Newsletter Category: Advisor Focused Newsletter

The 2017 Tax Cuts and Jobs Act doubled the federal gift and estate tax exclusion amount, which had previously been $5 million (adjusted each year for inflation) per individual. The exclusion amount for 2020, including the adjustment for inflation, is $11.58 million. However, the increase in the exclusion amount is temporary and, unless Congress extends it, will expire on December 31, 2025. This has caused concern that if taxpayers made gifts of the additional $5 million (adjusted for inflation) between January 1, 2018 and December 31, 2025, the benefit could be “clawed back” in the calculation of their estate taxes if they died on or after January 1, 2026—i.e., after the expiration of the increased exclusion amount. This concern arose because gift and estate taxes are calculated together, as a unified calculation. The determination of whether any tax is due is made by applying a credit based on the basic exclusion amount. The credit is first applied against the gift tax, and to the extent that any credit remains at death, it is applied against the estate tax. Some worried that if the exclusion amount at death is lower than the amount of the exclusion when lifetime gifts were made, this could create a difficult situation in which tax could be due at death, but no money would be left to pay it, because it had been given away during the taxpayer’s lifetime.

Special Rule

In November 2019, the Internal Revenue Service (IRS) released final regulations 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 amount is set to decrease to the pre-tax reform level. Instead, the new IRS regulations adopt a special rule allowing an estate to compute its estate tax credit using the greater of the exclusion amount applicable to gifts made during an individual’s lifetime or the exclusion applicable on the date of death.

Use It or Lose It

The IRS also clarified that the increased exclusion amount is a “use or lose” benefit available to an estate only to the extent that a person who dies on or after January 1, 2026 has actually used it by making gifts during the increased exclusion period (between January 1, 2018 and December 31, 2025). In Example 2,[1] the IRS provided an illustration of this situation. If Terry, who has never been married, makes gifts of $4 million between January 1, 2018 and December 31, 2025, and dies after December 31, 2025, during a period when the inflation-adjusted amount of the exclusion has reverted to $6.8 million, the credit to be applied for purposes of computing Terry’s estate tax credit is based upon the $6.8 million exclusion amount applicable as of the date of death: That is, the $4 million dollars actually used is treated as the exclusion amount for the period from January 1, 2018 to December 31, 2025, rather than the higher amount (for example, $11.58 million if the gifts were made during 2020) Terry could have utilized, but did not, during the increased exclusion period. As a result, because Terry, now-deceased, only made lifetime gifts of $4 million, the greater of the two exclusion amounts that should be used to calculate the estate tax credit is $6.8 million.

Application to Spousal Portability

The IRS regulation also addresses how the use by a surviving spouse of a deceased spouse’s unused exclusion amount, otherwise known as the portability option, will apply if the increased exclusion amount sunsets as expected at the end of 2025. The portability option allows an estate to elect to transfer any unused portion of the last deceased spouse’s unused gift and estate tax exclusion (DSUE) to the surviving spouse, who can apply it to cover any gift or estate tax liability arising from later lifetime gifts or transfers at death. The new IRS regulation makes clear that if an estate elects to transfer any DSUE to the surviving spouse between January 1, 2018 and December 31, 2025, when the increased exclusion amount is effective, it will not be reduced as a result of the sunset of the increased exclusion amount.

In Example 3, the IRS illustrates that if Whitney died between January 1, 2018 and December 31, 2025, at a time when the exclusion amount was $11.4 million, and Whitney had not made any taxable gifts and did not have a taxable estate, the executor of Whitney’s estate could elect to allow his surviving spouse, Robin, to use his $11.4 million exclusion amount. If Robin, who does not make any lifetime gifts and does not remarry, dies after the sunset of the increased exclusion amount at a date when the exclusion amount is $6.8 million, the credit to be applied in computing Robin’s estate tax is $18.2 million ($11.4 million, the unused portion of the gift and estate tax exclusion amount applicable on Whitney’s date of death, plus $6.8 million, the exclusion amount applicable on Robin’s date of death). 

Let’s Collaborate to Help Your Clients Take Advantage of the Tax Savings

Here are a few of the strategies we can implement together to enable your clients to take advantage of the higher exclusion amount available until December 31, 2025 (unless Congress decides to either extend the increase or make it permanent), whose application is now clarified by the IRS’s anti-clawback regulations.

Lifetime gifts. You can help your clients benefit the most from the higher exclusion amount by advising them to make use of it through strategic lifetime gifts. Lifetime gifts typically result in transfer tax savings (assuming the assets gifted do not decline in value). Individual clients have the opportunity to remove $11.58 million and married couples can remove $23.16 million from their taxable estates by making lifetime gifts in 2020. You can provide valuable guidance to your clients by helping them transfer appreciating assets to their children or loved ones—or preferably to a trust for their benefit, which will provide asset protection for the beneficiaries and direction regarding distributions. This will also enable you to keep assets under management and gain new clients by assisting the next generation with their financial and estate planning.

Spousal lifetime access trusts. If a gift of $11.58 million is too large for your client to comfortably make without retaining some of the benefits of that money, your client can make a completed gift to a spousal lifetime access trust (SLAT), using the temporarily increased exclusion amount. The client’s spouse can be a beneficiary of the trust, providing access to the trust assets to support the family if they are needed. A properly drafted SLAT will ensure that the trust’s assets, including any growth of the assets, will not be subject to estate tax liability at the death of the gifting spouse.

Grantor trusts. Using a grantor trust, your clients can make a gift, taking advantage of the increased exclusion amount, but also pay the income tax, enabling the trust’s beneficiaries to eventually receive assets that have grown with no reductions as a result of the grantor’s payment of the income tax. The grantor can reduce his or her taxable estate both in the amount of the assets transferred to the trust and the amount of income tax paid on the trust assets.

We Are Here to Help

Working together, we can help your clients take advantage of significant tax savings provided by the increased gift and estate tax exclusion amount during the current window of opportunity. We look forward to working with you to create the most advantageous estate plans for your clients, designed with their unique circumstance in mind. Give us a call today to discuss how we can collaborate for your clients’ benefit.

[1] Treasure Decision 9884 (which sets forth the final regulations) states that although the proposed regulations included examples that did not reflect the annual inflation adjustments to the exclusion amount, “the examples in the final regulations reflect hypothetical inflation-adjusted [basic exclusion] amounts.”

Millennials (born 1981 to 1996) are well known for their distinctiveness as a group. They have followed paths and set goals that are decidedly different from those chosen by previous generations. They are highly diverse, better educated, more socially conscious, and wait longer to have families than their parents and grandparents. But one thing millennials have in common with other generational groups is the need for estate planning. Unfortunately, a startling 79% of millennials do not have basic estate plans in place. Their needs and goals may vary, but having an estate plan in place is crucial for every adult, including millennials. Whether your clients are young or old, they do not know what the future holds, and together, we can help them put plans in place that not only provide for their own future needs but also those of their loved ones.

