After several days of counting ballots, Joe Biden has been declared the winner of the 2020 Presidential election by many major news outlets. Although we await the official certification of the election by each state, an official concession by President Trump, and the outcome of several pending lawsuits–which could take us into December or even January–the 2020 election and its aftermath promise significant changes in how our clients will be taxed. While it is unlikely that every proposal discussed during President-Elect Biden’s campaign will become the law of the land, we can still glean essential details from all the campaign rhetoric to help us prepare to weather these possible changes.
Proposed Policy Adjustments under a Biden Presidency
Here is what we know so far about some of President-Elect Biden’s key proposals that are most relevant to our clients’ estate planning:
Estate, Gift, and Generation-Skipping Transfer (GST) Taxes
For 2020, the estate and gift tax exemption is set at $11.58 million (indexed for inflation), with any wealth over that amount being taxed at a 40 percent rate as it passes to heirs. This exemption amount is scheduled to be lowered in 2025 to $5 million (also indexed for inflation) unless new legislation is passed before then.
President-Elect Biden suggested during his campaign that he would support legislation that would reduce both the estate and GST tax exemptions to $3.5 million per individual and would lower the lifetime gift tax exemption to $1 million. Other proposed legislation that President-Elect Biden has discussed, favorably proposed by Senator Bernie Sanders, aims to place annual, aggregate donor limits on gifts to certain types of entities such as irrevocable life insurance trusts and certain pass-through entities such as family limited partnerships.
In addition to reduced transfer tax exemption amounts, several Democratic tax reform proposals have suggested returning estate tax rates to historical norms. What does that mean? In the 1940s, the top estate tax rate was 77 percent, and under 2001 federal tax law, it was as high as 45-55 percent. As a result, we may well see an upward adjustment in the estate and gift tax rates.
Capital Gains Taxes
Our current law taxes capital gains as regular income if those gains are realized on property held for less than one year. For long-term capital gains (gains on property held for a year or longer), there is a graduated tax rate depending upon the tax filer’s income level (0 percent, 15 percent, or 20 percent). For individuals and couples who earn more than $200,000 and $250,000 per year respectively in net investment income, there is an additional 3.8 percent surtax added to their capital gains tax rate.
In addition, the current law allows for a step-up in basis of appreciated property if the property is held until the owner dies. This allows for inherited property to be sold or liquidated shortly after the owner’s death, with little to no capital gains taxes assessed on the property’s sale.
Today’s law also allows for like-kind exchanges of appreciated property such as artwork and rental properties. This allows clients to reinvest the gains that they earn on appreciated property into similar types of property without ever having to pay capital gains taxes when the property is sold. If the client keeps making such like-kind exchanges on appreciated property until the client’s death, the capital gains built up in that property will be erased by the basis step-up rules.
Proposed changes under a Biden presidency would either (1) eliminate the step-up basis rule for inherited property and impose a carryover basis rule for inherited property or (2) impose recognition of gain on property at the owner’s death. Additionally, the Biden tax plan proposes eliminating like-kind exchanges and imposing a 39.6 percent long-term capital gains tax rate on individuals earning more than $1 million per year. And if the 3.8 percent surtax on net investment income remains in place, the effective federal tax rate on long-term capital gains could exceed 43 percent.
If these changes are implemented along with the changes to the estate tax laws discussed above, many estates could see significant tax bills at the death of the estate owner.
What to Do in the Meantime
Although it may be too early to know exactly what the tax laws will look like in 2021, we can nevertheless provide some concrete guidance to our clients while we wait for answers. Tax issues, while certainly important, should not overshadow the need for clients to get their affairs in order in case of an untimely death or disability. If it has been some time since they have reviewed their estate planning documents such as their wills, trusts, powers of attorney, and healthcare directives, now is a great time to have them do so. Providing an encouraging reminder to clients to review these important planning elements can go a long way to helping them find peace and security in these uncertain times. And that is the kind of value that fosters long-term loyalty from clients.
We Are Here to Help
No one knows for sure what the future holds for our country. However, what is certain is that we will continue to monitor the latest tax law developments closely and keep you updated as they unfold. In the meantime, if you have any questions or concerns, please do not hesitate to contact us. We are here for you and your clients.
Newsletter Category: Advisor Focused Newsletter
Helping Couples Plan for Their Future
October is one of the most popular months for couples to tie the knot in the United States. While wedding planning most often includes tuxedos, dresses, rehearsal dinners, guest lists, and the honeymoon, an overlooked part of pending nuptials is estate planning.
For younger couples beginning a life together and getting married for the first time, estate planning may not be a terribly complicated endeavor. With minimal property and savings, simple wills, financial powers of attorney, and healthcare directives may be sufficient and prudent planning for the first years of marriage.
The age at which couples are getting married for the first time continues to creep upward, however. It is therefore common for individuals to accumulate significant amounts of property, savings, and investments during their single years. When couples with property beyond the most simple items marry, estate planning becomes much more urgent. It is even more crucial when children are born into the marriage or when entering a second or third marriage, perhaps creating a blended family.
If your clients are considering marriage or have recently tied the knot, reviewing the following information with them can help them tackle the critical task of planning for the management and distribution of their property should either of them become unable to manage their affairs or die sooner than expected.
Challenge Their Assumptions
An all too common mistake that married clients make when approaching estate planning is assuming that their spouse sees things the same way they do. The following questions should be asked of each spouse:
How do you feel about the necessity of purchasing and maintaining life insurance?
Do you feel that the other spouse could handle the family finances on their own if you were to die suddenly or become unable to manage your own affairs?
Who should care and raise your minor children if you both die?
To what extent should the money and property left to each other be protected from future creditors or new spouses?
Who is best prepared to make end-of-life decisions for you should you become critically ill and unable to communicate your wishes?
Do you expect that all of your wealth should be left to your spouse?
Do you want to leave any money or property to aging parents, children from another marriage, or to a charity or other important cause?
How should your property be left to your spouse or your children or grandchildren? Do you believe that inheritances should be distributed outright (no strings attached) or should it be left to beneficiaries in trust (with specific instructions as to when and how the inheritance is to be used)?
The answers to these questions regularly surprise couples. These questions should be discussed sooner rather than later, especially if you sense that your clients are not sure of how each would answer. Couples who communicate and challenge their assumptions will be far better prepared to successfully complete their estate plan.
