may arise when multiple individuals, such as children, are given priority to serve as decision-makers. Each person may have different philosophies or opinions about the client’s care, leading to disagreements and potential disputes. It is crucial to consider these dynamics and select decision-makers who can work together harmoniously.

Unexpected tax consequences. Inadequate estate planning can lead to significant tax liabilities that may deplete the wealth your client intended to pass on to their loved ones or favorite organizations. By leveraging effective tax planning strategies such as trusts or gifting, your client can potentially minimize estate taxes and maximize the financial legacy they leave behind.

Business succession issues. If your client owns a family business, a lack of succession planning can be particularly detrimental. Without a well-defined plan, conflicts may arise regarding leadership, ownership, and the future direction of the business. This can jeopardize the continuity of the enterprise and strain relationships among family members involved in the business.

Emotional toll on loved ones. A poorly crafted or outdated estate plan can place an immense emotional burden on your client’s loved ones during an already challenging time. Without clear guidance, your client’s family members may be left guessing their wishes, resulting in anxiety, resentment, and fractured familial bonds. By proactively addressing potential conflicts in your client’s estate plan, you can help your client alleviate potential emotional strain on their beneficiaries and foster a sense of unity.

To mitigate these potential conflicts, it is advisable for your client to consult with an experienced estate planning attorney to create a comprehensive and up-to-date plan. Regularly reviewing and updating the plan as circumstances change can help ensure that their intentions are clearly communicated, reducing the likelihood of conflicts among their loved ones and protecting their legacy.

Introduction

On March 9, 2023, the Biden administration released a proposed budget for fiscal year 2024 calling for an increase in federal spending along with a series of counterbalancing revenue raisers. The budget was outlined in a document called the “General Explanations of the Administration’s FY2024 Revenue Proposals,” otherwise known as the “Greenbook.” 

The Greenbook is a document created by the US Department of the Treasury to explain the revenue proposals in the President’s budget. The Greenbook also serves as a guide to Congress for tax legislation by describing current laws, proposed changes to those laws, the rationale behind the proposed changes from a policy perspective, and US Department of the Treasury’s revenue projections based upon the proposed changes.

Proposed Rules Regarding Retirement Plans

Prevent Excessive Accumulation

The Greenbook outlines proposals on several different topics. One proposal that could directly impact the future financial security of your clients is the proposal to prevent excessive accumulations of wealth by high-income taxpayers using tax-favored retirement accounts.

Tax-favored (sometimes referred to as tax-deferred) retirement accounts, such as individual retirement accounts (IRAs) and 401(k)s, were approved by the federal government as a method of encouraging American citizens to save money for retirement. These accounts allow individuals to contribute a portion of their earnings to an investment account without taxes being withheld at the time of contribution. The money invested can grow with tax liability being delayed until the monies are withdrawn from the retirement account. 

In 2021, 87 percent of US citizens who were sixty-years old or older had some type of retirement savings.¹ According to the latest findings, the average balance in American retirement accounts was $141,542 in 2021.² However, the Joint Committee on Taxation estimates that as of 2022 there are roughly 500 taxpayers with retirement accounts worth $25 million or more, and over 28,000 additional retirement accounts worth $5 million or more.³ 

Because of the special tax treatment afforded retirement accounts, high-income taxpayers have started using these accounts as wealth transfer tools. An individual taxpayer is in the high-income category if their modified adjusted gross income is over $450,000 if married filing jointly, over $425,000 if head-of-household, or over $400,000 in other cases.⁴ Some high-income taxpayers have been able to accumulate amounts in “tax-favored retirement arrangements that are far in excess of the amount needed for retirement security.”⁵ According to the Greenbook, “the exemption from required minimum distribution rules for Roth IRAs means that a taxpayer who has other sources of retirement income could choose to continue accumulating investment returns on a tax-favored basis until the taxpayer dies, which means that the tax-favored retirement arrangement could be passed on in its entirety to the taxpayer’s heirs.”⁶