Will and/or Trust

Millennials may not have accumulated as much wealth as older Americans, but it is important for them to make sure that their assets will go to the family members or loved ones they have chosen at their death. If they do not have a will or trust, their assets will pass to the person designated by the state intestacy statute, which may not be the person they would want to inherit their prized possessions and money. In addition, if they are married and have young children, they need to take steps to ensure that their spouse and children are provided for. A trust is often the best solution: If the millennial client’s spouse inherits their money and property outright under a will and the spouse eventually remarries, it could go to the second spouse instead of your client’s children. In addition, the inheritance will be vulnerable to claims made by the spouse’s creditors. A trust can avoid these results by allowing the client to choose who receives their property and money, as well as the timing and size of the gifts the beneficiaries receive.

Pet trust. Many millennials, especially those who live in large urban areas, are choosing either to delay having children or to remain childless. Many of those childless millennials adopt pets who become as beloved and doted upon as if they were children. Those clients, especially if they are single, should consider a pet trust to provide for their pet’s care if something happens to them. This can include if the client dies or is physically unable to care for the pet themselves. The pet trust can not only specify a caregiver for their pet, but also provide care instructions and set aside funds sufficient to care for the pet’s needs (medical care, grooming, exercise, etc.). If a substantial amount of money is being left for the benefit of the pet, an additional person can be appointed to solely manage the money.

Charitable remainder trust. Millennials are well known for being socially conscious and wanting to make a positive difference in the world. If your millennial clients want their money and possessions to support a charitable cause when they pass away, they may be interested in establishing a charitable remainder trust, which enables them to benefit from a stream of income for their own life, with the remainder of the assets in the trust going to a charity they have selected upon their death.

Planning for Student Loans or Credit Card Debt

As the cost of college tuition continues to increase, the level of debt millennials have begun their adult lives with is startlingly high. The average student loan debt of adults aged 25 to 34 is $33,000 per borrower. Federal student loans typically are forgiven upon the borrower’s death, but the estates of borrowers who obtained private loans can be pursued by those lenders. In addition, high credit card debt is prevalent among millennials. Life insurance sufficient to cover income tax on the cancellation of debt in the case of a federal student loan or to cover the debt itself if a student loan is owed to a private lender or if money is owed to a credit card company may be a good solution for millennials who are concerned about the burden their debt could place on their loved ones upon their death.

Digital Assets

Millennials, as the first generation who grew up using the internet, have typically amassed a much greater quantity of digital assets than members of previous generations. These assets may include social media accounts, blogs, photographs and videos, financial accounts, and email accounts, among many others. A comprehensive list of these of these assets, which may be among your clients’ most prized possessions, as well as the accompanying usernames and passwords, and instructions for their management, is essential to ensure that their wishes are honored if they pass away or become too ill to manage them on their own. Depending upon your clients’ wishes, they can appoint a separate person to wind up (or continue managing, e.g., in the case of a blog) these assets and accounts, or they can choose to have their executor or trustee handle this aspect of their estate. The list, which can be incorporated into your clients’ other estate planning documents by reference, should be stored in a secure place along with their will and/or trust.

Powers of Attorney

Medical power of attorney. Young adults may not realize that their parents no longer automatically have the right to make medical decisions on their behalf if they become too ill to make them or if they are unable to communicate their wishes. Even if they are married, their spouse still needs to be properly designated using a medical power of attorney in order to make decisions for them. It is also important to designate a trusted person to act on their behalf if the spouse is unavailable. If they fail to designate a trusted person to make medical decisions for them if, e.g., they are in an automobile accident and are unconscious, a court proceeding may be necessary to appoint someone to fill that role. Your millennial clients should also consider completing a living will spelling out their wishes regarding medical treatments they want–or don’t want–at the end of their life or if they are in a persistent vegetative state.

Financial power of attorney. Another document that is essential for your clients’ care if they were to become unconscious or too ill to make their own financial decisions is a financial power of attorney. It allows the person they have named to pay bills, take care of their home, manage their accounts, and make other money-related decisions. Even for clients who are married, a financial power of attorney is important because any bank accounts or other property that are not jointly owned cannot be managed by the spouse without it—unless the spouse goes to court and asks to be appointed as your client’s guardian, causing unnecessary stress in an already distressing situation. A financial power of attorney can also be helpful for those millennials who do a lot of international travel and may occasionally need someone to handle financial matters while they are out of the country.

Let’s Collaborate for the Benefit of Your Millennial Clients

Millennials may think that estate planning is only for the elderly. However, regardless of whether they have accumulated much money or property, an estate plan is crucial, not only for the well-being of their families, loved ones, and pets, but also to put plans in place in case they become ill or are severely injured and cannot make medical and financial decisions for themselves. You can add value to them as an advisor by educating them about the benefits of planning ahead and the increased stress and heartache that their loved ones will likely face if they become incapacitated or die without a comprehensive estate plan. Let’s work together to help your millennial clients prepare for the future.

According to a 2015 study conducted by the National Alliance for Caregiving and AARP, approximately 43.5 million caregivers provided unpaid care to an adult or child during the prior 12 months. Those who have taken on the role of caregivers for ill or disabled spouses, aging parents, children or other loved ones with special needs are typically selfless and giving individuals who may not stop to consider their own financial and estate planning needs. It is likely that you have clients who are providing this type of care. It is essential to broach this subject with your clients to ensure they have financial and estate plans in place that address both their own needs and those of their care recipients.

As their trusted advisor, you can encourage them not only to recognize their own emotional needs and develop the skills needed to deal with the stresses of caregiving, but to take the time to create financial and estate plans, or if they have those plans in place, to reevaluate them at regular intervals. It is crucial for caregivers to ensure not only that their own future is secure, but to also create plans that provide for their families and their care recipient if something should happen to them. The following are some suggestions about how you can help clients who are caregivers.

Discourage isolation. You have developed a relationship with your clients and meet with them regularly. When you become aware that one of your clients has taken on the role of caregiver, it is important to encourage them not to neglect their own needs. Urge them to seek out the emotional support of others, either family members or other caregivers, who can understand and empathize with both the rewards and the physical, emotional, and financial burdens associated with caregiving.

Create a budget. Caregiving may involve additional expenses, particularly if the care recipient is a spouse, a child with special needs, or even a parent who lacks their own financial resources. A recent report by AARP estimated that family caregivers spend $7000, on average, on costs related to caregiving, which translates into nearly 20% of their income. Your client may also need to reduce their hours at work or stop working to provide care for their loved one. You can help your clients stay on top of their finances by assisting them in creating a budget and advising them to take steps to save for the future. Even if they are only able to set aside a small amount each month, over time, it can grow into a substantial nest egg. You can also help your clients to explore state or federal aid and tax credits or deductions that may be available to caregivers to ease the financial burden.

