Newsletter Category: Advisor Focused Newsletter

When clients select a successor trustee for their trust, they frequently choose one person to serve as a successor trustee at a time. Many attorneys continue to recommend that only a single trustee be appointed to avoid the potential for disagreements or conflicts between co-trustees during the trust administration after the trustmaker’s death or disability. This can be a prudent approach and works well in many situations. This is particularly true when the appointed trustee diligently keeps the trust beneficiaries informed about the trust administration and carefully fulfils the trustee’s responsibilities under both the law and the provisions of the trust document.
 
However, many clients are reluctant to place the entire responsibility for trust administration on one person. As a result, it is increasingly common for a trustmaker to nominate two or more family members or friends to serve as successor co-trustees. In some cases, it may even be beneficial to divide the trustee responsibilities between a professional trustee and a family member trustee. For example, a professional trustee might be given the responsibility for trust investments, accounting, and tax matters, and the family member trustee may be asked to handle certain distribution responsibilities, such as the timing and amounts of distributions to a minor beneficiary. While this co-trustee approach can have some drawbacks, it also has benefits that may be worth considering.
 
Advantages and Disadvantages of a Co-trustee Approach
Choosing multiple individuals to serve as co-trustees offers the following advantages:

• Co-trustees can provide checks and balances to guard against potential abuses.

• Sharing or separating the responsibilities of trust administration among co-trustees can expedite the efficient administration of a trust.

• Depending on the terms of the trust, a particular co-trustee may be able to respond quickly to an emergency situation if none of the other co-trustees are available.

• Beneficiaries may be more likely to accept the actions and decisions of unified co-trustees as opposed to the decisions of a single trustee.

• Administrative responsibilities can be allocated among the co-trustees based on each co-trustee’s unique strengths and skills.

However, there are also disadvantages to consider:

• Disagreements between co-trustees can lead to conflicts or stalemates.

• Delays can result if the trust requires that all co-trustees be present and act together to conduct trust business.

• Financial institutions, individuals, and businesses may be reluctant to take direction from fewer than all co-trustees, even if the trust document authorizes a single co-trustee to act.

• Compensating multiple co-trustees for their time spent handling trust business can result in potentially higher costs.

What You Can Do to Help
As a professional advisor, you should discuss these advantages and disadvantages with your clients well before a client has a health event that could lead to their incapacity or death. Doing so will help them identify whether they are comfortable with their choice of one successor trustee or multiple successor co-trustees. This discussion may help your clients realize that they need to make changes to their estate planning documents, either to add another individual or a professional fiduciary as a successor co-trustee or to remove certain individuals listed as a co-trustee because of the potential for conflicts. Of course, we welcome the opportunity to meet with you and your clients to discuss available options and make any necessary updates to their estate documents to ensure that their documents better match their intent.
 
On the other hand, you may not learn of your clients’ choices regarding successor trustees until a client has passed away and the successor co-trustees are in your office asking for your help in the trust administration process. If that is the case, you will likely have to play the hand that is dealt and work to bring value to the client through alternative means.
 
As an advisor, you can play a crucial role in counseling the successor co-trustees by educating them on the financial and tax consequences of certain decisions, such as liquidating different types of accounts and property held in the trust in preparation for distribution. Alternatively, if a trust is being divided into separate subtrusts for tax planning or asset protection planning purposes, the co-trustees may need education on the different options for long-term investing of the trust property to help them fulfill their fiduciary duty under the law to prudently administer the trust.
 
Counseling and educating co-trustees on these options may also help facilitate the resolution of conflicts that may arise between co-trustees during the trust administration. Your prior experience working with clients with similar conflicts can be a valuable resource to draw upon as you suggest possible compromises and solutions to the co-trustees for resolving their own conflicts. In this way, your professional advice can bring great value and clarity to an otherwise contentious impasse between trustees. The added value you bring to the table will increase the likelihood that the trustees will continue to rely on your professional advice and services throughout the trust administration and in the future.
 
Whether your clients have a single successor trustee or co-trustees, you can play a valuable role in helping them successfully navigate the many challenges and decisions that can arise during the trust administration. Contact us today so we can discuss additional strategies for working with successor trustees.