Special Distribution Rules for Large Account Balances

To prevent such “excessive accumulations” by individuals, the Greenbook contains proposals that would modify rules related to retirement accounts. One such proposal would impose special distribution rules on high-income taxpayers with large account balances. Under the proposal, a high-income taxpayer with an aggregate vested account balance in a tax-favored retirement account exceeding $10 million would be required to distribute a minimum of 50 percent of the excess.⁷ “[I]f the high-income taxpayer’s aggregate vested account balance under these tax-favored retirement arrangements exceeded $20 million, then the required distribution would be subject to a floor.”⁸ “The floor is the lesser of (a) that excess and (b) the portion of the taxpayer’s aggregate vested account balance that is held in a Roth IRA or designated Roth account.”⁹ Commentators have suggested that this proposal is simply a rehashing of the mega-IRA proposals in the Build Back Better Act.¹⁰ Based on a $10 million threshold, the proposal would not likely affect the majority of retirement plan participants.¹¹ However, for those individuals who have accumulated more than $10 million in their retirement account, the proposed changes would greatly limit their ability to retain balances in excess of $10 million and use these accounts as wealth transfer tools.¹² 

Limit on Rollovers and Conversions

Another Greenbook proposal that could impact your clients and their financial plans is the proposed limit on rollovers and conversions to designated Roth retirement accounts or to Roth IRAs. The proposal “would prohibit a rollover of a distribution from a tax-favored retirement arrangement into a Roth IRA unless the distribution was from a designated Roth account within an employer-sponsored retirement plan or was from another Roth IRA if any part of the distribution includes a distribution of after-tax contributions.”¹³ The proposal would further “prohibit a rollover of a distribution from a tax-favored retirement arrangement into a designated Roth account if any part of the distribution includes a distribution of after-tax contributions, unless the distribution was from a designated Roth account.”¹⁴ “This proposal would eliminate the commonly used ‘backdoor’ Roth conversion for all high-income earners.”¹⁵ A backdoor Roth conversion is a strategy used by high-income earners who are prohibited from contributing to a Roth IRA because their income is above certain limits. Instead of contributing directly to a Roth, these high-income taxpayers contribute to a traditional IRA (which has no income limits), and then convert it to a Roth IRA. “Backdoor conversions would still be allowed for taxpayers with income above the Roth IRA contribution limit, but below the high-income earner limit.”¹⁶ However, according to some commentators, “this proposal does not appear to limit Roth contributions in employer retirement plans.”¹⁷

Although these are just proposals, we are committed to keeping you and your clients up-to-date on matters that may impact them and their financial future. We look forward to working with you in the future to help shape and protect our clients’ and their loved ones’ futures.

Four Improvements the Administration Wants to Make Regarding Administration for Trusts and Decedents’ Estates

When a client dies, there are often several tasks that need to be completed to properly wind down the deceased’s affairs—funerals and other preparations need to be planned, bank and investment accounts closed, property transferred, arrangements made for pets, tax returns filed, and final bills paid. There are several proposals in the Greenbook that are meant to help alleviate some of the complications that have arisen in estate and trust tax matters and simplify the process. 

Extending Duration for Estate and Gift Tax Liens

One such proposal is to extend the current ten-year duration of certain estate and gift tax liens. Current law provides an automatic lien on all gifts made by a donor and generally all property owned by an individual at their date of death to enforce the collection of gift and estate tax liabilities from the donor or from the accounts and property owned by the deceased individual upon their death, as applicable.¹⁸ “The lien remains in effect for ten years from the date of the gift for gift tax, or the date of the decedent’s death for estate tax, unless the tax is paid in full sooner.”¹⁹ As the law stands today, “the 10-year lien cannot be extended, including in cases where the taxpayer enters into an agreement with the IRS to defer tax payments or to pay taxes in installments that extend beyond 10 years.”²⁰ Therefore, this special lien has no effect on unpaid amounts due to be paid after the ten-year period.²¹ A proposal outlined in the Greenbook “would extend the duration of the automatic lien beyond the current 10-year period to continue during any deferral or installment period for unpaid estate and gift taxes.”²² The administration’s “proposal would apply to 10-year liens already in effect on the date of enactment, as well as to the automatic lien on gifts made and the estates of decedents dying on or after the date of enactment.”²³