Contribute to retirement accounts. If your clients have employers that offer 401(k)s and match their contributions up to a certain percentage, they should contribute as much as they can up to the amount the employer will match. In addition, you can help your clients establish either a Roth or traditional IRA to take advantage of the tax benefits provided by those accounts.

Consider long-term care insurance. Clients who are caregivers are more aware than most people of the high cost of medical and nursing care. Encourage them to consider long-term care insurance to help cover the cost of their own in-home care, assisted living care, nursing care, and hospice care when the time comes. Although long-term care insurance is expensive, paying for long-term care out of pocket is much more expensive and can quickly deplete their savings and investments.

Create or revise an estate plan. In addition to the typical concerns about providing for family members, clients who are caregivers for their parents, spouses, or loved ones with special needs may have a heightened level of concern about what will happen to their loved one if they pass away or become too ill to care for them. Who will care for their loved one, and how will it be paid for? Remind your clients that a well-thought-out estate plan can provide them with peace of mind by ensuring that plans are in place to provide for the needs of their care recipients. The estate plan should be reviewed regularly to make any modifications needed to address changing life circumstances and laws.

Name a guardian.

Parents who are caregivers for a special needs child should name a guardian—and more than one alternative—in their will or revocable living trust to serve in the role of parent if the parents die or are no longer able to care for the child. Otherwise, the decision about who will act as a guardian will be left to the courts, which may not reflect the parents’ wishes.
If the care recipient is an adult, it will be necessary for the caregiver to ask a court to name the caregiver as their loved one’s guardian and/or conservator to be able to make decisions about their health care, living arrangements, and finances. A conservator, who typically handles financial matters, may need to be a different individual from the person providing day-to-day care.

State law varies regarding the designation or appointment of a successor guardian for an adult. Some states allow a standby guardian to be appointed at the same time the first caregiver is appointed or to be designated in the initial guardian’s will or another written document, as long as it is properly witnessed. If anything happens to the initial caregiver, the standby guardian can immediately step in to begin providing care. Some states allow a standby guardian to serve for a brief time but require court approval before being appointed as the permanent guardian. Still other states have laws enabling the court to consider an individual your client nominates in their will as a successor guardian when the court is making the decision about who is the best person to take on that role. We can help your clients determine the best course available to them.

Consider a special needs trust.

A will alone is unlikely to be adequate to address the needs of your client’s care recipient. If your client leaves money outright to the person for whom he or she is caring or to another caregiver, it could be spent in a way that is contrary to your client’s wishes, and it is vulnerable to creditors. In addition, it could make your client’s loved one ineligible for government benefits or aid.

A special needs trust is one estate planning tool that may be very beneficial for your clients’ care recipients. A special needs trust can help preserve the beneficiaries’ eligibility for government benefits, name a well-qualified trustee, designate a care manager, and preserve their loved one’s quality of life. You can help determine which of the caregivers’ resources can be used to fund the trust or provide products such as life insurance policies to ensure that sufficient funds are available in the trust to provide for the beneficiary’s care. The funding plan should be revisited regularly and updated when necessary, providing you with the opportunity to continue to properly manage the assets. Together, we can help your clients develop a plan that sets aside, protects, effectively manages, and distributes assets for their care recipient’s lifetime, and equally important, designates a trusted individual to act as an advocate for their loved one if they cannot.

It Requires a Team Effort

Helping your clients design a plan that addresses both their own needs and those of their care recipients is a great way to provide tremendous value and solidify your relationship with them. Your clients rely on you to help them plan and make wise decisions to enhance their financial security, but it is important to assemble a team that can work together to create a comprehensive financial and estate plan. Depending upon the individual circumstances of each client, this could include you, as the financial advisor, an estate planning attorney, a tax advisor, a trustee, and care service providers. Please give us a call to discuss how we can collaborate to provide your caregiving clients with the optimal plan for their individual circumstances.

As your client’s trusted advisor, you may be the first person the family turns to when a family member or loved one passes away. Although it is important for your client to contact us soon to start the process of estate or trust administration, the shock and grief of losing a loved one are often overwhelming. Sometimes, family members simply need a brief respite before addressing these legal matters.

However, there are several practical and legal considerations that the person named as the executor of the estate or trustee of the trust should address in the initial weeks following the death, prior to the administration of the estate or trust.  During this stressful and emotional period, your client may forget about certain tasks which may lead to problems if left undone, and there are important legal considerations your client must heed. Here is a list you can provide to your client of some important initial steps to take:

Checklist of Initial Responsibilities

• Make burial arrangements. If some time is likely to pass before burial, for example, if there will be a delay prior to a special ceremony and burial in a veteran’s cemetery, your client should make arrangements with a funeral home to store the deceased loved one’s remains until the service.

• Obtain ten original certified death certificates. After someone passes away, their death should be registered with the local or state vital records office, which can then issue official death certificates. A state-licensed funeral director or coroner typically prepares and files the death certificate with the state. A death certificate is often required to claim life insurance benefits, close bank accounts, transfer titles, and take care of other matters connected to the estate.

• Ascertain the immediate needs of beneficiaries and expenses that must soon be paid. Your client should determine which of his or her loved one’s accounts contains cash that can be accessed for the beneficiaries’ needs and other expenses. The last thing you want is for an item to be repossessed or the electricity turned off due to non-payment.

• Arrange care for animals. If your client’s loved one had pets or other animals, care should immediately be arranged for them. The will or trust may name the person your client’s family member has chosen to care for them, but if there was no will or trust, your client may need to arrange for someone to look after the animals until a caretaker can be determined.

• Inspect the loved one’s home to make sure it is secure. If your client’s family member owned a home, your client should walk around the home to make sure any points of entry are locked and that there are no maintenance issues that need to be addressed. The police department should be notified that the home will be vacant so police can patrol the area more frequently.

• Change the locks. It is important for your client to change the locks on the home to ensure that neighbors, service providers (maids, dog walkers, etc.), and even family members who had keys are no longer able to enter the home.  This is important to ensure that no one prematurely removes any property from the home, even if they are well-intentioned.

• Remove valuables from the home and store them in a secure place. Jewelry, cash, works of art, furs, and other especially valuable property should be kept in a safe place until the estate or trust is administered and the items are transferred to the proper beneficiary. Check on the insurance coverage for these items.

• Secure vehicles. Any cars your client’s family member owned should be locked. No one should drive the car, and the odometer should be checked to determine the mileage at the time your client’s loved one passed away. If the car is parked on the street or in a driveway, your client should notify the police to keep a closer eye on it. Insurance on the car should be maintained.