Joint or Separate Estate Plans
The decision to jointly engage an attorney to assist with an estate plan may not be as simple as it would seem at first blush. Depending upon the clients’ circumstances, it may be advisable for a couple to engage separate legal counsel to assist with the estate planning process. If any of the following circumstances apply to your clients, you should advise them to give serious thought to hiring separate counsel for their estate planning:
Does either spouse have children from a prior marriage or relationship? If yes, is there any tension between the spouses when they discuss how they would want the accounts and property divided upon the death of one or both of them?
Did one spouse bring far more money or property into the marriage?
Does one spouse have something in the estate plan that the spouse wants to keep hidden (for example, is there a child from outside the marriage that the spouse does not want revealed)?
Do your clients have very different ideas about philanthropic goals in their estate planning?
Do your clients have a prenuptial or postnuptial agreement?
If so, do your clients now desire to change the terms of that agreement through an amendment or estate plan?
There may be other reasons to seek separate counsel in estate planning. A good rule of thumb is that if there are aspects of one spouse’s financial or family relationships that will likely breed contention and misunderstanding between the couple, the clients should consider using separate counsel to help them carefully negotiate and resolve the legal and estate planning issues that intersect with these problem areas.
On the other hand, for those clients who are willing to communicate and resolve the differences discussed above, it may be possible to assist them with their estate plan. One advantage of joint legal counsel is that the attorney can act in some ways as a mediator and educator, helping clients identify and craft creative solutions to challenges that may arise during the estate planning process. Additionally, jointly hiring legal counsel tends to be a less expensive solution and communication tends to flow much more freely when fewer individuals are involved.
Elective Share Laws
It is important to understand that even if clients do separate estate planning, the United States has elective share laws that are designed to ensure that a married individual cannot completely disinherit a spouse or minor child from another marriage. The reason for these types of laws is that traditionally, lawmakers felt that these family relationships deserve to be protected from financial ruin by an individual who perhaps would unwittingly or unwisely attempt to disinherit a spouse or child dependent upon that individual for support.
These elective share laws allow a disinherited spouse or child who is still dependent upon the deceased individual to legally claim a percentage share of the deceased individual’s accounts and property regardless of what the will or trust provides.
If spouses have agreed to leave their entire estate to someone other than the surviving spouse, they will likely need to sign a prenuptial or postnuptial agreement in which the disinherited spouse waives elective share rights. Such a waiver must meet certain requirements to be valid, which can vary by state. For example, most state laws require that the disinherited spouse must have been represented by independent legal counsel when negotiating the waiver in the marital agreement.
Unmarried Couples
Marriage today is less common than it was a few decades ago, with more couples choosing to live together without the legal consequences of marriage. Suppose your client is in such a relationship, but feels a deep financial commitment to the client’s partner. In that case, the client may be in even greater need of a carefully crafted estate plan depending upon the client’s goals.
In nearly every state, intestacy laws that govern how an individual’s property is to be managed when that individual is unable to manage their own affairs or dies without a valid will or trust typically do not allow for an unmarried partner to receive the individual’s property. To ensure that property passes to a partner, certain legal steps must be taken:
Jointly titling property (such as bank accounts and real estate) with the partner so that it passes to the survivor automatically at the deceased partner’s death
Naming the partner as the payable-on-death or transfer-on-death beneficiary of certain financial accounts
Naming the partner as the beneficiary on an IRA, 401(k), 403(b), or another retirement plan
Drafting a will or a trust and naming the partner as a beneficiary
Naming the partner as the beneficiary on a life insurance policy
Drafting a financial power of attorney naming the partner as the trusted individual to make financial decisions on the client’s behalf
Each of these methods of leaving property to a partner has pros and cons. For instance, jointly titling a home with a partner may be an easy way to ensure that the partner will inherit the shared home when your client dies. However, if your client and the partner split, the former partner will continue to jointly own that property and can force the sale of the property to liquidate the partner’s share. Additionally, there may be gift tax consequences to adding a partner to the title of a banking or investment account, which could affect your client down the road. Even worse, jointly titling property with a partner can subject it to the partner’s lawsuits or creditor claims in the future even though your client’s intent was merely to allow the partner to inherit that property upon the client’s death.
An unmarried client should also consider drafting a healthcare power of attorney and living will (also called an advance healthcare directive) naming the partner as a medical decision maker should the client be unable to make or communicate the client’s medical wishes.
Estate Planning When the Marriage Is on the Rocks
Sadly, many marriages ultimately end in divorce. If a couple is in the process of divorcing, it is important to consider the implications of any current estate plan in place should something suddenly happen to your client. Some decisions that the client might want to change immediately include the following:
The person named as the client’s medical decision maker. Choosing a different decision maker can usually be done at any time. Most people would not want their soon-to-be-ex to be in charge of making life and death decisions on their behalf.
The person appointed to make the client’s financial decisions. Depending upon the type of financial power of attorney prepared, the ex might be authorized to act when the client is no longer capable of handling the client’s own financial affairs (a springing power of attorney)—or is currently able to act on behalf of the client (immediate power of attorney).
The guardian for the client’s minor child from a prior relationship or marriage, if the client would no longer want the soon-to-be ex-spouse to be the guardian.
The person named in the client’s will as personal representative or as trustee of the client’s trust (if the client has a separate trust from their spouse).
However, there are some things that may not be changed until after the divorce is finalized. For example, when a divorce case is pending in court, the couple is legally prevented from changing the following:
Beneficiary of a will or trust
Legal title to bank accounts, real estate, and other types of investments
Beneficiary designations on retirement accounts
Beneficiary designations on life insurance
Ownership of personal property such as vehicles, art, furnishings, etc.
Once a divorce has become final and the property division is memorialized in the divorce decree, the client has the right (and should not delay) to revise the client’s estate plan in whatever manner the client wishes, keeping in mind any requirements imposed by the divorce decree, elective share laws for child support, or continuing spousal support obligations.
As you can see, it can be critically important for clients with spouses, partners, or children to obtain solid legal estate planning counsel. Without careful planning, a client is almost guaranteeing that their loved ones will experience frustration, expense, and delays when it comes to the management and distribution of their accounts and property if something happens to them. Conversely, a carefully crafted estate plan can provide significant peace of mind for your clients and their significant others for years to come. Call our office today for a virtual or in-person meeting to discuss how, together, we can help your clients achieve their important estate planning goals.
Protect Your Clients from Lawsuits with a Domestic Asset Protection Trust
Conversations with family, friends, and colleagues can sometimes wander into the topic of lawsuits, divorces, bankruptcies, and other threats that put one’s property at risk of loss to a creditor. Such conversations often leave people shaking their heads, asking what the world is coming to, and feeling vulnerable and frustrated. However, an important tool has become increasingly available to even those of modest means to protect their property from such threats at a reasonable cost and with relatively few hoops to jump through.