When we think of estate planning, we often think about preparing our clients’ accounts and property to go to their loved ones in a tax-efficient way, protected from probate, disgruntled heirs, beneficiaries’ creditors, divorcing spouses, bankruptcy, and the poor spending habits of beneficiaries. We rarely consider helping our clients prepare for receiving an inheritance.
 
Believe it or not, there are several essential things a client must consider if they anticipate receiving an inheritance. Helping them understand these issues brings value to your professional relationship, ensuring that they return for your advice and counsel for years to come.
 
Understanding the Nature of the Property to Be Inherited
The first way to help a client properly prepare to receive an inheritance is to discover what exactly they will be inheriting. Is it real estate, a 401(k), or an individual retirement account (IRA)? Perhaps it is publicly traded stock, an interest in a family business, or simply cash from a savings account or life insurance policy.
 
Whatever type of account or property it is, there are steps you can take to help the client plan to receive and manage it properly going forward. For example, if the client will receive a large IRA account from a parent, does the client understand the new rules associated with inherited IRAs implemented by the SECURE Act passed in late 2019? If not, you can provide crucial guidance on how to maximize the tax benefits available under the law regarding required distributions. If the client fails to understand these sometimes complicated rules, they could make an irreversible mistake and withdraw all of the IRA funds at one time, thereby substantially increasing their tax liability in the year of withdrawal.
 
Furthermore, by helping them plan to receive that inheritance, you may discover opportunities to help your clients properly invest and manage that inheritance under your own professional management. Doing so will allow you to continue to bring your expertise to the table for years to come for the benefit of your clients.
 
Powers of Appointment
If someone has established an irrevocable trust for your client, such trusts may include important features such as powers of appointment. A power of appointment in a trust is a right, often given to the beneficiary of the trust, to gift trust property to someone else or, in some cases, to themselves. These powers are often limited to making gifts to only certain classes of people (such as the descendants of the trustmakers) or they may be limited to making gifts only at death (a testamentary power of appointment) or during life (a lifetime power of appointment). Some trusts include both types of powers. These can be powerful planning tools given to your clients by their parents or other family members. Failure to recognize the existence of these powers can lead to unintended consequences, or at the very least, crucial missed asset protection and tax-planning opportunities.
 
If your clients know that they have been granted a power of appointment, encourage them to obtain a copy of the relevant trust documents to carefully review and determine the nature of these powers. With this information, you can properly advise them on the planning opportunities and tax consequences of their powers of appointment.
 
Keeping Inheritance Separate from Marital Property
A common mistake made by married heirs or beneficiaries of an inheritance is to commingle that inheritance with the property of both spouses. How can this be a mistake? An example may best illustrate the point:
 
Imagine Robin receives a cash inheritance from her deceased father of $300,000 and she and her spouse Morgan decide to use the inheritance to buy a vacation cabin in the mountains. When purchasing the property, the title company assumes that because they are a married couple, they want to take title to the property as joint tenants with rights of survivorship and the deed gets prepared and recorded accordingly. Further imagine that over the years, they furnish the property together, maintain it, and enjoy many family vacations there. One night, however, Morgan has a little too much to drink at a bar, gets behind the wheel, and causes a deadly accident that results not just in a DUI, but also in a wrongful death lawsuit. Because Morgan’s name is on the title to the property as a joint owner, Robin and Morgan discover that the family cabin is an asset that can be used to satisfy the lawsuit judgement against Morgan. As a result, they are forced to sell the cabin and use half of the proceeds to satisfy the judgement.
 
This unfortunate circumstance can be the result of Robin’s failure to keep her inheritance as separate property. By commingling her property with Morgan, she made it much easier for the judgment creditor in the lawsuit to reach what otherwise would have been considered Robin’s separate inheritance property.
 
Commingling inherited property can also lead to a similar result if Robin and Morgan ultimately divorce and the family court judge has to determine how to divide the marital property. Failing to keep the inherited property separate during marriage can often lead to that property being divided between spouses at divorce.
 