• Arrange for the home and yard to be maintained. Your client should continue lawn care and general home maintenance to ensure that the house does not become an eyesore and a target for thieves.

• Discontinue services that are no longer needed, and hire any new personnel required by a beneficiary or dependent. If your client’s deceased loved one had domestic help, security guards, or assistants that are no longer needed, stop the services after checking any contracts or written agreements. If a beneficiary or dependent now needs the help of an assistant or maid, the necessary workers should be hired to ensure they receive the proper care.

• Leave the heat or air conditioning on. To prevent any problems that may arise as a result of very high or very low temperatures, it is important to continue to heat and cool the home. In addition, if the home is vacant during cold winter months, a faucet should be turned on or cabinet doors opened to prevent pipes from freezing and bursting.

• If required, alert local officials of the vacant home. In some areas, a higher tax rate is applied to vacant homes, so in those places it is important to notify the city if the home is vacant and part of an administration.

• Contact agencies to cancel benefits. If your client’s family member was receiving Social Security, veterans, or other benefits, the relevant agency should be notified of the death. Your client should not cash any benefits checks that arrive after death, and if any benefits are received covering a period after death, they should be returned.  Depending on the timing of the death, the government agency may automatically withdraw the last electronic payment.

• Cancel subscriptions and monthly service agreements. If your client’s loved one was receiving a newspaper, magazine, or other regular subscription or monthly service, it is important to cancel them, and if applicable, request a refund.

• Cancel credit cards and charge accounts. Your client should notify all of the deceased person’s credit card companies of the death and close the accounts as soon as possible. It is also important to notify all three major credit bureaus of the death to avoid identity theft.

• Locate insurance policies. Your client should find all his or her loved one’s insurance policies. The homeowner’s insurance company should be contacted to confirm that there is coverage for fire, flood, and/or other needed items as part of the homeowner’s insurance policy. In addition, your client should locate the deceased family member’s life insurance policies, which may have been issued by alumni associations, travel clubs, credit card companies, trade associations, etc.

• Gather personal records. Your client should locate all bank statements, checkbooks, canceled checks, and at least the past three years of income tax returns.

• Determine if anyone owed money to the deceased loved one. While gathering the needed personal records, check to see if there are any documents reflecting debts owed to the deceased individual. Your client should contact those individuals to collect the amounts owed.

Legal Considerations Your Client Should Keep in Mind

• After your client’s loved one has passed away, anyone authorized by a power of attorney to act on the now deceased person’s behalf is no longer valid. Therefore, for example, if a family member was in charge of paying the deceased person’s bills as an agent under a financial power of attorney, that person should stop paying those bills after the individual has died. The executor of the will or trustee of the trust is now the proper person to handle those matters.

• If your client’s family member made arrangements for his or her funeral in advance utilizing a document such as a Remembrance and Services Memorandum, the deceased person’s written instructions may be legally binding under state law, and thus, the survivors may be obligated to comply with them. It is also possible that the client’s family member prepurchased their funeral arrangements through a local funeral home.

• If any of your client’s deceased loved one’s property or money was not part of his or her trust at the time of death or was not made a part of the trust at the time of death automatically, that money or property must be handled through the probate process. That is, the money or property cannot be distributed to anyone, including the trust, without involvement by the probate court.

• If there is any possibility that your client or any other family member may want to disclaim, i.e., refuse to accept, any money or property they will inherit, it is important not to take any action that would be considered an acceptance of the inheritance. For example, if your client is one of the beneficiaries of the deceased loved one’s life insurance, but would like his or her share to go to the next beneficiary in line, your client should not complete any paperwork and reject any checks involving the life insurance policy. There may be tax consequences if they accept the money and then choose to give it to a different beneficiary.

• Your client and other family members should not prematurely distribute any of the deceased individual’s property or funds. The executor of the will or trustee of a trust are the only individuals allowed to distribute the deceased individual’s money or property and must pay all debts and taxes before transferring any funds or property to the beneficiaries.

Call Us As Soon As Possible

Although your client can handle many of these initial concerns, the administration of your client’s loved one’s estate or trust will be quite complex. Even small mistakes could end up being a major headache. It is important for your client to contact an experienced estate planning attorney to help with probate or trust settlement and/or administration, as well as any other legal matters that may arise during this difficult and emotional time. Our goal is to provide your clients with peace of mind by guiding them through the administration and settlement of their family member’s trust or estate, so please encourage them to call us as soon as possible.

In 2008, Congress recognized the need for the public to understand the importance and benefits of estate planning by passing House Resolution 1499, which designated the third week of October as National Estate Planning Awareness Week. Nevertheless, according to a 2019 survey carried out by Caring.com, 57% of adults in the United States have not prepared any estate planning documents such as a will or trust despite the fact that 76% viewed them as important. Many of the respondents said this was due to procrastination, but many others mistakenly believed that it was not necessary because they did not have many assets.

Estate Planning Awareness Week is a great reminder of the need to explain what estate planning is to your clients and why it is crucial for them not to delay putting an estate plan in place, regardless of the size of their estate.

What Is Estate Planning?

Estate planning is an important part of your clients’ financial planning, as the creation of an estate plan enables the growth, protection, and transfer of their wealth in accordance with their identified goals. It involves much more than simply designating who they would like to receive their property when they die. An estate plan will help provide financial stability for your clients’ surviving spouse, preserve and protect their assets, minimize tax liability and other costs, support their designated charities, and name trusted individuals to make decisions on their behalf in the event they become incapacitated.

As your clients’ trusted financial advisor, you can help them become aware of their need to create or update their estate plan to achieve their goals. A good estate plan typically consists of multiple components that are tailored to meet your clients’ individual goals and needs. Ask your clients if they have in place some of the most commonly used estate planning tools, which include:

Last Will and Testament. It is essential for your clients to have a will: If they do not, their property will be distributed according to state law rather than in a way they have chosen. Although the results are occasionally the same as they would have wanted, they more often are not. Most people would rather not have this decision made for them, as it can sometimes lead to very undesirable and unintended  results. In a will, your clients can name an executor–also called a personal representative–who will help carry out their wishes as specified in their will and designate a guardian for minor children or other dependents.

Trust. A trust may also be appropriate for clients who seek privacy and wish to avoid probate. Many people find a revocable living trust to be beneficial, as they can retain control of their assets prior to their death, but those assets can pass immediately to their named beneficiaries without probate after their death. Trusts are often superior tools for incapacity planning. Some types of trusts also provide tax advantages or asset protection.

Powers of attorney. A financial power of attorney will allow your client to designate an individual to make financial and property decisions on their behalf. Financial powers attorney enable a trusted individual to file taxes, pay bills, apply for government benefits, and much more. Financial powers of attorney can be customized to meet your clients unique situation and goals.  Similarly, a medical power of attorney enables your client to designate a person they trust to make medical decisions for them when they are incapacitated or otherwise unable to communicate.