Required Reporting on Trust Value

Another Greenbook proposal would require reporting the estimated total value of a trust’s assets and other information about trusts to the Internal Revenue Service (IRS) on an annual basis. Currently, most domestic trusts must file an annual income tax return. However, trusts do not have to report the nature or value of the trust assets.²⁴ Because of this, “the IRS has no statistical data on the nature or magnitude of wealth held in domestic trusts.”²⁵ This lack of statistical data has made it difficult for the administration “to develop administrative and legal structures capable of effectively implementing appropriate tax policies and evaluating compliance with applicable statutes and regulations.”²⁶ This in turn further hampers the administration’s “efforts to design tax policies intended to increase the equity and progressivity of the tax system.”²⁷ The proposal outlined in the Greenbook would require certain trusts to report certain information to the IRS on an annual basis to facilitate the analysis of tax data, the development of tax policies, and the administration of the tax system.²⁸ The Greenbook continues its proposal by providing that the information could be reported on an annual income tax return or other form, as determined by the Secretary, and would include the name, address, and taxpayer identification number of each trustee and trustmaker, and general information about the nature and estimated total value of the trust’s assets.²⁹ Also, each trust (regardless of value or income) would be required to report the inclusion ratio of the trust at the time of any trust distribution to a non-skip person, as well as information about trust modifications or transactions with other trusts that occurred that year.³⁰ “The proposal would apply for taxable years ending after the date of enactment.”³¹ It is anticipated that increased reporting would require increased participation by attorneys in the preparation of fiduciary income tax returns.³²

Require Defined Value Formula Clause Be Based on Variable Without IRS Involvement

A third proposal aimed at simplifying issues involving estate and trust matters requires that a defined value formula clause be based on a variable not requiring IRS involvement. Many taxpayers like to use gifts, bequests, or disclaimers as part of a particular tax strategy. To achieve this result, sometimes a defined value formula clause is necessary to determine how much should be transferred. A defined value clause is the amount transferred based on a value as determined for tax purposes and using a formula based on IRS enforcement activities.³³ After losing a number of court decisions upholding taxpayer use of formula clauses for hard-to-value assets, the Biden administration has found the defined value formula poses a number of challenges as it currently exists because it potentially (a) allows a donor to escape the gift tax consequences of undervaluing transferred property, (b) makes examination of the gift tax return and litigation by the IRS cost-ineffective, and (c) requires the reallocation of transferred property among gift recipients (donees) long after the date of the gift.³⁴ Additionally, the administration feels that “defined value formula clauses that depend on the value of an asset as finally determined for Federal transfer tax purposes create a situation where the respective property rights of the various donees are being determined in a tax valuation process in which those donees have no ability to participate or intervene.”³⁵ To address these concerns, the Greenbook proposal provides “that if a gift or bequest uses a defined value formula clause to determine value based on the result of involvement of the IRS, then the value of such gift or bequest will be deemed to be the value as reported on the corresponding gift or estate tax return.”³⁶ Transfers made by gift or occurring upon a death after December 31, 2023, would be subject to this proposal. 

Eliminating Present Interest Requirement for Annual Gifts

A fourth Greenbook proposal to simplify estate and trust matters is to eliminate the requirement that gifts must be of a present interest to qualify for the gift tax annual exclusion. Currently, annual per-donee gift tax exclusion is available only for gifts of a present interest. According to the Greenbook, “[a] present interest is an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.”³⁷ If a taxpayer wants to make a gift in trust for the beneficiary, using the annual exclusion amount, the trust beneficiary must usually be given timely notice of a limited right to withdraw the trust contribution (referred to as a Crummey notice) to qualify the gift as a present interest.³⁸ Complying with the notice requirement and record maintenance can pose a significant cost for taxpayers and the administration and enforcement of these rules also imposes a large cost to the IRS.³⁹ Under the new proposal, gifts would no longer have to be of a present interest to qualify for the gift tax annual exclusion. “Instead, the proposal would define a new category of transfers (without regard to the existence of any withdrawal rights) and would impose an annual limit of $50,000 per donor, indexed for inflation after 2024, on the donor’s transfers of property within this new category that would qualify for the gift tax annual exclusion.”⁴⁰ 

Even though we do not know for certain which or if any of these proposals will come to fruition, we are carefully monitoring the latest legislation to ensure that our clients and advisors are properly prepared if and when Congress acts.

Ways the Administration Wants to Modify the Tax Rules for Certain Trusts

Taxes are not just for individuals—they can impact certain types of trusts as well. Whether a trust pays its own taxes or whether the taxes are paid by the trust’s beneficiaries or the trustmaker depends on several factors. 