Inheritor’s Trust
A fourth way to help your clients prepare to inherit property is by using an inheritor’s trust. This is a special type of trust that can be established with the help of your client and the individual who will be leaving an inheritance to your client. The inheritor’s trust is designed to receive the inheritance that your client would otherwise receive directly. It must be carefully designed and implemented to work properly, and an experienced estate planning attorney should most certainly be used in the effort. A properly drafted inheritor’s trust includes the following key elements:

• It is created and signed by the individual who will be leaving the client an inheritance, not by the client

• The trust creator names the trust instead of the client as the beneficiary of their will or revocable living trust

• It typically has a spendthrift clause or is otherwise designed to protect the inherited property from creditors, divorcing spouses, lawsuits, bankruptcies, etc.

• The client is the beneficiary of the inheritor’s trust

• The client may also be named as the trustee or co-trustee of the inheritor’s trust, depending upon how protective the trust needs to be of the trust property

An inheritor’s trust includes the following benefits:

• The inheritance can be excluded from the client’s taxable estate, potentially saving their  family estate taxes

• The trust can be a more cost-effective way to protect the assets instead of the client’s loved one revising their existing plans

• Upon the client’s death, the inheritance will be distributed outside of their probate estate, which can help ensure privacy and lower attorneys fees and administration costs

• The inheritance will be protected from creditors, lawsuits, and divorcing spouses

• In some circumstances, the inheritance can even be controlled and managed by the client as a trustee

• The client can decide how remaining trust assets will be distributed after they pass away if the trust gives them that power (through powers of appointment) 

An inheritor’s trust can be a powerful tool to use for a client who anticipates receiving a large inheritance and would like to make sure that the inheritance is protected from certain tax consequences or threats from creditors.
 
Being prepared to discuss these important concepts with your clients is an important way to stay top of mind and bring value to your relationship. If you would like to learn more about any of these concepts, give us a call. We would love to discuss these ideas in greater depth with you so we can help you help your clients build and protect their wealth more effectively.

Estate planning attorneys frequently hear from their clients, “I’d like to leave something to my grandchildren. What’s the best way to do that?” 

Naturally, grandparents love their grandchildren and want them to succeed in life. And when grandparents are in the twilight of their lives, their hearts often turn to the younger generation with a desire to give them whatever advantages they can, especially if they were unable to give their own children those same advantages when their children were younger.

For most grandparents, the best way to provide for their grandchildren is to leave their accounts and property to the grandchildren’s parents to ensure the financial stability of that family unit, thereby indirectly benefiting the grandchildren. In fact, default inheritance laws in nearly every state reflect this common desire to provide first for children and then for the grandchildren in the event that an adult child predeceases the grandparent. From a practical perspective, the grandchildren’s parents are often in the best position to know how to use the money for the benefit of their children and can spend or invest it appropriately on their behalf.

In some cases, however, it makes better sense for grandparents to leave property directly to their grandchildren—for example, if the grandparents have reason to believe that their own children would not responsibly use the money intended for the benefit of the grandchildren, or if the grandchildren’s parents are independently wealthy and distributing the property to them would unnecessarily expose the property to estate tax in their estate. In other cases, although the intent of the grandparents may have been to leave everything to their adult children, an inheritance may flow to grandchildren unintentionally because of an accident or illness that prematurely takes the life of an adult child. In any of these situations, it is important to consider the possibilities and the options for leaving an inheritance to grandchildren. Failing to do so can have long-lasting consequences and, in many cases, do more harm than good.

The Trouble with Outright Gifts

Perhaps the simplest way for clients to leave an inheritance to grandchildren is to name the grandchildren as beneficiaries in their will or trust to receive a specific amount of money or a percentage of their total accounts and property. If all of the grandchildren who will receive such gifts are physically and emotionally stable, financially prudent, and have reached adulthood, this strategy may work just fine and reduce the administrative burden of distributing and managing your client’s accounts and property to their beneficiaries or heirs.