Advance directives. Also known as a living will, an advanced directive is a legal document used to provide instructions for your clients’ family, doctor, or other healthcare provider if they unable to communicate the information themselves, including, for example, whether or not they wish to remain on life support if they are in a persistent vegetative state or terminal condition.

Beneficiary designations. Some property, including trust assets, can pass to your client’s beneficiaries without having to be mentioned in their will or go through the probate process. This includes funds held in IRAs and 401(k)s, and life insurance. For some types of accounts, such as 401(k)s, a spouse is the primary beneficiary by law unless the spouse signs a waiver. Nevertheless, it is essential for your clients to name a primary beneficiary, as well as a contingent beneficiary, to receive the funds upon their death for these accounts or policies. Otherwise, the funds held in these accounts, or the death benefit in the case of a life insurance policy, may be distributed according to state law or pursuant to the terms of the retirement plan rather than according to your clients’ wishes.

How to Broach the Subject

Estate planning is often a difficult topic to bring up with clients, as it brings the unpleasant topics of aging and death to the forefront of their minds. However, creating or updating an estate plan can also provide significant peace of mind for your clients by ensuring their life savings are protected, plans are in place in the event they become ill, and their property is passed down according to their wishes.

One way to begin the conversation is to talk first about whether their beneficiary designations accurately reflect their wishes, and whether the primary beneficiaries of their accounts or policies could actually handle a lump sum payment or windfall upon their death. You might discover that their goals and wishes are not as straight forward and that they need estate planning to ensure their assets are transferred to whom they want and in the way they wish.  They might have specific ideas on how to provide for the care of any children, grandchildren, or pets.  Your clients may also have concerns about how their finances, property, or business interests would be managed in the event they become incapacitated.

Let’s Work Together

Educating your clients about the need for a comprehensive estate plan will demonstrate that you care not only about their present financial planning, but also the protection of their legacy, their personal wellbeing, and the welfare of their children or grandchildren. As your clients’ financial advisor, you are closely attuned to their financial needs and goals, both for themselves and for their families, and you keep abreast of changes in their life circumstances, i.e. divorces, marriages, children reaching adulthood. As a team, we can work together to make sure that your clients have an up-to-date estate plan that provides financial security for themselves and their families and makes arrangements for their care should they become incapacitated.

Contact us today to discuss how we can collaborate for the benefit of your clients.

Since the enactment of the Tax Cut and Jobs Act of 2017, the utility of the irrevocable life insurance trust (ILIT) has been in question. The substantial increase in the federal estate tax exemption–$11.4 million for an individual and $22.8 million for a married couple in 2019—greatly reduced the need for estate planning aimed at lessening federal estate tax liability or offsetting estate taxes for many clients. As a result, your clients may be wondering if an ILIT is necessary.

An ILIT Can Still Be a Helpful Planning Tool

Depending upon the particular goals and circumstances of your clients, an ILIT can still be a useful planning tool. As a financial advisor, you can enhance your relationships with your clients by helping them to reassess their goals for both the present and the future, providing valuable guidance about how the ILIT may be able to meet their estate and financial planning needs. There are several factors that you should discuss with your clients:

1. Rapidly appreciating assets. Particularly for clients with a higher net worth whose current estates are valued below the federal estate tax exemption, it is important to examine the current composition of their estate to determine if it includes assets that are likely to appreciate rapidly, potentially pushing the value of the estate over the federal estate tax exemption. Even if there is currently no estate tax liability, an ILIT may be needed if the estate includes an interest in a successful and growing business, real estate in a location with increasing property values, or other rapidly appreciating assets that may soon be at risk of generating an estate tax liability.

2. State estate taxes. In 2019, 12 states and the District of Columbia have their own estate taxes (with maximum rates varying from 12 to 20 percent) with exclusion amounts ranging from $1 million in Massachusetts to $5.7 million in Maine. As of 2019, New York has increased its exclusion amount to match the federal exemption of $11.4 million. Although New Jersey repealed its estate tax in 2018, political prognosticators are predicting that it will be reinstated in the future. Obviously, for clients living in those areas, an ILIT may still be a useful tool for mitigating or eliminating state estate tax liability.

3. Sunset of the current estate tax exemption. It is important to remind your clients that the current federal estate tax exemption is not permanent. It may revert to the 2017 level of $5 million (adjusted for inflation) in 2026, only seven years from now. Many clients who needed an ILIT prior to tax reform are likely to need it again if Congress does not act to extend the current exemption amounts or make them permanent. Discuss these possibilities with your clients and help them assess the exemption level they would feel comfortable planning for in their estate plan.

4. Protection against your client’s creditors. All 50 states and the District of Columbia have statutes that protect the death benefit or cash value of life insurance, and sometimes both, from creditors’ claims. In some states, however, the exemptions are limited to a specific dollar amount or to the amount reasonably necessary to support the beneficiary. In addition, although typically, the proceeds of the life insurance policy are never available to your client’s creditors because they pass to their beneficiaries without ever becoming part of their estate, some states have laws that limit the exemption only to certain beneficiaries, such as a spouse, children, or other dependents. Designating an ILIT as the direct beneficiary of their policy can be a strategy to protect proceeds that are outside the scope of the statutory exemption.

5. Protection against creditors of your client’s loved ones. Although state law provides that the proceeds of life insurance policies are exempt (at least partially) from your client’s creditors, once those proceeds are in the hands of your client’s direct beneficiaries, they typically are within the reach of their creditors. Even if their children or other loved ones do not currently have any creditors, they may eventually face lawsuits, bankruptcy, or divorce. If they are direct beneficiaries of your client’s life insurance policy, the death benefit your client intended for them to receive may be exposed to claims from those creditors. As a result, designating an ILIT, rather than an individual, as the beneficiary of your client’s life insurance policy may be a good option. If the trust is the owner of the proceeds, the creditors of the beneficiaries will not be able to reach the death benefit to satisfy their debts. An ILIT can also protect the death benefit through the inclusion of a “spendthrift trust” provision that prohibits trust beneficiaries from pledging the life insurance proceeds, which are an asset of the trust, as collateral. Their creditors are then only able to reach any distributions made to them from the trust.

6. Liquidity. If your client has assets that are difficult to divide, for example, a business interest or the family home, a life insurance policy can provide liquidity that can be used to equalize an inheritance by providing cash to one or more children. Consequently, children who are not interested in the business will still receive an inheritance, and the family home will not need to be sold so the proceeds from the sale can be divided among the children. An ILIT is a good option under these circumstances because the insurance policy is beyond the reach of creditors.

What If the ILIT Is No Longer Needed?