The Domestic Asset Protection Trust
A domestic asset protection trust (DAPT) is a legal structure into which a client (as the grantor or trustmaker) can transfer accounts and property such as a home, cash, stocks or other investments. Once transferred into the DAPT, the property is legally protected from future lawsuits, divorcing spouses, bankruptcies, and similar threats. Although the client has transferred these accounts and property to the trust, the client can continue to enjoy the benefit of this property in the DAPT with only minor limitations.
DAPTs work on the legal principle that someone cannot take away from you something that you no longer own. When the client transfers property into a DAPT, the client is actually making a gift of it to the trustee (the person or entity the client chooses to manage, invest, and use the accounts and property) on behalf of the irrevocable trust. The trustee is then under a legal obligation to use the property for the client’s benefit, or for the benefit of those the client has named in the trust.
How a DAPT Works
To create a DAPT, the client signs a trust document and permanently gifts some of the client’s property into the trust. The trust is irrevocable, meaning the client cannot change it. The trustee can make distributions to the client, thereby allowing the client to continue enjoying some benefits of the property in the trust. However, the trustee in most cases needs to be an independent trustee (someone who is not related or subordinate to the client or any other beneficiary and will not inherit anything from the trust) in order to preserve the asset protection properties of the trust. Still, many states allow for a grantor to be a co-trustee and exercise authority with respect to the investment decisions of the trust.
Which States Have DAPT Laws?
Currently, the following states have legislation that authorizes the creation of a DAPT: Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
It is important to remember that DAPT laws can vary significantly by state. Residency requirements of the grantor or trustee of a DAPT vary from state to state, as does the required connection of the grantor with the DAPT state. In some instances your client can live in one state but have a DAPT in a different state. Some DAPT laws are better than others, and their effectiveness may depend upon the location of the property that a client plans to gift into the trust. Given these considerations, it is critical that your client speak with an experienced attorney when setting up a DAPT. Key differences in state law that can have a significant impact on the effectiveness of a DAPT include the following:
how a DAPT must be set up
who can serve as the trustee
how much of a client’s property can be placed in the trust
which creditors will be blocked from reaching the trust property
what additional powers (if any) the grantor can exercise over the trust
how much time must pass before the property placed in a DAPT is protected from creditors
What Kind of Creditor Protection Does a DAPT Provide?
In general, a DAPT allows a client to shield accounts or property owned by the DAPT from any creditor claims that arise after the DAPT is funded and after any applicable time periods or notice requirements imposed by state law have been met. In many states, this protection can even include future claims of a current or future spouse, child, or creditor. It is important that the client consult an experienced attorney regarding the protections the client’s state’s DAPT statutes offer, as these can vary by state.
Despite the protection offered by a DAPT, some creditors will still be able to reach the property owned by the DAPT regardless of which state law the client uses. Currently, no state’s DAPT laws allow a DAPT to be used to
spend down or qualify a grantor or the grantor’s spouse for Medicaid eligibility;
defeat state or federal reimbursement claims or rights of recovery for Medicaid benefits paid to the grantor or the grantor’s spouse; or
defeat creditor claims if property is transferred to a DAPT with the intent to prevent, hinder, or delay a known or present creditor from reaching the property.
Most states’ DAPT laws also provide the following exceptions to the creditor protections:
taxes (state and federal tax claims must still be paid from trust assets)
family support obligations such as alimony and spousal support (state laws differ significantly on this topic)
medical bills of a beneficiary (certain states allow access to the trust property to pay these bills)
Who Is Likely to Need a DAPT?
Not everyone will need a DAPT because not all people face the same kinds of risks. However, there are certain professions and circumstances for which clients may want to consider using a DAPT as part of their estate planning.
High-risk occupations. Lawsuits are increasingly common against those in certain professions, such as doctors, accountants, lawyers, real estate developers, builders, architects, and business executives. Creating a DAPT to protect a portion of the property owned by clients in these occupations can be an effective shield against risks associated with lawsuits.
Owning a business. Owning a business can put a client at a higher risk of lawsuits. Using a DAPT can protect the client’s home and other personal property against claims brought against the business.
Personal injury and accidents. Unfortunately, accidents happen to everyone. Moreover, it is common today for even innocent accidents to lead to litigation and potential loss of personal wealth. A tool such as a DAPT can be a critical part of protecting clients’ property for their families both now and in the future.
Deciding If a DAPT Is Right for Your Client
Deciding whether to use a DAPT should not be undertaken without good legal advice. The following factors, among others, need to be carefully considered with the help of a qualified estate planning attorney:
How much of a client’s property should the client place in the DAPT?
What kind of access to trust property will your client need in the future?
Who will serve as the independent trustee responsible for making distributions to the client?
Who, besides the client, will be a beneficiary of the DAPT?
In which state will the DAPT be formed?
What types of creditors are of most concern to your client, and do the relevant state’s DAPT laws protect the client against such creditors?
Once these questions are answered, you will have a much better sense of whether a DAPT is a tool that will work for your clients. If you have additional questions about DAPTs, please give us a call. We would love to visit with you or any of your clients about this topic, either in person or virtually.
Low Interest Rate Strategies You Should Be Discussing with Your Clients
COVID-19 has deeply impacted the economy in the United States and will likely continue to do so for some time. While most would agree that this pandemic is not a positive development, there are nevertheless some silver linings. One such silver lining is the significant drop in the federal funds rates. Many experts predict that these historically low rates will remain low for a while as the economy recovers. With such low rates, certain powerful estate planning strategies have become much more attractive and feasible. The following planning strategies are a few that warrant renewed consideration for affluent clients with potentially taxable estates.
1. A Grantor Retained Annuity Trust (GRAT) is a tool that can be created by an experienced estate planning attorney to help a client transfer significant wealth at reduced transfer tax cost. This strategy requires a grantor (the person creating the trust) to transfer property into a carefully drafted irrevocable trust. The trust is designed to pay the grantor a stream of income at least annually and over a specific term of years. At the end of the specified term, the payments end and any money or property left in the trust not already paid to the grantor is transferred tax-free to a remainder beneficiary. This beneficiary is usually a child or descendant of the grantor.
A GRAT is typically structured so that the present value of the annuity payable to the grantor over the specified term of years roughly equals the amount initially transferred to the GRAT. In other words, by using the Internal Revenue Service’s (IRS) published rate of return (the Section 7520 rate) as the assumed rate of growth on the assets, the present value of the annuity payment back to the grantor over the term of the GRAT is designed to be close, if not exactly the same, as the value of the gifted assets at the creation of the trust. The goal, however, is for the actual rate of return on the accounts or property placed into the trust to ultimately be well above the locked-in Section 7520 rate. If this occurs, the assets remaining in the GRAT are transferred to the remainder beneficiaries free of gift taxes.