However, depending on when the client passes away, if any of the named grandchildren are minors, the client could create additional hassles by leaving a gift directly to their grandchildren. The executor of your client’s estate or the trustee of their trust may have to establish certain types of custodial accounts to hold that gift for the minor child until the child has reached the age of majority (either age eighteen or twenty-one depending on the state). In some states, and depending on how much money is involved, establishing a court-controlled conservatorship over the property may be required. In other cases, setting up an account using the Uniform Transfers to Minors Act laws of the state may be all that is necessary. In either of these cases, however, once the child reaches the age of majority, the client may not be able to control how that money is used by the grandchild. It could be spent on fast cars and fancy clothes rather than on an education, starting a business, or a down payment on a home, as your client might have imagined. In a worst-case scenario, a grandchild might even unwisely invest it with a spouse who later divorces them, or with an unscrupulous business partner who preys upon inexperienced individuals who have come into a sum of money.

By being aware of these risks, you can help your clients take steps today to make sure that any of their property that ends up in the hands of their grandchildren is protected from not only their grandchildren’s own poor spending choices but also the claims of a divorcing spouse, an unethical business partner, or an opportunistic lawsuit filed by a stranger against a grandchild.

Using Trusts for Gifting to Grandchildren

A trust offers one of the most flexible methods for leaving an inheritance to grandchildren. When a client leaves an inheritance to grandchildren via a trust, they can ensure that the money and property are used appropriately and at appropriate times. There are a variety of ways to use trusts in estate planning. Clients can add provisions to their wills or revocable living trusts that instruct the executor or trustee to hold any property that is payable to a grandchild in a separate trust share rather than making a direct distribution of the accounts or property to them. Clients can specify in those trust terms how the money is to be used or distributed and when. These can be very important provisions to include in a trust even if the client is planning to leave their accounts and property only to their children. As mentioned, it is possible for a client’s child to pass away before the client does, such as in an accident or from illness. And if a client’s child has children of their own and the client wants their child’s share to go to their own children, it can be crucial to have a trustee protect and manage it until it can be distributed to the grandchildren at a more appropriate time.

Another way to use trusts is to create the trust during the client’s lifetime (an inter vivos trust), name the client as the trustee, and transfer some of the client’s property into the trust for the benefit of the grandchildren. From a tax perspective, a client can make gifts to this trust using the annual gift tax exemption (currently, $15,000 per beneficiary of the trust per year) to shelter the gifts from transfer taxes. Gifting in this way during life allows a client to have confidence that the trust is set up appropriately and enables them to enjoy watching their grandchildren actually benefit from the trust. They can also feel confident that once they pass away, their grandchildren and even their great-grandchildren will continue to benefit from the property in the trust, if that is their goal.

Health and Education Exclusion Trusts

Beyond the traditional use of trusts in estate planning, clients can also design special trusts to provide additional tax benefits if their estates are large enough to potentially be subject to the generation-skipping transfer (GST) tax. A health and education exclusion trust (HEET) is one of these special types of trusts. A HEET is designed to make use of certain tax code provisions that exclude from lifetime gifts any amounts paid directly to healthcare and education institutions on behalf of someone. A HEET can be designed to name, as beneficiaries, any number of a client’s grandchildren or succeeding generations, if desired. The funds in the trust can then be used to pay for health and education expenses directly on behalf of the beneficiaries without being subjected to gift taxes in the future. Furthermore, the distributions to the beneficiaries will be exempt from the GST tax. This benefit is obtained by naming a charitable institution as an additional beneficiary of the trust. As long as the trustee makes regular and reasonably substantial distributions to the charitable beneficiary from the trust, the distributions to the other beneficiaries will be GST tax-exempt.

A HEET is worth considering if (1) the client would like to help their grandchildren and succeeding generations with their education and medical expenses, (2) the client has used up their GST tax exemption amount through gifting or other estate planning strategies, and (3) the client wants to benefit a charitable organization as part of their estate planning.