If your client currently has an ILIT that was created primarily as a means of avoiding estate tax liability, and none of the factors mentioned above are major concerns, there are several strategies your client, as the grantor of an ILIT, could use to extricate life insurance from an ILIT now viewed as unnecessary. For example, your client could substitute cash of equivalent value for the life insurance policy in the ILIT or buy the policy back. Alternatively, the life insurance policy could simply be allowed to lapse by no longer providing funds for the premium payments, leaving the ILIT without any assets to manage. Policies that have cash value could be surrendered or sold in a life settlement transaction, and if the trustee has the discretion to do so, the cash could be distributed to the beneficiaries of the ILIT. It is also possible that the ILIT could be terminated pursuant to its own terms, with the consent of both the grantor and the beneficiaries, or through a court order requested by the beneficiaries.

We Are Here to Help

The best estate plans are the product of a team effort. We can help you and your clients consider all the relevant factors to determine whether an ILIT will be beneficial for them and their loved ones. We look forward to collaborating with you to design the optimal estate plan for your client’s individual circumstances. Please give us a call today to learn more about how we can help.

The 2019 estate tax exemption is $11.4 million per person, up from $11.2 million per person in 2018. According to the Tax Policy Center, only 4,000 estate tax returns were filed this year, with only 1,900 of those returns owing tax. Some industry experts estimate that less than one percent of all estates are taxable.  Put another way, over 99 percent of all estates are exempt from estate tax. With the likelihood of clients having a taxable estate being relatively low right now (this is subject to change, of course), it only makes sense that clients focus on income tax planning. As a trusted advisor, you hold a crucial role in ensuring that our clients receive the best comprehensive strategy.
 
Basics of Income Tax
What is the income tax?
Income tax is a tax paid on an individual or entity’s income that meets certain requirements.
 
Taxable income can be broken into two types. Earned income includes financial gains such as wages, tips, a salary, or bonuses. It also includes other monetary gains unrelated to a job, such as gifts, lottery winnings, alimony (if your divorce agreement was executed before 2019), etc. Unearned income, by contrast, includes income from interest, rent, dividends, or other sources.
 
How much is taxed?
We have a progressive federal tax system. This means that people earning less each year than a certain federally set limit pay less tax, and people earning six figures or more annually pay a higher tax rate.
 
What are the current rates?
The 2019 rates for single filers start as low as 10% for the lowest income tax bracket (up to $9,525).

• Those earning $9,526 to $38,700 can expect to pay 12%.

• For people in the $38,701 to $82,500 income bracket, the rate is 22%.

• Those reporting income of $82,501 to $157,500 will pay 24%.

• In the $157,501 to $200,000 bracket, the tax is 32%.

• In the range of $200,001 to $500,000 earnings, taxpayers will be charged 35%.

• For the highest income bracket, $500,001 and up, the current tax rate is 37%.

Setting Goals
As the professional your client has trusted with their financial future, your goal is simple: to help them pay the least amount of income tax possible, or even to avoid it entirely.  This goal can be extrapolated to help your clients pass assets to intended beneficiaries in the most tax-advantageous manner.
 
During your routine client meetings, you have probably covered the basics of estate planning, such as wills, trusts, and gifting using the annual exclusion amount ($15,000 for 2019). However, these measures have no immediate negative income tax impact. For those clients with income tax concerns, we need to move beyond the basics and into more advanced planning techniques, a few of which are discussed below.
 
Basis Planning
If a client has low basis assets (i.e. assets that have significantly appreciated since their original purchase or acquisition date), planning for the ultimate cost basis of such assets at the client’s death is an important and often overlooked tax-saving strategy. In fact, gifting assets during a client’s lifetime can result in a loss of the stepped-up basis that would have otherwise occurred at their death. Married couples living in community property states benefit from a double step-up in basis upon the first death, resulting in lower tax liability for the surviving spouse.
 
Charitable Remainder Trust
If your client is charitably inclined, another option is charitable planned giving. By using a Charitable Remainder Trust (CRT), the grantor retains or names non-charitable beneficiaries to receive an annual income stream (as either an annuity or unitrust amount), and at the end of the term (which can be a single life, joint lives, or multiple lives), the remainder goes to the designated charity. When the grantor funds the CRT, he will be allowed to take a charitable deduction on his income tax return (with certain limits). There will also be no capital gains due when the appreciated property is transferred to the trust or when the trust sells the asset in order to have the liquidity to make the annual payments to the beneficiary. Funding a CRT with highly appreciated assets is, therefore, a great planning strategy.
 
When annual distributions are made from the trust, the current beneficiary will be subject to income tax.
 
Charitable Lead Trusts
The Charitable Lead Trust (CLT) can be a valuable option as well. A CLT is funded with income-producing assets that have been ultimately earmarked for heirs. Upon the funding of the trust, the grantor may be entitled to an immediate income tax deduction for the charitable contribution. The amount of the deduction will be based on amount ultimately given to the charity and the interest rates at the time. With this type of trust, the charity is the current beneficiary and gets a stream of annual payments (as either an annuity or a unitrust) for a set period of time. At termination of the CLT, the trust assets pass to the heirs, free of any transfer tax on appreciation realized after the date the trust was created, but only as long as the rate of return on the assets exceeds the Applicable Federal Rate (AFR) that was in effect when the CLT was first established.
 
The taxable gift to the heirs is calculated in the year the CLT is created if the stream of payments is an annuity. If the CLT is a unitrust, it’s calculated at the termination of the CLT.
 
A CLT is not exempt from income tax, because the ultimate beneficiary of the trust is not a charity. However, this can be a very beneficial strategy for a client who has a substantial amount of income in one year. All taxable income earned by the trust in future years will then be taxed to the grantor, saving your client money.
 
Don’t Hesitate to Reach Out
With estate tax exposure being a concern for so few clients, income tax needs to be our next priority. Familiarizing yourself with the above strategies will help you advise your clients and assist in creating the most comprehensive and tax-efficient estate plans for your clients. Never hesitate to reach out and collaborate with us on powerful advanced planning techniques that can really make a difference for your clients.

If there’s one thing we can all agree on, it is that each client is unique.
 
Likewise, our approach to counseling these clients should be tailored to each one’s specific needs.
 
Let’s work together to develop special plans that fit each client’s special circumstances.
 
One key tool to consider is the niche trust.
 
Usually, when we speak about a trust, we mean an “express trust.” An express trust is a three-way relationship between the grantor, the beneficiary or beneficiaries, and the third party, or trustee. The grantor has assets he or she wishes to distribute in a specified way to the beneficiary, and the trustee holds those assets on behalf of the beneficiary.
 
The assets, financial needs, and wishes of each client are particular to that person, so the use of trusts needs to be part of a nuanced strategy. Enter the niche trust. These trusts are designed for very special situations and fulfill particular needs. It’s important to be informed about the types of trusts that are available to use as tools. Let’s explore some of them here.
 