Grantor Retained Annuity Trusts

If the trust is a grantor trust (a type of trust where the trustmaker, or grantor, typically retains power or control over the money or property in the trust), then trust income is taxed to the trustmaker. Grantor trusts may be revocable or irrevocable. Irrevocable grantor trusts such as a grantor retained annuity trust (GRAT) are popular among high-income taxpayers. These are trusts where the trustmaker retains an annuity interest (a right to receive payments of income) in a trust for a term of years. 

The Greenbook proposes to modify the tax rules for grantor trusts. Currently, estate planning tools such as GRATs and other grantor trusts allow taxpayers to substantially reduce their federal tax liabilities.⁴¹ It is the position of the Biden administration that legislative changes need to be made “to close the existing loopholes and ensure the effective operation of Federal income, gift, and estate taxes.”⁴² This Greenbook proposal “would require that the remainder interest in a GRAT at the time the interest is created would need to be a minimum value for gift tax purposes equal to the greater of 25 percent of the value of the assets transferred to the GRAT or $500,000”.⁴³ Also, “the proposal would prohibit any decrease in the annuity during the GRAT term and would prohibit the grantor from acquiring in exchange an asset held in the trust without recognizing gain or loss for income tax purposes.”⁴⁴ In addition, the proposal would require a GRAT to have a minimum term of ten years and a maximum term set at the life expectancy of the annuitant plus ten years. It would also “provide that the payment of the income tax on the income of a grantor trust (other than a trust that is fully revocable by the grantor) is a gift.”⁴⁵ The unreimbursed amount of the income tax paid would be considered a gift.⁴⁶ This proposal is the same proposal that was included in the 2023 Greenbook⁴⁷ and was previously included in Greenbooks from the Obama administration.⁴⁸

Charitable Lead Annuity Trusts

Charitable trusts are also being targeted by the Greenbook proposals—particularly charitable lead annuity trusts (CLATs). A CLAT is a special type of charitable trust where the trustmaker selects a charity or charities to receive annual payments from the trust. The payments can be made either for the trustmaker’s lifetime or for a predetermined number of years. Once the trust terminates, any remaining trust money or property is distributed to noncharitable beneficiaries. The Biden administration feels that “taxpayers often design the CLAT to have an annuity that increases over the trust term, thereby largely deferring the charitable benefit until the end of the trust term.”⁴⁹ By using this and other tax planning techniques, it is possible to greatly increase the value of the trust remainder without incurring increased gift tax consequences. The Greenbook “would require that the annuity payments made to charitable beneficiaries of a CLAT must be a level, fixed amount over the term of the CLAT, and that the value of the remainder interest at the creation of the CLAT must be at least 10 percent of the value of the property used to fund the CLAT, thereby ensuring a taxable gift on creation of the CLAT.”⁵⁰ This proposal has not appeared in prior Greenbooks and it is unclear at this point in time how it will be received.

Loans from a Trust

Another Greenbook proposal modifying the tax rules of trusts “would treat loans made by a trust to a trust beneficiary as a distribution for income tax purposes, carrying out each loan’s appropriate portion of distributable net income to the borrowing beneficiary.”⁵¹ Currently, with few exceptions, loans from a trust to a borrower do not result in tax consequences to the borrower.⁵² Additionally, loans to a trust beneficiary would be treated as a distribution for generation-skipping transfer (GST) tax purposes under the proposal, “thus constituting either a direct skip or taxable distribution, depending upon the generation assignment of the borrowing beneficiary.”⁵³ 

In addition to discourage borrowing from a trust by a person who is not a trust beneficiary but who is a deemed owner of the trust under the grantor trust rules, the proposal would treat a trustmaker’s repayment of a loan from a grantor trust as an additional contribution to the trust for GST tax purposes.⁵⁴ In some instances, “this new contribution (like any other contribution) would utilize GST exemption of the borrower(s), generate a GST tax liability in the case of a direct skip on such borrower(s) or their respective estates, or increase the trust’s inclusion ratio.”⁵⁵ The trust could be liable for the GST tax payable on such a deemed direct skip if it could not be collected from a deemed owner or a deceased deemed owner’s estate.⁵⁶ This proposal would allow certain types of loans to be excepted from the application of the proposal, such as short-term loans or the use of real or tangible property for a minimal number of days.⁵⁷