The following factors can impact the effectiveness of a GRAT:
The health of the grantor and whether the grantor can be expected to live beyond the GRAT term
The Section 7520 rate for the month in which the accounts or property are transferred to the GRAT
The nature of the accounts or property being contributed to the trust and their growth potential
The remaining lifetime gift tax exclusion amount available to the client
It is also important to note that the creation of a GRAT will require the filing of a gift tax return to report the gift. With deliberate planning, however, the amount of the gift to be reported can be negligible.
2. A Charitable Lead Trust (CLT) can also offer significant tax savings for those clients who intend to make charitable giving a part of their estate plan. This is particularly true in today’s low interest rate environment. Similar to a GRAT, a CLT is an irrevocable trust that makes payments out of the trust to a beneficiary over a specified period and is tied to the IRS Section 7520 rate. The period can be a set number of years or for the lifetime of the grantor. Unlike a GRAT, however, a CLT names a charity as the payee of the annuity or unitrust amount over the trust term. Upon completion of the trust term and payments, the assets remaining in the trust pass to the grantor’s chosen beneficiaries, free of gift and estate tax. The value of the gift reported on the grantor’s gift tax return for the year in which the gift was made is calculated as the difference between the amount of the initial gift and the present interest of the annuity or unitrust amount payable to the charity. Because the present interest value is calculated using the currently low Section 7520 rate, the aim is for the assets in the CLT to grow at a higher rate, allowing more of the growth of the assets to be transferred tax-free to the remainder beneficiaries at the end of the trust term. In addition, a CLT can provide valuable income tax deductions to the grantor depending upon how it is structured.
It is important to remember that the payments to the charity must be made each year regardless of the performance of the trust assets. Poor performance can result in a need to distribute trust principle to cover the required charitable payments.
3. Intrafamily loans are another often overlooked strategy to transfer additional wealth to family members without unnecessarily using up a client’s gift and estate tax exemption amounts. These kinds of loans can be an excellent way to help family members recover from low credit scores or eliminate certain high interest commercial home loans, consumer debt, business loans, or education loans, all while keeping interest payments within the family rather than enriching commercial lenders.
In a low interest rate environment like we have today, a client could loan a family member money using the Applicable Federal Rate (AFR) as the interest rate over the term of the loan. The loaned money could then be invested by the borrower in assets that are likely to grow faster than the AFR built into the loan. The difference between the AFR payable to the lender and the realized rate of growth of the invested loan proceeds would accrue to the benefit of the borrower and outside of the estate of the lender. Thus, the lender can indirectly transfer this growth to family members without the need to report that “transferred” amount as a gift to the IRS.
As a reminder, even though these are intrafamily loans, this does not mean that they can be informal. Such loans must be properly documented with executed promissory notes and, where appropriate, secured as if they were arm’s-length transactions so that the IRS cannot reclassify all or part of the loan as a gift.
Getting the Family Involved
There are several other strategies beyond those mentioned that can be used to help your clients take advantage of historically low interest rates. Now is a great time to discuss these strategies with your clients and help them leverage low interest rates in their estate planning. Doing so can help them maximize their wealth even in these economically challenging times. Further, you can demonstrate to succeeding generations of family members the value that you, as the family’s professional advisor, bring to the table. Give us a call today so we can discuss, in person or virtually, the best ways to utilize these strategies.
Christmas in July: Gifting During Uncertain Times
Changes in the federal transfer tax laws over the last few decades, as well as the economic volatility brought on by a global pandemic, have called into question the wisdom of making large lifetime gifts for estate planning and tax purposes. In today’s economic and tax environments, many professionals remain uncertain about whether advising clients to make lifetime gifts still makes sense. Given the large estate and gift tax exemption amounts, and the decreases in value of many types of accounts and properties caused by COVID-19, it may be a perfect time for clients to make significant gifts to family members or loved ones. Helping clients understand the tax consequences and other issues surrounding gifting is critical, however, so they are informed before making large gifts.
Annual Gifting and Gift Taxes
In 2020, an individual can make tax-free gifts of up to $15,000 per person per year using the annual federal gift tax exclusion. A married couple can give up to $30,000 per year to each child without needing to file a federal gift tax return. Such gifts can be made by each spouse individually, or one spouse can make the entire $30,000 gift from separate assets and attribute half of that gift to the other spouse through the practice of “gift-splitting.” When gift-splitting, the couple must file an Internal Revenue Service (IRS) Form 709, Gift (and Generation-Skipping Transfer) Tax Return, which notifies the IRS that half of the gift should be allocated to the spouse.
Gift-splitting can be very useful when a couple wants to gift property that is titled in the name of only one spouse such as stock, business interests, or real property. It is important to note, however, that once a married couple elects gift-splitting on a gift tax return, the IRS will consider all gifts made during the year by either of them to be split evenly between the spouses regardless of whether the couple wants this outcome.
The Lifetime Gift Tax Exemption
If an individual makes an annual gift to someone in excess of $15,000 per person per year, an IRS Form 709 must be filed to report the excess gift. Every gifted dollar over $15,000 made to an individual is subject to federal transfer taxes (at an approximately 40 percent tax rate).
Even though a gift may be subject to the gift tax, this does not necessarily mean that the client will have to pay the tax. In addition to the annual gift tax exemption, each U.S. citizen currently enjoys a historically high $11.58 million lifetime estate and gift tax exemption to apply against any gift or estate tax that may be due. Under current law, this exemption amount will continue to increase, indexed with inflation, through the end of 2025.
This exemption is like a coupon that can be used against gift taxes that would otherwise be due. Once all $11.58 million of the exemption has been used, the client will then be required to pay gift taxes on gifts that exceed the annual exemption amount.
If your client is looking to do a lot of gifting, it may be advisable for these gifts to be made prior to 2026, as the IRS released final regulations in November 2019 providing that taxpayers who take advantage of the higher gift and tax exemption applicable between 2018 and 2025 will not lose the tax benefit of the higher exclusion amount upon their subsequent death on or after January 1, 2026, when the exclusion is set to decrease to the pre–tax reform level.