Health and Education Exclusions Trust (HEET)
This trust is tailored to help clients avoid paying gift tax on tuition and medical care expenses for individuals two or more generations younger than the client. Tuition payments made directly to an educational institution on behalf of one of these beneficiaries are not subject to gift tax.  Similarly, payments made directly to a medical care provider that are not reimbursed by the donee’s insurance are also not subject to gift tax. However, in order to qualify for these benefits, at least one beneficiary of the trust must be a charitable organization.
 
These payments, if made on behalf of a “skipped person” from a non-Generation Skipping Transfer Tax (GSTT)-exempt trust are not considered GSTT transfers.

• TIP: This is a great option if your client has already used their GST exemption. 

Pet Trust
This trust can either stand alone or be part of a revocable living trust. It is used to provide for the care of pets after the grantor passes or during his or her incapacity, and to appoint someone to care for them. A pet trust also nominates someone to handle the disbursement of funds to cover pet care.
 
Gun Trust
A gun trust is used to pass firearms to heirs in compliance with state and federal regulations outside of probate.

• TIP: Due to the punishment for violating state and federal firearms regulations, it is crucial to seek the assistance of a qualified estate planning attorney when planning for the distribution of firearms.

Incentive Trust
With an incentive trust, assets are held for the benefit of a beneficiary who must meet certain requirements before a distribution will be made. The requirements are put in place by the grantor and must be met prior to the distribution of any of the principal or income. For example, a grantor could stipulate the funds be distributed:

• Only when the beneficiary has graduated from college.

• Only if a beneficiary abstains from illegal drug use.

While some clients may like the idea of being able to put stipulations on a beneficiary’s inheritance, it is important to note that conditions for the disbursement of assets cannot be illegal or against public policy.
 
Gifting Trust
Using either the annual gift tax exclusion or the grantor’s lifetime gift tax exemption, a gifting trust holds and invests property for the benefit of family members. This can be a great strategy for transferring family wealth from an individual in a high income tax bracket to a lower one.

• TIP: If you want to use the annual gift tax exclusion to shelter gifts to the trust for gift tax, you will need to include a Crummey power. A Crummey power is a technique that allows a person (beneficiary of the trust) to receive a gift that would not usually be eligible for gift tax exclusions, and makes that gift eligible. To accomplish this, after each annual gift is made, the beneficiary will be given the opportunity to withdraw the amount. However, in most cases, the beneficiary will leave the money in trust, so as to ensure the grantor will keep making the annual gifts according to the original plan. Because gifts can be made annually, the grantor can stop at any time. 

Supplemental Needs Trust (3rd Party)
In a supplemental needs trust, assets are set aside for the benefit of a beneficiary whose disabilities may allow that person to receive public assistance for medical and other care expenses. In order to guarantee that the beneficiary will not lose government benefits or fail to qualify for those they would otherwise be eligible for, it is important to consult an experienced estate planning attorney.
 
Standalone Retirement Trust
This trust is designed to receive “qualified retirement accounts” like IRAs and 401(k)s. It can be set up as either revocable or irrevocable, and provides additional protections for the inherited retirement account. While the future of the lifetime “stretch” for non-spouse beneficiaries is still in the balance, this type of trust is still a great alternative to allowing a beneficiary to immediately cash out an inherited retirement account. This can be an important consideration when planning for retirement. If it is anticipated that a large sum will be left over in the account upon the passing of a client, planning needs to be done to address this.
 
Qualified Personal Residence Trust (QPRT)
With a QPRT, a personal residence is the main asset of the trust. The grantor keeps the right to live in the home for a specified number of years, and after that term ends, the home is transferred to the beneficiaries. This means if the grantor survives the term of the trust, the grantor must move out or begin paying rent to the trust in order to continue living there. 
 
This can reduce the burden of gift tax that will be incurred when the residence is transferred to the beneficiary.
 
Let’s Work Together
All of these trusts are tools in building a comprehensive, personalized estate plan that will make your client happy. The important thing to keep in mind is that estate planning must be a collaboration, taking into account the wants and needs of the client and drawing on the expertise of planners and attorneys. The result will be a robust and individualized plan that will not let your client down. Don’t hesitate to reach out today to work with us.