When a president submits a proposed budget, it is viewed as an invitation to begin policy debates with Congress. Many people feel the proposed budget for 2024 is “dead on arrival” due to discord between congressional Democrats and Republicans and that the chance of most proposals becoming law is remote. However, the Greenbook still serves as an indicator of the current administration’s goals and agenda. As an advisor, it is important to be aware of the administration’s proposals so you can be an informed resource for your clients and help them understand what it means for them when the media reports on proposed tax increases for high-net-worth individuals.

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Footnotes

1. Share of adults with any retirement savings in the United States in 2021, by age group, Statista.com (Feb. 8, 2023), https://www.statista.com/statistics/1273812/adults-with-no-retirement-savings-by-age-us/.
2. How America Saves 2022, Vanguard, https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/22_TL_HAS_FullReport_2022.pdf (last visited May 26, 2023).
3. Retirement Tax Incentives Supercharge the Fortunes of Wealthy Americans, Washington Center for Equitable Growth (Mar. 17, 2022), https://equitablegrowth.org/retirement-tax-incentives-supercharge-the-fortunes-of-wealthy-americans/.
4. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal [hereinafter General Explanations] at 90, https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf.
5. Id. at 89.
6. Id.
7. Id. at 90.
8. Id.
9. Id.
10. The House approved the Build Back Better legislation in November 2021, but it was never passed by the Senate.
11. General Explanations, supra n. 4, at 90.
12. Amy E. Heller et. al, The 2024 Green Book and Tax Implications: A Primer, Skadden, Arps, Slate, Meagher & Flom LLP (Mar. 20, 2023), https://www.skadden.com/insights/publications/2023/03/the-2024-green-book-and-tax-implications-a-primer.
13. General Explanations, supra n. 4, at 92.
14. Id.
15. Analysis and Observations of Tax Proposals in Biden Administration’s FY 2024 Budget at 38, KPMG (Mar 14. 2023), https://assets.kpmg.com/content/dam/kpmg/us/pdf/2023/03/tnf-fy-2024-green-book-mar14-2023.pdf.
16. Id.
17. Id. at 39.
18. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal [hereinafter General Explanations] at 115, https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf.
19. Id.
20. Id.
21. Id.
22. Id. at 118.
23. Id. at 117.
24. General Explanations, supra n. 18, at 115.
25. Id.
26. Id. at 117.
27. Id.
28. Id. at 118.
29. Id.
30. General Explanations, supra n. 18, at 118.
31. Id. at 119.
32. James Dougherty and Marissa Dungey, The 2024 Green Book Limits Use of Defined Value Clauses, WealthManagement.com (Mar. 17, 2023), https://www.wealthmanagement.com/estate-planning/2024-green-book-limits-use-defined-value-clauses.
33. General Explanations, supra n. 18, at 116.
34. Id. at 117.
35. Id.
36. Id. at 119.
37. Id. at 116.
38. Id. at 117.
39. General Explanations, supra n. 18, at 117, 118.
40. Id. at 119.
41. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal [hereinafter General Explanations] at 124, https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf.
42. Id.
43. Id. at 127.
44. Id.
45. Id.
46. Id.
47. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals at 40, https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf.
48. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals, https://home.treasury.gov/system/files/131/General-Explanations-FY2016.pdf; and Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals, https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf.
49. General Explanations, supra n. 41, at 127.
50. Id. at 128.
51. Id. at 129.
52. Id. at 124.
53. Id. at 129.
54. Id.
55. General Explanations, supra n. 41, at 129.
56. Id.
57. Id.

Important Probate Rules Everyone Should Know:

When a person dies, what happens next depends on whether the deceased person had any foundational estate planning documents such as a last will and testament (otherwise known as a will) or trust, who their living relatives are, and their relationship to the person who died. If the deceased person did not have a trust or will, the state where the deceased person resided has rules for overseeing how the deceased person’s money and property are to be distributed. If the deceased person died owning accounts and property in their own name and had a will, it will contain instructions for what is to happen to the decedent’s money and property and must be filed with the probate court. Probate is a formal legal process of proving that a will is valid (if the person had a will), appointing someone to carry out the deceased person’s wishes (known as a personal representative or executor), and supervising the distribution of the deceased’s money and property.  