Generation-Skipping Transfer Taxes

Although we have mentioned GST taxes in passing, it is important to remember that whenever a client is including grandchildren in their estate planning, they should seek advice from their attorney and tax advisors with regard to this unique form of taxation. For most people with modest accounts and property, the GST tax is not a significant issue. However, if what the client owns is valued at more than the current estate tax exemption amount, the GST tax is something that the client should be aware of and plan around, particularly if they anticipate that any amount of their property will eventually be distributed to their grandchildren. Clients should also be aware of the GST tax if they are creating trusts specifically for their grandchildren and their descendants. Clients may need to take certain steps upon creation of such trusts to ensure that the trust is GST tax-exempt. An experienced tax professional can provide you with important guidance on this point.

Keeping Parents in the Loop

Grandparents often overlook bringing parents into the conversation when planning for their grandchildren. Consequently, some grandparents have been unpleasantly surprised at the negative reactions from their own children or in-laws when they make generous gifts to their grandchildren. Depending on a family’s parenting philosophy, the grandchildren’s parents may resent an unexpected, large sum of money or the payment for certain expenses. Instead of seeing it as a boon, a parent could see it as a grandparent interfering in the character development of their children, robbing them of important opportunities to become financially independent and learn important life lessons about sacrifice and hard work, such as qualifying for merit-based scholarships, and the value of money in general. Having your clients speak with the grandchildren’s parents beforehand about how they can best support their grandchildren’s development into responsible adults can go a long way toward ensuring that your clients’ gifts will be appreciated and truly beneficial in everyone’s perspective.

Conclusion

Whether your clients want to specifically and intentionally include their grandchildren in their estate planning or just want to make sure that their grandchildren are carefully accounted for in the event that their grandchildren unexpectedly inherit their property, it is critical that your clients examine their estate planning with their attorney to ensure that their plan reflects their wishes and overall family values. Beyond making sure that your clients’ property gets to the right people at the right time, careful planning with the help of competent tax professionals can also ensure that significant tax savings are preserved, thereby keeping more money in the hands of your clients’ families and out of the hands of the government.

This year has been unprecedented from a political perspective in many ways. President Joe Biden stepped into office facing huge obstacles related to the COVID-19 pandemic, an economy battered by the pandemic, a crumbling national infrastructure in dire need of repair, an ongoing immigration crisis at our southern border, and deep political and social divisions in this country, among other challenges.
 
As Biden entered office, he named the following issues as his top priorities:

1. Getting past the COVID-19 pandemic through masking, vaccinations, and opening schools

2. Addressing climate change and alternative energy solutions

3. Financial regulation and student debt

4. Anticompetition practices among the leading companies in Big Tech

5. Revitalizing the economy and employment to recover from the pandemic

6. Improving international relations

7. Immigration

8. Race, gender, and social issues

With these issues at the top of Biden’s priority list, it may appear that no real changes are coming down the pipeline that are directly related to the estate plans of most Americans of average means. But if recent history is any guide, although many of us hope that the estate planning landscape will remain settled and predictable, it is unlikely that we will be so lucky. Here’s what we know so far with regard to proposals coming from the White House.
 
Action from the First One Hundred Days That Could Affect Your Estate
While many of the issues Biden has prioritized have begun to be addressed within his first one hundred days in office, many of them are still in their infancy, with the details of how they will be implemented and funded still to be determined. The following steps have already been implemented or proposed in Biden’s plan:

1. In early March, Biden signed a $1.9 trillion COVID-19 relief bill (named “The American Rescue Plan”), providing stimulus payments, unemployment benefits, and child tax credits to millions of Americans to help stimulate the economy.[1]

2. On March 31, through the “American Jobs Plan,” Biden outlined a nearly $2 trillion infrastructure and jobs plan that is to be funded primarily through a corporate tax hike and additional measures designed to discourage U.S. corporations from moving their operations overseas to reduce or eliminate U.S. taxation (i.e., “offshoring”).[2]

3. The American Rescue Plan also allocates significant funding for providing vaccinations to all Americans at no cost if needed, and additional funds to help the nation’s food service industry and K-12 schools survive the financial impacts of the pandemic.[3]

4. The proposed “American Families Plan” by the White House in late April is also designed to help families cover basic expenses, gain greater access to health care insurance, and reduce child poverty through the use of child tax credits and similar measures.[4]