Outright Gifts
Not all gifts are created equal, and a client should understand this before making a gift. Each type of gift has its own tax and other consequences that should be considered before the client ultimately turns over ownership of any money or property. Outright gifts of cash, stock, real estate, or any other form of property are easy to make. However, although outright gifting may be the simplest way of making gifts, once the gift is made, the property can no longer be controlled or protected by the donor. With full control and ownership, the donee is free to use the gift in any way the donee chooses. This could include spending, selling, encumbering, or otherwise using the gift. The gift could also be seized by any creditors of the donee or considered in a divorce proceeding.
Gifts to Irrevocable Trusts
Risks posed by creditors, lawsuits, divorce, and irresponsible management of assets associated with outright gifting cause many individuals to consider making gifts to irrevocable gifting trusts. Such trusts enable clients to make gifts that qualify as gifts for transfer tax purposes, and also to better control and protect the gift for the person receiving it based on the terms of the trust and the directions given to the trustee for using the gift.
Gifts of Family Business Interests
Another important and useful method for making gifts is for the donor to contribute assets such as real estate or stocks to a family limited partnership (FLP) or family limited liability company (FLLC). The donor can then make gifts of membership interests in that business entity to family members. Gifting in this manner can provide important methods of control over the assets in the business entity by the majority owner (often the donor). This method of gifting also allows the donor to reduce the value of the assets, for gift tax purposes, in the business entity through the use of valuation discounting. Such reductions allow for the transfer of more property at a lower tax cost than would be possible through outright gifts.
Income Tax Considerations
Clients are often surprised by the potential negative tax consequences that accompany gifting. Other than cash, most accounts and property carry a tax basis that results in some level of capital gain when the account or property is sold or converted to cash. When accounts and property appreciate and are then gifted, the tax basis of the gifted account or property carries over to the gift recipient. As a result, if the recipient later sells the account or property, some portion of the increase in value could be subject to capital gains tax. On the other hand, if an individual waits to transfer an account or property to someone through a testamentary instrument like a will or revocable living trust, the account or property would get a stepped-up basis, meaning that any gains on that property based on the date of death value of the property would be effectively erased. The new tax basis for the recipient of the testamentary gift would be the date of death value of the property, decreasing the amount of capital gains tax due.
Deciding Whether to Gift Now
Because of the historically high gift and estate tax exemption, many advisors feel that in certain cases, it makes sense for some clients to aggressively use their gift tax exemption now because of the risk that Congress will reduce the exemption amount in 2026, leaving clients with a missed opportunity. Additionally, gifting during life can provide the donor with the certainty that the donee has in fact received title to the gift, and the donor can ensure that any future growth of the gifted account or property takes place outside of the donor’s estate, further reducing estate taxes at the donor’s death.
In addition to tax benefits, clients can gain significant nonmonetary benefits from seeing their donees enjoy and use their gifts while the client is still alive. Observing how a donee uses (or in some cases, squanders) a lifetime gift could provide the client with valuable information for structuring the remainder of the client’s estate plan with regard to that donee.
Why Gifting Makes Sense For You
You can play an important role in your clients’ decisions to make gifting a part of their estate planning strategy. Whether it is an outright gift or one made in trust, a gift tax return has to be filed. This is an extra return preparers can add to their existing services. Additionally, if an irrevocable trust, FLP, or FLLC is created, an additional yearly income tax return may need to be filed for those entities. If an account is being gifted, you have the ability to gain a new client by discussing the benefits of keeping the money in the account as opposed to liquidating it. Lastly, if the client is choosing to make a substantial gift to one person, the client may need a way to equalize gifts among multiple donees. Life insurance can be a great way to provide liquidity to the client so that in the end, all beneficiaries receive the same value.
Tap into Your Client’s Team
As you can see, there are many considerations when advising a client on whether to make large gifts. Legal, tax, and financial considerations should all be weighed carefully in decisions like these. A team approach that includes a client’s tax advisor, financial advisor, and legal counsel can provide crucial information to help clients make informed decisions. We encourage you to let us know if you or your clients are considering making significant gifts. We are here to help. Please call us today to set up a virtual or in-person meeting so that we can assist you.
Correction to June 2020 Advisor Newsletter
In our efforts to quickly provide you with information about new legislation (the CARES Act and its impact on the new SECURE Act), we incorrectly stated the RMD rollover rule in our last newsletter in the section addressing required minimum distributions as follows: “Although those who have already taken an RMD for 2020 are not allowed to repay it into their retirement plan, they are permitted to roll it over into a new IRA within 60 days of the distribution, allowing them to avoid paying income tax on the RMD.”
Here is the rule correctly stated, with some additional explanation:
Under the previous tax law, an RMD taken by an account owner cannot be rolled back into an IRA unless this is done within 60 days after the distribution, and a rollover from one IRA to another IRA (or from one Roth IRA to another Roth IRA) can be done only one time per year (365 days). Under the CARES Act, those who had already taken an RMD prior to the passage of the new law are allowed to roll it over into the original account within 60 days, and this time limit was extended by IRS Notice 2020-23 for distributions—including RMDs—taken between February 1st and May 15th if the rollover occurs by July 15th. If the account owner took an RMD in January, it may not be returned unless the IRS provides additional relief.
Although the once-per-year IRA rollover rule is still in effect, if the account owner has already used their IRA rollover, they are permitted to do a rollover to a non-IRA retirement account such as a 401(k). The once-per-year rule does not apply to RMDs taken from a 401(k) or to Roth conversions.
Our sincerest apologies for the misstatement of the new, temporary rule.
Time to Review Clients’ Retirement Accounts
The COVID-19 pandemic has led to volatile markets, resulting in retirement accounts with much smaller balances than only a few short months ago. In response to the economic fallout stemming from the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020. The CARES Act was primarily aimed at providing quick and substantial relief to individuals and businesses affected by the economic shutdown in response to the spread of COVID-19. Several relief measures have a significant impact on clients’ ability to benefit from their retirement accounts. You can provide significant peace of mind to your clients by keeping them informed about how they can use their retirement funds now without penalties if necessary, as well as benefit from other tax relief provided by the new legislation.
The CARES Act creates new distribution options for those adversely impacted by coronavirus, expands the availability of plan loans, and waives required minimum distributions for most retirement plans for 2020.
Early Distributions. Pursuant to Section 2103(a) of the CARES Act, the 10% early distribution penalty tax under I.R.C. Section 72(t) that would otherwise apply to the majority of distributions made before a participant turns age 59 ½ is waived for “coronavirus-related distributions” (CRD) made at any time during 2020 from qualified retirement plans for distributions of up to $100,000. The distribution option is permissive, not mandatory, for eligible plans such as IRAs, 401(k)s, 403(a) and (b) plans, and 457 plans.