While probate rules can vary by state, there are some important ones that you should be aware of for your own personal knowledge and to better serve your clients who may be in charge of wrapping up a deceased loved one’s affairs. 

Deadlines

Deadlines are important rules that must be followed during the probate process. Failing to meet these deadlines could cause trouble for those in charge of an estate administration.

When and if to file the last will and testament. If and when a will must be filed with the probate court can vary by state, but it is important that your clients understand when this task needs to be completed. Some states require that a will be filed with the probate court within a certain number of days after the decedent’s death, while others only require that a will be filed if a probate is necessary. This might occur when the decedent died owning accounts and property in their sole name that need to be transferred. Once the will is filed, the court will generally begin by reviewing the will to ensure that it was properly made and signed. If the court is satisfied, it will appoint a personal representative.  

Collecting and securing items. The personal representative must locate and secure the deceased person’s money and property and create an inventory of all items. Deadlines for filing an inventory with the court are usually calculated from the date your client was appointed as personal representative and can vary greatly among states, from sixty days in Florida to six months in New York. The inventory will include a valuation of the items as of the date of death. During this period, the personal representative may also need to establish a tax identification number for the estate and open an estate checking account for depositing estate funds.

Notifying creditors. The personal representative must notify known creditors and attempt to find unknown creditors. Generally, at the direction of the probate court and with the assistance of an experienced estate administration attorney, the personal representative is required to publish notice of the deceased’s death in appropriate newspapers to run for a specified length of time. This notice is typically published in the local newspaper where the person died. The purpose of this notice is to allow creditors, both known and unknown, time to make a claim to the estate for any debt owed. The personal representative must then determine the validity and priority of all creditor claims received and pay those claims as appropriate.

If the personal representative follows the correct steps regarding notice to creditors, any debts not brought to the personal representative’s attention during the applicable time period established by state law may be barred, and the estate may not be responsible for paying them. The creditor deadline gives creditors an opportunity to come forward with their claims, but it also provides a cutoff point for the personal representative so they can wind up the deceased’s affairs in as efficient a manner as possible.

Maintaining and providing estate accounting records. The personal representative must maintain accounting records as proof of monies coming into and going out of the estate. Depending on the circumstances, the accounting records may need to be filed with the court, and interested parties may need to sign releases at certain intervals.

Filing and paying taxes. A personal representative must ensure that the deceased’s final tax return is filed by the personal income tax filing deadline of the year following the deceased’s death. If the estate earns income after the deceased’s death, the personal representative must file estate income tax returns (sometimes referred to as fiduciary income tax returns). Finally, a personal representative may have to file an estate tax return if required by law or for further tax planning. Each of these returns will have a specific deadline.

Who Has to Know

During the probate process, there are a lot of steps that are involved, and there may be multiple individuals who need to be kept informed about what is happening. If the deceased had a will, this would include those named in the will (beneficiaries). In some states, the deceased’s relatives and the deceased’s creditors can also be interested persons. When dealing with individuals other than those the deceased named in a will, it may be tempting to leave them in the dark, especially if there has been bad blood. However, personal conflicts do not absolve the personal representative of the duty to keep an interested person informed and to provide them with the information they are legally entitled to.

Who Can Be Put in Charge

Another important probate rule is who can be appointed as a personal representative. The personal representative can be almost anyone. Many states require that the personal representative be an adult or an emancipated minor. However, some states may not appoint a personal representative who is a non-US resident, nonstate resident, or a felon. Most often, a personal representative is a surviving spouse, a family member, a close family friend, or an attorney. There is no requirement that the personal representative have any experience or expertise in handling estate matters, nor is the person required to have any financial or legal experience or background.

We Are Here to Help

Probate is a process with many rules. We understand that this can be overwhelming for some clients, and we are committed to working with nominated or appointed personal representatives to ensure that their administration is as smooth as possible with no missed deadlines and follows all the rules. If you would like to learn more about the probate process, reach out to us to schedule a meeting. 