These large spending bills, both passed and proposed, will need to be funded in some manner. Currently the following are some of the changes to the tax laws that could have a significant impact on your clients’ estate planning:[5]

1. Increase IRS enforcement efforts of wealthy taxpayers. The White House has determined that significant tax revenues are being left on the table due to the inability of the IRS to enforce current tax laws. Biden has proposed increased funding of the IRS to enforce laws against tax avoidance abuses and increase audits to ensure taxes that are in fact owed are being assessed and collected.[6]

2. Elimination of the rule of step-up in basis at death. This proposed change to the tax code would eliminate the benefit of receiving a step-up in tax basis on inherited property in the hands of a deceased individual’s heirs and beneficiaries for gains in excess of $1 million (or $2.5 million per couple when combined with existing real estate exemptions). This could result in significant capital gains taxes being assessed upon the sale of the property once it has been inherited. However, certain exceptions to this rule for small business owners and farmers would be preserved under the proposed legislation.[7]

3. Increases in top income tax rate. Another Biden proposal under consideration is the increase in the top individual tax rate from 37 percent to 39.6 percent and elimination of the lower capital gains tax rates otherwise available for those earning over $1 million annually. Rather, capital gains would be taxed as ordinary income for those earning over $1 million annually.[8]

4. Reducing potential benefits of 1031 exchanges. The President is calling on Congress to reduce the benefits available with the special tax break that allows real estate investors to defer paying capital gains taxes when they exchange properties.[9]

Flexibility Is Key in These Uncertain Times
We are living in a time of significant uncertainty when it comes to estate planning and the economy. As a result, it is more important than ever to ensure that your clients’ estate plans are designed in a way that enable them to move quickly and take advantage of estate and tax planning opportunities that may arise or those that may be eliminated soon.
 
Additionally, there remain many non-tax-related reasons to encourage your clients to keep their estate planning up-to-date and relevant to their current circumstances:

• Protecting property for the benefit of your client’s loved ones. Careful estate planning can do more than just avoid taxes. Clients can also ensure that their loved ones are the only people to benefit from their wealth by protecting inheritances from threats such as lawsuits, bankruptcy, divorcing spouses, and poor management and spending habits. By using various estate planning techniques such as trusts, LLCs and family limited partnerships, and exempt property planning, significant protections can be created for a client’s loved ones.

• Avoiding probate courts. Quality estate planning frequently incorporates a variety of probate avoidance techniques, such as using fully funded trusts, proper beneficiary designations, and lifetime transfers to beneficiaries. By avoiding probate, clients can ensure that their family’s privacy is maintained and prevent needless court interference and challenges to their estate planning.

• Planning for incapacity and long-term care. Using powers of attorney, healthcare directives, trusts, and healthcare privacy information authorization documents, your clients can ensure that only those whom they trust to manage their healthcare decisions and finances are the ones to do so if they ever become incapacitated.

Keeping abreast of the whirlwind of changes in the law and the economy can be a tall order for anyone when it comes to maintaining an estate plan. That is why having an estate plan with appropriate provisions that allow for flexibility is so important. We are prepared to keep you and your clients apprised of the legislative changes that are headed our way and will help you stay informed so you can move quickly if changes to your clients’ estate plans become necessary. We always welcome a call from you to discuss how we can help you and your clients prepare for whatever may come.

[9] Id.

An often misunderstood but prevalent estate planning tool that often appears in estate planning documents is the power of appointment. Not to be confused with a power of attorney (the document that allows a living person to delegate certain powers to an agent to act on their behalf), a power of appointment can be an incredibly useful tool if used properly and knowledgeably.
 
A well-considered power of appointment allows a client to maintain significant flexibility in their estate plan now and in the future, even when that estate plan is otherwise considered irrevocable under the law. Though hundreds of pages of books, scholarly articles, court decisions, and tax regulations have been written on the topic of powers of appointment, this newsletter can help you counsel your clients intelligently and confidently on the topic. It can also help you recognize and identify the existence of powers of appointment in your client’s estate planning documents and call attention to them if they could have unintended negative consequences.
 