A CRD is a distribution from an eligible retirement plan made during 2020 to a qualifying individual who is diagnosed with coronavirus, or whose spouse or dependent has been diagnosed with it, or who has experienced adverse financial consequences from a coronavirus-related quarantine, furlough, layoff, work reduction, business closure or reduction in hours (for business owners) or an inability to work due to lack of child care related to coronavirus. The distributions will be subject to income tax, but the qualifying individual may opt to spread the payments evenly over three years rather than having to pay it all in 2020. The participant may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan.
Loans. During the 180-day period from the date of enactment of the CARES Act, plans can increase their loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance for qualified individuals, up from the previous limits of $50,000 or 50% (note that loans are not permitted from IRAs) for participants adversely affected by coronavirus as discussed above. Qualified individuals with an existing loan from a retirement plan that is due to be repaid by December 31, 2020 can delay repayment by one year. Later repayments will be adjusted to reflect the delayed due date plus interest accruing during the delay. In addition, the one-year period of delay in repayment is disregarded in determining the maximum five-year loan period.
Required Minimum Distributions. For participants in 401(k), 403(a) and (b) plans, 457, and IRAs (not defined benefit plans), the CARES Act waives required minimum distributions (RMDs) for the calendar year 2020. Under the new SECURE Act, effective January 1, 2020, retirees are typically required to take an RMD from their plan upon reaching age 72. The CARES Act waiver also applies to RMDs for retirees who reached age 70 ½ in 2019 but deferred taking an RMD in 2019 until April 1, 2020. Normally, retirees in this category would also have to take a second RMD for 2020 by December 31, 2020, but this RMD is waived as well. Although those who have already taken an RMD for 2020 are not allowed to repay it into their retirement plan, they are permitted to roll it over into a new IRA within 60 days of the distribution, allowing them to avoid paying income tax on the RMD.
The waiver is also applicable to designated beneficiaries who have inherited retirement accounts. Further, 2020 is not counted for purposes of the post-death payout “five-year rule” applicable to non-designated beneficiaries[1] when the owner died before his or her own required beginning date.
However, the CARES Act has no impact on the new 10-year payout rule required by the SECURE Act, which precludes most non-spousal beneficiaries from stretching their distributions over their lifetime, as 2020 is the first year that non-eligible designated beneficiaries[2] would be subject to that rule when they inherit a retirement account. Because the 10-year payout does not start until the year after the year in which the account owner died, 2021 counts as year one rather than 2020.
Note: The CARES Act does not affect the ability of clients who are 70 ½ years old to make an annual qualified charitable distribution (QCD) of up to $100,000 from his or her IRA directly to a qualified charity in 2020 without taking the distribution into taxable income. However, the suspension of RMDs reduces the incentive for doing so because the distribution will not offset the client’s RMD, thus enabling the client to avoid taxable income. However, a QCD will reduce clients’ taxable IRA balance, so it will still provide a tax benefit to them. Further, under the CARES Act, for 2020, individuals who itemize their deductions can elect to deduct up to 100% (up from 60%) of their adjusted gross income for cash charitable contributions, so if clients choose to take a cash distribution from their IRA and contribute that cash to a qualified charity, they can potentially completely offset the tax attributable to the distribution using the charitable deduction.
Review Beneficiary Designations. In any discussions with clients about their retirement accounts, it is always prudent to remind them to regularly review their beneficiary designations. As you know, life circumstances can change very quickly. If a marriage, death, or divorce has occurred since they last reviewed their beneficiary designations, they should give some thought to whether their current beneficiary designations are still consistent with their estate planning objectives. It would be unfortunate if their retirement funds went to an ex-spouse or someone else a client no longer wants to benefit. In addition, alternate beneficiaries should be named in case the primary beneficiary passes away before inheriting the account.
In addition, if a trust is the beneficiary of their retirement account, make sure your clients are aware of the new 10-year rule established under the SECURE Act, which precludes most non-spousal beneficiaries from stretching the distributions over their lifetime. Before the SECURE Act was passed, some clients may have created trusts with “conduit” provisions so that the trust would qualify as a designated beneficiary of a retirement account, allowing the RMDs to pass through to the trust’s primary beneficiary for their individual life expectancy. Now, conduit trusts are ineffective after ten years, at which point the retirement account balances must be paid directly to the trust’s beneficiaries, possibly increasing their income taxes and making the funds available to claims by creditors or divorcing spouses. If your clients were utilizing this type of trust in their estate planning, now is a good time for a review of their documents, as this type of trust may no longer achieve their goals.
Now Is a Great Time to Meet with Clients
As a result of the uncertainty, clients are likely in need of reassurance and advice, so it is an opportune time to meet with them—virtually or by telephone if they prefer. You know your clients’ circumstances, both financial and personal, so you are perfectly positioned to advise them about the best strategies for their retirement plans. We have all been affected by COVID-19 in one way or another: Strengthen your relationships with clients by empathizing with the stress they may be feeling and letting them know that you are available to help. Clients are best served by a collaborative team, so please contact us if we can help your clients with their estate planning needs, whether this involves their retirement account or any other concerns.
[1] The plan participant’s estate, a charity, or a trust that does not qualify as a see-through trust.
[2] Beneficiaries who do not fall within one of five categories (surviving spouse, minor child of participant, disabled beneficiary, chronically ill individuals, beneficiaries less than 10 years younger than the plan participant) of beneficiaries that are still allowed to use the life expectancy payout.
Helping Clients Create Positivity with Their Estate Plan
Many scientific studies have established that there is a wide range of benefits flowing from a positive attitude and positive thinking. At a time when many are focused on worst-case scenarios and gloomy predictions, help your clients resist the pull of negativity and embrace the beneficial results of positivity. This is not just an attempt to make them (or ourselves) feel better in spite of reality, but rather to take full advantage of the proven benefits of optimism. We can develop stronger relationships with our clients by helping them to incorporate positivity into their estate planning: They can increase not only their own wellbeing but also that of their children or other beneficiaries by creating an estate plan designed to promote their loved ones’ happiness, which in turn, will enable them to live healthier and more successful lives. Fortunately for those to whom it does not come naturally, positive thinking can be learned by surrounding themselves with positive people, deliberately engaging in positive self-talk, and living a healthy lifestyle, just to name a few common methods.