What? You didn’t know that March 14 (3/14) is National Pi Day? We didn’t either until recently, but now we know that this celebratory day was established (you guessed it!) by a physicist (Larry Shaw) to recognize the mathematical constant (𝛑) whose first three digits are 3.14—probably as an excuse to devour lots of pie. National Pi Day is a great occasion to invite your clients in to enjoy a slice of pie and discuss their financial planning, as well as how estate planning will help them determine how they should slice their financial pie when they pass their wealth on to their children and loved ones. No complicated mathematical formulas are necessary to determine whom they would like to leave their money and property to, but it is an important subject that requires some serious thought.

How Should Clients Slice Their Pie?

With only a couple of possible exceptions, clients are free to use their estate plan to slice up their wealth for the benefit of anyone they choose. Some common beneficiaries that your clients may choose are spouses or other significant others—such as their boyfriend, girlfriend, or partner—and their children. More and more people are also leaving money in trust to be used for the care of their pets. Others want to provide a gift to one or more close friends when they pass away. Some clients may choose to include institutions as well as people or pets in their estate plan: if they have a strong relationship with a favorite alma mater, charity, or church, they may choose to leave money or property for its benefit.

It is crucial for your clients to create an estate plan to ensure that each person or institution gets the slice they intend. Without an estate plan, their money and property will be divided up according to state law, which may not provide the result they would have wanted. The state’s intestacy statute typically provides that if a deceased person had no will, the surviving spouse will inherit everything, but if the deceased person had children from a prior relationship, the estate will be divided between them and the surviving spouse. If there is no surviving spouse or children, the estate may go to the deceased person’s parents or siblings. In the absence of any surviving family members specified in the statute, the deceased person’s money and property go to the state. This means that if the deceased person had stepchildren or foster children who were beloved but not adopted, or a significant other who was not a spouse, those loved ones will receive nothing. In addition, a person who did not have family members or did not want to leave their money and property to their family will lose out on the opportunity to leave their wealth to a charitable organization or other institution of their choice; instead, their wealth will go into the state’s coffers.

By creating an estate plan, your clients can specify not only to whom they want to leave a slice of their pie but also the size of that slice. For example, they may want each of their children to receive an equal inheritance, or they may choose to divide up their wealth among their children based upon what they think each one needs. Children who are disabled and unable to provide for themselves may need more than other children who are independently wealthy. There is no right answer: it is up to your clients to determine those to whom they want to leave their money and property and the size of each gift.

Depending on state law, there may be a couple of exceptions that have at least some impact on clients’ ability to specify the size of the slices of their pie:

• Spouse’s elective share. Nearly every state has a statute that protects a surviving spouse from complete disinheritance by allowing them to elect to take a certain portion, such as one-third or one-half, of their deceased spouse’s estate. In some states, the size of the elective share may depend on whether the deceased spouse left behind children, grandchildren, or parents in addition to their spouse. The surviving spouse’s elective share may be smaller if there are other surviving relatives who would benefit from the deceased spouse’s estate.

Some states’ elective share statute applies only to the probate estate, that is, accounts and property that are held in the deceased spouse’s individual name. However, other statutes also subject money and property that the deceased spouse had transferred to a revocable living trust during their lifetime to the surviving spouse’s elective share. Elective share statutes are generally a default rule, so a surviving spouse may contractually waive or modify their right to an elective share if they sign a premarital or postmarital agreement to that effect.

• Family allowance. Under state law, the surviving spouse, minor children, and adult children with special needs may be entitled to an amount from the deceased person’s estate necessary for their maintenance if they are able to demonstrate their need to the probate court. The money and property considered in determining the amount to which the spouse or children may be entitled vary depending on state law. Often, if the family allowance is determined to be available, it will be paid to the spouse or children before gifts are made to other beneficiaries named in the deceased person’s estate plan or most other claims against the estate. If there are insufficient funds in the estate to cover the family allowance, the court may order the sale of estate property.

You Can Help Your Clients Slice Their Pie How They Want

Review beneficiary designations. In addition to encouraging your clients to create an estate plan, you can help them review the assets under your management to ensure that they have named beneficiaries on their accounts. If the accounts were established years ago, your clients should consider whether the person or entity named is still the beneficiary they would like to receive that particular slice of their financial pie. If no beneficiaries have been named on their accounts, your clients should designate one or more beneficiaries to avoid the need for the accounts to go through probate and be distributed according to the terms of their will or state law if they did not have a will.