What Is a Power of Appointment?
Broadly speaking, a power of appointment is a right granted in a legal document, including in a will or a trust, by an individual (the donor) to another (the donee or the power holder). This granted power allows the donee to name someone else as a recipient (the appointee) of all or a portion of the donor’s money and property in the future. The power holder is not required to exercise the power. Rather, the power holder simply has the option to exercise it. If the power is left unexercised, then the money and property will pass to those individuals or entities originally named in the will or trust as the beneficiaries and in the amounts originally specified. This tool essentially allows for the person making a will or trust to postpone the decision about who should receive the donor’s money and property, and grants such decision-making power to someone else who may be in a better position in the future to determine who will receive it.
 
General Versus Limited Powers of Appointment
In trust law and tax law, there are two types of powers of appointment: (1) a general power of appointment and (2) a limited power of appointment (also known as special or nongeneral powers of appointment). A general power of appointment is, with only a few exceptions, a power that is exercisable in favor of the decedent, their estate, their creditors, or the creditors of their estate.[1] If a power of appointment does not fit within the definition of a general power, then it is, by default, a limited power of appointment. A common example of a limited power of appointment is a power that is limited to distributions for the health, education, maintenance, or support of a beneficiary (called the HEMS standard). Another example is a power granted to the power holder to distribute the property among only a limited group of individuals, for example, among only a person’s descendants.
 
Lifetime Versus Testamentary Powers of Appointment
An additional characteristic of a power of appointment is whether the power is a lifetime power of appointment or a testamentary power of appointment. The difference has to do with the particular moment that the power can be exercised by the power holder. For example, if a power of appointment gives the power holder a power to distribute property among grandchildren only while the power holder is alive, this would be a lifetime power of appointment. However, because this is also a limited power of appointment, we can properly refer to this power as a lifetime limited power of appointment. Similarly, if a general power of appointment is granted, but only for life, then it would be a lifetime general power of appointment.
 
On the other hand, if a power of appointment (either limited or general) is granted to a power holder that can only be exercised at the power holder’s death, then this would be considered a testamentary power of appointment. Typically, a testamentary power of appointment must be exercised through a provision in the power holder’s will or trust that specifies how the property subject to the power is to be distributed upon the power holder’s death. Thus, someone could be granted either a testamentary limited power of appointment or a lifetime limited power of appointment, or a testamentary general power of appointment or a lifetime general power of appointment.
 
Why Use Powers of Appointment?
There are a variety of reasons why someone might want to use a power of appointment in their estate plan, including tax planning considerations, asset protection, and a desire to create flexibility. The following are a few examples to help illustrate how and why a power of appointment may be used:

1. Sarah creates a trust that is designed to hold her property for the benefit of Dave, her only son, for his lifetime, which will then pass to his children upon his death. However, three of her grandchildren have a history of drug use, terrible spending habits, and have even attempted to financially exploit her in the past. Although Sarah wants only her grandchildren to benefit from the trust after her son dies, she wants to allow Dave to determine how much (if anything) should go to each of her grandchildren depending on how they conduct their lives in the future and what their needs are. Sarah’s estate planning attorney suggests that she grant Dave a testamentary limited power of appointment in her trust that allows Dave to distribute the remainder of the trust property according to how he sees fit among his children, in equal or unequal shares at his death. This will require Dave to draft a will or trust that includes a provision that specifies how the remainder of Sarah’s trust will be divided among his children at his death. Including such a power allows Sarah to maintain some control over who will receive her property, but also grants some important flexibility in her estate plan to her son so that he can take a second look at the family circumstances years after Sarah has passed away.

2. Marty died, leaving a trust that owns a significant amount of quickly-appreciating corporate stock shares. His only daughter Betty is the income beneficiary of the trust and enjoys the stock dividends that are paid out to her every year. Betty’s children are the remainder beneficiaries of the trust. Betty is in her late eighties and is experiencing failing health. Before Marty died, he amended his trust to ensure that it contained a provision that granted Betty a testamentary general power of appointment over the trust. As a result, upon Betty’s death, the stock in the trust receives a full step up in tax basis under current federal tax law, thus eliminating the capital gains taxes that would have otherwise been due on the sale of the stock in the hands of Betty’s children after her death. Significant tax savings are achieved by including this type of a power of appointment.