Health Benefits of Positivity
According to the Mayo Clinic, positive thinking has a multitude of health benefits, including an increased life span, lower rates of depression, lower levels of distress, greater resistance to the common cold, more psychological and physical well-being, better cardiovascular health and less risk of death from cardiovascular disease, and better coping skills.[1] Happiness, a byproduct of a positive attitude, has repeatedly been shown to boost the immune system, with studies showing that happy people who were exposed to illness were less likely to become sick or had milder symptoms than others who were less happy.[2]
Impact of Positivity on Success
Dr. Martin Seligman, a well-known researcher in the field of psychology, has found that those who are happy and satisfied with their lives are more likely to have desirable outcomes in school, work, social relationships, health, and life in general. Negative emotions narrow our perspective, driving us toward a single, instinctive action (reacting to danger) while ignoring everything else around us. In contrast, positive emotions are accompanied by a broadened perspective that allows us to see and examine a variety of options and then choose the one we believe is best for that moment.
Those who tend to be more optimistic are more likely to establish clear life goals, focus on different ways to reach their goals, and believe that their goals will become a reality. Hopeful people view negative events as temporary setbacks or isolated unfortunate events. As a result, they are more resilient and able to handle challenges and view them as learning experiences. They have confidence that they can take action to improve their lives, and thus, are more likely to do just that.
Encourage Clients to Use Their Estate Plan to Create Positivity and Appropriate its Benefits for Beneficiaries
Rather than focusing primarily on negative goals, such as preventing a spendthrift child from wasting his or her inheritance, encourage your clients to also view their estate planning as a way to pass along a positive legacy. One method is to encourage them to create an ethical will that shares important values, religious beliefs, life lessons, and blessings with their family members. An ethical will, which could be in written or video form, is something that could be shared during your clients’ lifetime as a way of drawing family members closer together, or it could be one of the most meaningful gifts they leave for family members when they pass away. The positive emotions that come from the enhanced relationship and knowledge that they are loved could be a powerful catalyst that increases the wellbeing of your clients’ families.
In addition, clients can provide funds for activities that create positive experiences for beneficiaries, ultimately enhancing their wellbeing. Although providing financial security for family members and loved ones is clearly a positive goal, rather than simply thinking of their wealth as a way for their children or loved ones to acquire more “stuff,” they can be more deliberate and thoughtful about their estate planning, setting aside money for meaningful experiences, e.g., family trips, schooling, or volunteer activities, that will allow their beneficiaries to flourish and develop their strengths and interests. In fact, research shows that experiential gifts (gifts of events that recipients experience) result in a stronger relationship between the giver and the gift recipient than material gifts, even if the gift giver does not experience the event with the recipient.[3] The improvement in the relationship is the result of the positive emotions that are experienced while the recipient is experiencing the gift. These positive emotions also can ultimately increase their physical and mental wellbeing and likelihood of success in life.
Let’s Work Together to Help Clients Achieve a Positive Goal
During this time of crisis, a positive attitude is more important than ever. As your clients’ trusted advisor, one way you can help them is to try to have a positive outlook yourself. If you have a negative attitude, your clients are likely to sense it. On the other hand, if you have a positive outlook, they may feel more confident as well. In helping your clients think through and identify the ways they can incorporate positivity into their estate planning, you will develop a stronger and closer relationship with them that is likely to endure over time. Together, we can help clients have confidence and peace, knowing that they are not only providing their families with financial security, but also that they are leaving a positive legacy that will promote their loved ones’ physical, emotional, and spiritual wellbeing and future success.
[1] “Positive Thinking: Stop Negative Self-Talk to Reduce Stress,” last visited April 16, 2020, https://www.mayoclinic.org/healthy-lifestyle/stress-management/in-depth/positive-thinking/art-20043950
[2] Mark Holder, “Happiness and Your Immune System,” Psychology Today, June 9, 2017, https://www.psychologytoday.com/us/blog/the-happiness-doctor/201706/happiness-and-your-immune-system
[3] Cindy Chan and Cassie Mogilner, “Experiential Gifts Foster Stronger Relationships than Material Gifts,” 43(6) Journal of Consumer Research 913 (April 2017), https://academic.oup.com/jcr/article/43/6/913/2632328
Family Offices: Clients Want Their Own Wealth Team
Since 2017, the number of single family offices has grown substantially, with 3100 offices in North America. As the economy has surged, the number of families with millions in assets to invest has increased correspondingly. As a trusted advisor, you play an important role in managing the wealth of these families—and managing the risks associated with the recent downturn triggered by the coronavirus. But even families who are less wealthy can benefit from a team approach to the management of their estate and financial planning.
What is a family office?
A family office typically provides a variety of services to a very wealthy family, including but not limited to the following:
Investment management
Cash management
Risk management
Financial planning
Estate planning
Tax planning
Planning for charitable giving
Multi-generational planning
Single family offices are typically used by one ultra-high net worth family having $100 million or more in assets to invest to manage its wealth, and each one is designed to meet the unique needs of the family it serves. Such families are often interested in having the family office serve as their own wealth management business in order to oversee all aspects of their wealth. By starting their own family office, these ultra-high net worth families can retain control of their assets, maintain privacy, pursue the family’s long-term goals, and benefit from the combined wealth of multiple generations, which increases their buying power.
Multi-family offices provide similar services to a limited number of families typically having assets exceeding $20 million, but without as much overhead and responsibility for each family. The multi-family office offers integrated services, which are still customized to meet the needs of each family. The families served receive the benefits associated with a family office but do not have to run it as a separate business.
The team approach is best for every family
Family offices offer a multi-faceted approach to wealth management in which attorneys, accountants/CPAs, insurance professionals, and financial advisors all play a role. Although a family office typically has its own staff, unless the family is ultra-high net worth and able to afford a large staff, it may also utilize third-party advisors to minimize the costs associated with hiring a large team.
Other families, regardless of their wealth, benefit from a team approach as well, as it helps to ensure that all of their estate and financial goals are achieved.
A financial advisor helps clients to identify and understand their financial goals and investment objectives. These goals likely include a financial plan that will enable them to have funds sufficient to meet their own needs and maintain the lifestyle they want as well as pass an inheritance on to their loved ones. For high net worth clients, this often includes planning for multigenerational wealth transfers or charitable giving.
An estate planning attorney will help your clients with their legal affairs so that people they trust are authorized to make decisions for them if they are too ill to do so themselves and so their money and property are distributed in the way they wish after they pass away.
An accountant or CPA provides essential tax planning strategies to your clients, minimizing the taxes that your clients may owe, including the estate tax liability of your wealthier clients (for 2020, the federal gift and estate tax exclusion amount is $11.58 million for individuals and $23.16 million for married couples).