Evaluate their accounts and property. You can also help your clients determine if their assets are sufficient to provide for their beneficiaries in the way they wish. This is particularly relevant for clients who have many beneficiaries and are concerned that their current money and property will provide smaller slices of wealth for each one than they desire. If their current accounts and other property are insufficient, you have the opportunity to suggest solutions such as additional life insurance or adjustments to their financial and investment plans. 

Determining who receives a client’s money and property, as well as how much, are important decisions that are the cornerstone of most estate plans. By working together, we can help clients legally document their wishes and ensure a smoother administration when the time comes. If you would like to discuss ways we can partner together to serve our mutual clients, please reach out to us.

We associate March with St. Patrick’s Day and Irish traditions such as searching for four-leaf clovers, which are thought to bring good luck. One thing that parents should never leave to luck is providing for their minor children. Parents work hard to create a wonderful life for their children and pass on wealth to them in the future, but they also need to create a plan for their children’s care if something happens to them. Although it will be difficult for them to think about having their young children grow up without them, they need to recognize that lack of planning for this possibility could be disastrous for their children. This is an opportunity to strengthen your relationship with clients who are young parents by providing the financial and investment advice they need to provide for their children. 

Recommend that parents of minor children create an estate plan. If clients who are parents of young children fail to create an estate plan, the fate of their children’s care will be left to a court. Instead of nominating individuals they trust to provide care for their children and manage the children’s inheritance for their benefit, the court must choose who will fill those roles, and it may not choose the people the parents would have wanted. Even worse, a lack of planning may mean that they will not leave enough money and property to fund their children’s upbringing: this is a terrible problem that you can help them avoid by evaluating whether they should obtain additional life insurance to provide for their children’s care. In addition, the lack of an estate plan will mean that the parents will not have any input into who manages their accounts and property through the probate process after they die. The personal representative that the court appoints may not be as familiar with their money and property as you are and may not continue to keep their accounts under your management. If they have an estate plan, they can provide for how their accounts are to be managed in their trust document instructions, which puts you in a better position to continue managing their accounts for the benefit of their children. 

Think twice about advising parents to name their minor children as beneficiaries on accounts. Typically, naming beneficiaries on investment and retirement accounts is important to avoid probate of those accounts. If these accounts represent most of their wealth, parents may mistakenly believe that no estate plan is necessary. In the case of minor children, however, probate may still be necessary even if their minor children are named as beneficiaries of the accounts. Although state law varies, an interested adult may request that the funds be placed in an account established under the relevant state’s United Transfers to Minors Act if the value of the account is below a certain amount, for example, $20,000, which will be managed on their children’s behalf. However, a conservator may need to be appointed by the court to manage the funds on behalf of the children until they reach the age of majority if the accounts have significant value. As mentioned, in the absence of an estate plan, the person the court appoints may not be the person your clients would have chosen and may not understand how your clients would like the funds to be used for their children. There is also a risk that whoever is appointed to manage the inheritance will liquidate the accounts or switch them to another financial advisor rather than maintain them under your management.

Parents also may not want their children to receive a substantial amount of money at the age of eighteen or twenty-one (the age of majority may vary by state). Many parents believe that their children will not be mature enough to responsibly handle a large inheritance at such a young age. However, unless the parents create an estate plan including a trust specifying that the funds should be held and distributed for the children’s benefit at a later date, the children will have full access to their inheritance and it could be spent quickly and wastefully. If the funds are quickly dissipated, not only will the parents’ goal of providing for their children be frustrated, but you will have no opportunity to continue your financial planning relationship with the next generation.

Give Us a Call

You can strengthen your relationship with your clients who are parents by encouraging them to contact an experienced estate planning attorney who can help them create or update their estate plan instead of leaving their children’s future to chance. We can not only help your clients achieve their goal of providing for their children’s needs if something should happen to them but also facilitate their purchase of financial products such as insurance that are necessary to provide sufficient funds for their children’s needs until they reach adulthood and beyond. In addition, your clients are likely to want you, as their trusted advisor, to continue managing their money for the benefit of their children. Their intentions can be included in their estate planning documents, providing you with an opportunity to establish a strong relationship with the next generation. Give us a call to discuss how we can help your clients safeguard their children’s future.