3. John is Karen’s second husband. Karen has children from a previous marriage. John has never been married and has no children of his own. Some of Karen’s children have been very nice to John while others have been quite mean to him. Karen has significant wealth and intends to ultimately leave it to her children; however, she wants to provide for John throughout the remainder of his life if he outlives her. To that end, Karen’s estate plan establishes a qualified terminable interest property (QTIP) trust that qualifies for the unlimited marital deduction upon her death. The income generated on the property in the QTIP trust is paid out to John throughout his life, with the principal of the property payable to her children at John’s death. However, she also grants John a testamentary limited power of appointment over certain company stock held in the trust so that upon his death, he can determine who among Karen’s children will receive that stock and in what shares. Karen explains this to her children so that they get the message that, if they mistreat John after she is gone, he has the authority to reduce the value of their share of her trust by at least some degree. Her hope is that this will incentivize her children to treat John with a certain level of respect that they sometimes have struggled with during her life. 

These examples illustrate just a few of the more common reasons why and how powers of appointment can be creatively used to build flexibility into an estate plan. There are many other ways to use these incredibly useful tools. It is important to note, however, that they can also create significant risk and lead to unintended consequences.
 
For example, what if John, in the example above, turned out to be vindictive and, out of spite, exercised his testamentary limited power of appointment to grant everything to one of Karen’s children who had a terrible gambling problem, and who then managed to lose everything in one weekend in Atlantic City? Certainly, this would not have been what Karen had intended. But, a power of appointment can lead to this type of result if the power holder chooses to exercise that power irresponsibly.
 
How Can This Information Help Your Clients?
Now that you have a better grasp of the uses and limitations of this powerful estate planning tool, you can help your clients identify situations in their own circumstances that would call for use of a power of appointment. You can also identify in clients’ documents any powers of appointment that may exist and that pose risks to the clients’ estate planning objectives, depending on who the power holders are and how those powers might be misused.
 
It is also important to help your clients identify powers of appointment that they may hold that have been granted to them in the estate planning documents of their parents, spouses, or other loved ones. Because powers must be affirmatively exercised during the power holder’s lifetime through legal documentation, or at death typically through a will or trust, you can bring great value to your clients by informing them of the existence of these powers and what they must do to properly exercise those powers.
 
If you would like to learn more about how powers of appointment can be used to help your clients achieve their estate planning goals while maintaining significant flexibility, please reach out to us. We are eager to help you and your clients make the best planning decisions for their unique needs. Give us a call today.

[1] I.R.C. § 2041(b)(1).

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. 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. Though many states have adopted a uniform set of laws governing trust protectors, or a modified version of these uniform laws, other states have not addressed trust protectors at all. It is important to consult an attorney familiar with your state’s laws to understand whether trust protector provisions are right for your client’s estate planning goals.
 
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.
 
Probate can be an expensive, time consuming, and very public process that most 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.
 
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.

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, it is unlikely that 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.

In our efforts to quickly provide you with the most up to date information on the potential tax ramifications stemming from these unique election events, we did not include the 2018 update of the Tax Cuts and Jobs Act (TCJA) limiting Section 1031 like-kind exchanges to real property. 

Under current law, exchanges of real property used in a business, trade, or investment enjoy Section 1031 like-kind exchange treatment, whereas, as a result of the change made by the TCJA, like-kind exchanges of personal or intangible property are now a taxable event. A transition rule allowed for like-kind treatment in some exchanges of personal property if the taxpayer disposed of the personal or intangible property before the law went into effect. Please note that it will not constitute a like-kind exchange when the real property is held primarily for sale. 

Now that more states have declared Joe Biden as the President-elect, we will continue to keep you updated on his proposed tax plan and laws that will impact your clients. 

Our sincerest apologies for any inconvenience or confusion this may have caused.