An insurance professional provides your clients with an analysis of their current and future insurance needs. Life insurance is a critical part of many estate planning strategies because it can be an important source of liquidity needed to provide for all of your clients’ beneficiaries. Insurance is particularly important for clients whose main assets are a business or valuable land or property that is difficult to divide between multiple beneficiaries.
Let’s Work Together for the Benefit of All Our Clients
Whether you are advising very wealthy families who could benefit from a single or multi-family office or families with more modest means, we can achieve a comprehensive solution for these clients by collaborating to ensure all their financial and estate planning goals are achieved. Please call us to discuss how we can work together for the benefit of our clients. We look forward to working with you.
Helping Single Parents Protect Who They Love Most
In 2019, there were over eleven million single parents with minor children in the United States.[1] It’s likely that some of those single parents are among your clients. For single parents, making sure their children are provided for is probably the top financial and estate planning concern. They worry about whether there will be sufficient funds for the care of their children if something should happen to them. Purchasing a life insurance policy is a great option for many single parents, as they are likely the primary or sole source of support for their children. Their first instinct may be to name their children as the beneficiaries of their life insurance policies, but there are several considerations they should keep in mind, particularly if their children are minors. As their trusted advisor, you can help them think through their options, as well as help them determine the amount of insurance needed to provide for their children.
Can a Minor Be the Beneficiary of a Life Insurance Policy?
The answer is yes, but there are some very important caveats. Insurance companies will not pay out the proceeds of the life insurance policy to minors, so the parent needs to make arrangements for an adult to manage the money for the minor children’s benefit. If a plan is not put in place, and the parent dies while the children are still minors, the court will appoint a guardian to manage the insurance proceeds—and its choice may not be the person your client would have chosen. There are several options your clients can consider aimed at avoiding this problem.
Name a trusted adult as the beneficiary. The least complicated solution is for your clients to name an adult they trust as the beneficiary rather than the minor child. This adult beneficiary must be someone your client is assured will use the life insurance proceeds for the children’s benefit. The problem is that once this adult beneficiary receives the money from the insurance policy, he or she is not legally bound to spend the money for the children’s benefit, and there is nothing to prevent this individual’s current or future creditors from looking to the life insurance proceeds to satisfy their claims. In addition, if this trusted adult fails to create or update his or her own estate planning, ensuring the insurance proceeds go to your children at his or her death, the money may inadvertently go to that person’s creditors, spouse, children, or other heirs. So, although this is the simplest solution, it is very likely not the most advisable one.
Name a custodian. Many insurance companies require a custodian to be designated if a minor is named as the beneficiary of a life insurance policy—and it is a good idea to name an alternate custodian who can carry out this role in the event your client’s first choice is not available. The insurance company can provide your client with the necessary forms to name a custodian and set up an account under the Uniform Transfers to Minors Act (UTMA), which has been enacted in 49 states, or the Uniform Gifts to Minors Act, a similar statute enacted in South Carolina. The custodian will manage the money and can spend it for the benefit of the children as spelled out in the UTMA until they reach the age of majority (this varies from state to state but is typically age 18 or 21) or an age within a range set out in the state’s UTMA statute, e.g., between 18 and 25. The custodian, who has a duty to manage the property prudently, may or may not be the same person your client has named as the children’s guardian, who is the person who acts as their caregiver if your client dies: This really depends upon whether the guardian is adept at handling financial matters. Under some circumstances, it may make sense for the custodian of the life insurance proceeds and the children’s guardian to be two different individuals. If the children’s guardian is the client’s ex-spouse, he or she may not feel comfortable leaving financial decisions in their hands. Once the children reach the age of majority (or up to age 25 in some states), they will receive all of the funds from the account without any restrictions on its use. As a result, at that point, they could spend it irresponsibly or their creditors—future or present—could reach those funds to satisfy their claims.
Create a trust. Another solution that enables your clients to have control over how the life insurance proceeds are used is to create a revocable living trust naming the children as beneficiaries. The trust, rather than the minor child, can be named as the primary beneficiary of the life insurance policy. Your clients can establish terms in the trust specifying the purposes for distributions as well as the times when distributions can be made if they pass away. The trustee is bound to act in good faith and in the interests of the children who have been named as the trust beneficiaries. This is often the best solution for parents who want to ensure the life insurance proceeds are used for the children’s benefit but who are also concerned about whether an 18 or 21 year old will have the maturity to handle a large sum of money; the funds held by the trust can be distributed according to the parent’s wishes and are not required to be fully distributed when the children reach the age of majority. The trust can also be designed to protect the insurance proceeds from being reached to satisfy claims of the children’s creditors. A testamentary trust, created in a will, could also be used, but probate would be required in order for this trust to be established. Probate is a court-supervised process that is public and potentially lengthy and expensive.
How Much Life or Disability Insurance Is Needed?
As your clients’ financial advisor, you can help them think through how much life insurance will be needed to care for their children if they die unexpectedly. This responsibility is particularly pressing for single parents, as they are often the main or only source of financial support for their children. As you know, the amount of the life insurance should be sufficient to replace the parent’s income and cover expenses for the children’s care, as well as any additional amounts desired for expenses such as college tuition, a wedding, or the down payment for the children’s first home. You are in a great position to help them determine the amount of those expenses and take their other assets into consideration so they can make an educated decision about the proper amount of coverage. This will enable them to have the peace of mind that comes with knowing that no matter what happens, there is enough money to provide for their children’s needs.
Disability insurance is equally important for single parents. If they become disabled and are unable to work, they will need sufficient funds not only to cover their children’s expenses, but also their own. You can provide valuable advice based on your familiarity with the particular circumstances of each of your clients that will enable them to make a wise decision about how much disability coverage they should obtain.
Let’s Collaborate to Create a Comprehensive Financial and Estate Plan for Your Clients
Your clients, especially those who are single parents, depend on you to help them create financial plans that will enable them to meet their responsibilities and goals, including the care of their children. They are often the primary or even sole provider for their children, so every penny counts. You are best positioned to recommend products, such as life insurance, that will enable them to fund a trust or UTMA account for the benefit of their children. We can help implement the legal aspects of those plans, for example, by helping them determine the type of trust that is most appropriate for their personal circumstances and create trust provisions that will accomplish their goals. Together, we can create and implement the optimal plans for your single-parent clients so they can rest assured that their children will be provided for if they pass away or become disabled unexpectedly.
[1] United States Census Bureau, Table FG6. One-parent Unmarried Family Groups with Own Children Under 18, by Marital Status of the Reference Person: 2019, https://www.census.gov/data/tables/2019/demo/families/cps-2019.html