Prevention Is the Greatest Cure Your clients trust you with their financial future and the legacy they want to leave behind. They rely on you to anticipate challenges, foresee trouble, and take preventative measures. When it comes to a client’s financial wellbeing, it is up to the trusted advisor to know what problems are likely to arise and to have solutions ready to help avoid conflict in the family, waste of resources, and other common pitfalls. One crucial tool to keep assets safe and to ensure they are distributed in the way your client wants is through the use of a revocable living trust. What Is a Revocable Living Trust? A revocable living trust (RLT), sometimes called a revocable trust or living trust, is an alternative to a will. It’s a document that instructs a trustee on how to manage the client’s assets during the client’s lifetime and how to manage or distribute the assets upon the client’s incapacity and death. Diverse assets such as life insurance proceeds or policies, real estate holdings (including the client’s personal residence), bank accounts, and investments can be managed with an RLT. An RLT allows a client to name him or herself as the initial trustee and to name a successor trustee in the event that the client becomes incapacitated or dies. By being named trustee, the client retains full control and also retains the benefit of his or her assets. In addition to serving as the trustee, the client has the ability to alter the trust as he or she sees fit (hence being called a revocable trust), to add or remove beneficiaries, and use the assets as he or she wishes. Because the assets in an RLT are still under the control of the client, he or she will pay taxes on any income within the trust accordingly. RLTs Avoid Probate One major benefit of using an RLT as an estate planning strategy is that it avoids probate. This is accomplished by ensuring that all assets that otherwise would have been in your client’s name at death are funded into the trust. Then, when the client dies, there are no assets in the name of the client and no need for a probate. The terms of the trust will dictate what happens to the assets, not a court or state law. Probate can be a long and expensive process and can restrict beneficiaries’ access to assets from a few months up to several years. Estates whose assets span more than one state could end up going through probate in each state. Why put beneficiaries through this process when it can be avoided simply by creating an RLT? Protecting Inheritances Passing financial security on to the next generation is a popular goal for many clients. However, inheritances can be vulnerable to many life events and changes a beneficiary might experience. Assets can be spent too quickly, devalued, lost in a divorce, seized by creditors, or become vulnerable in a lawsuit. A properly drafted RLT allows clients to put restrictions in place to ensure their hard-earned money continues to benefit the next generation. Whether it is the use of a spendthrift provision or no-contest clause, or merely establishing an age that a beneficiary has to attain before receiving any distribution, the client is in control. Providing Privacy If a client has a traditional will, the terms in the will become public record as soon as the probate is opened. With an RLT, by contrast, assets are distributed privately. Without court supervision, there is no need for the RLT to be filed with the probate court. In turn, the transactions involved in administering the trust are not entered into the public record and cannot be searched, thus providing privacy to both the client and the beneficiaries. What Could Go Wrong? Most clients have a clear idea as to how they want their estate to be divided, but without proper estate planning, a lot can go wrong. Lack of foresight in estate planning will always come to bear sooner or later. Let’s take a look at some common shortcuts and their consequences—and how an RLT can help avoid these headaches. A client’s child is added directly to their bank account. This may seem like a straightforward way of designating a recipient for an asset, but what happens if the child incurs significant debt? The bank account will be seized by creditors, and the child will not see a penny. There is also the added risk that the creditor may decide to take the money as soon as the child is added to the account, despite the fact that the child never made any contributions to the account, and the client is still alive. The creditor will deem the child to be the owner of the account and can use those funds to satisfy the outstanding debt. By contrast, if the bank account is funded into an RLT, it can be protected from the beneficiary’s creditors during the client’s life and after their death. A client leaves their home to their child through the use of a transfer-on-death (TOD) deed. The client intends for the child to receive a certain share of the estate by deeding them the home upon the client’s death. What happens if the home is sold before the client passes away? Instead of an equal share in the estate, the child will receive nothing. By funding all assets into an RLT and designating shares for each beneficiary to receive, you will not have to worry about individual assets. In this instance, if the home is an asset of the trust and is sold, the proceeds will be deposited into a bank account owned by the trust, so even if the child does not get the house, they can still get the value of the house as part of their share. A client names a beneficiary directly in their life insurance policy. Again, in this case, there is no protection against the beneficiary’s creditors. And what happens if the policy premiums are not paid? If the policy lapses, there will be no asset for the beneficiary to inherit. This too can be avoided with the care and specificity of an RLT. As mentioned before, having the proceeds payable to the RLT means that the client can stipulate how the funds will be distributed to beneficiary instead of an outright distribution. Also, if the policy lapses, as a beneficiary of the trust, he or she will still receive a share of the overall trust assets. Honoring the Client’s Wishes As we have seen, any of these events could disrupt the client’s original intent of dividing assets as desired. An RLT is a much safer and simpler option. Instead of having to worry about how separate assets are titled and making sure beneficiary designations and account owners are updated every time the client changes his or her mind about who is to receive them, an RLT allows for one set of instructions that control everything. With assets being held in a trust and distributed over a period of time, an RLT encourages the continued management of the estate by qualified financial advisors. If the assets are allowed to be distributed outright, it is highly likely that the beneficiaries will cash out. Your clients depend on you to help them plan and make sound decisions about their financial health. Working together, we can help develop a comprehensive financial and estate plan that will help build financial stability for today and tomorrow. Do not hesitate to reach out for more information about how we can collaborate to best serve our clients.

For maximum benefit, estate planning should happen as a team effort, with CPAs, insurance professionals, financial advisors, and attorneys working together strategically and cooperatively. When it comes to helping married couples plan, today’s strategies need to be considerably more thoughtful than in previous years. Although the estate tax exemption is ever increasing, portability is still an important option, particularly for high net worth clients. Portability Is Here to Stay In fact, there’s really no downside to including portability in a plan, other than having to file a federal estate tax return. In the past, planners did not know whether portability was here to stay and were hesitant to rely on its benefits. However, at the beginning of 2013, portability laws became “permanent” under the American Tax Relief Act of 2012 (ATRA). It is now an essential part of estate and financial planning. Portability provides estate tax planning (without the use of credit shelter trusts) by permitting spouses to transfer their unused estate tax applicable exclusion amount to their surviving spouse. The surviving spouse can then use the deceased spouse’s unused exclusion (“DSUE”) amount for either gift or estate tax minimization or even elimination. In fact, they get to use all of the DSUE plus their own estate tax exclusion amount. This can be very beneficial if assets appreciated greatly after the death of the first spouse, or if the estate tax exclusion amount for the second spouse is lower due to legislative changes. The Best of Both Worlds Fortunately, your clients can have the best of both worlds. Portability and trust protections are not mutually exclusive. You can still utilize planning strategies, such as a QTIP (i.e., qualified terminable interest property) trust, providing asset protection and family line protection. So long as the portability election is properly made, the DSUE is reserved for estate tax minimization. Remember, since the DSUE is a monetary asset, it must be included in estate and financial plans, as well as pre- and post-nuptial agreements. It is also important to note that some states still have a state estate tax, some with exclusion limits below the federal exclusion. This means that tax planning is still relevant, even if the value of an estate is below the federal estate tax threshold. What You Need to Know An individual can use more than one DSUE. Potentially, the number of DSUEs is unlimited. Portability is not automatic. The election must be made on an estate tax return (Form 706) within nine months of death or within any extensions granted. Even if the surviving spouse does not have assets in excess of the Section 6018 filing threshold (federal estate tax exclusion amount), it is prudent to consider a protective 706. Portability offers federal estate tax planning without requiring an equalization of assets between spouses or their trusts. Portability allows a second step up in basis at the death of the second spouse, whereas the credit shelter trust alone provides a step up in basis only at the death of the first spouse. Trust planning remains relevant for tax planning, asset protection, and family line protection. In fact, trust planning and portability can be used together and are not mutually exclusive. How Can You Benefit Your Clients Most? Of course, you will want to ensure your clients get the best of both worlds: trust planning and portability. We would be happy to consult with you and to provide analyses of your clients’ plans. Here are some ways you can immediately benefit your clients: Contact your married couple clients and offer a financial analysis of their credit shelter planning. Would portability be a better fit for tax purposes? Do the documents include a trust protector or independent trustee to allow for future flexibility if the laws change yet again? Do they know to request a 706 filing at the death of the first spouse? Meet with surviving spouses and determine whether there are outstanding income tax implications. Can you achieve a step up in basis? Has a 706 electing portability been filed? Is there still time to file? Is there an exception that would allow late filing? Does the deceased spouse’s trust include a trust protector or independent trustee to allow for tax planning flexibility? Offer prenuptial portability counseling to single clients who may be contemplating remarriage. Your clients need to know that they will lose their DSUE from their previous spouse if their new spouse dies during their lifetime. It may be appropriate to financially compensate a spouse whose DSUE is reduced by remarriage. Life insurance can fund such compensation plans if other liquid assets are not available or if the client prefers. A marital agreement can include a provision that guarantees that portability will be elected, as there may be a conflict between a second spouse and children from the deceased spouse’s previous relationships. Reach Out to Collaborate Contact our office for assistance in analyzing your clients’ plans for portability benefits. We’re here to help you avoid pitfalls and maximize benefits. Give us a call today!