Newsletter Category: Client Focused Newsletter

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

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

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

• Depending on the terms of the trust, a particular co-trustee may be able to respond quickly to an emergency situation if no other co-trustees are available.

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

• Administrative responsibilities can be allocated among the co-trustees based on each co-trustee’s unique strengths and skills or in a fair and equitable manner.

However, there are also disadvantages to consider:

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

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

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

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

What Is the Right Approach for You?
Before you decide whom to name as a successor trustee, you should discuss these advantages and disadvantages with your attorney and other professional advisors well before there is a health event that could lead to your incapacity (the inability to make your own decisions) or death. Doing so will help you identify some of the potential pitfalls and complications that can arise with regard to your successor trustee choice. These discussions may also help you realize that you need to make changes to your estate planning documents, either to add another family member or a professional fiduciary as successor co-trustee or to remove certain individuals listed as a co-trustee because of the potential for conflicts. Of course, we welcome the opportunity to meet with you to discuss ideas and make any necessary updates to your estate documents so that they better match your intent.
 
As you prepare for these discussions with your attorney and other professional advisors, it may be helpful for you to consider some of the following questions before ultimately deciding whom to name as your successor trustee:
 
How well does the individual I want to name as trustee work with others?
Does your potential successor trustee have the temperament to delicately handle requests, questions, and perhaps even emotional outbursts from the trust beneficiaries while administering the trust? Do they handle conflict well, or do they have a tendency to escalate conflict when they encounter it? How might serving with a co-trustee mitigate or exacerbate this temperament?
 
Does the person you plan to name as trustee have sufficient time and flexibility for their duties?
Being a trustee requires a certain level of flexibility and availability. If your chosen trustee is a busy professional or a busy parent with little extra time to spend handling the trustee’s many tasks, would it make sense to nominate multiple co-trustees to share those responsibilities? On the other hand, would naming multiple trustees create frustration if the co-trustees are all required to be present to handle certain financial or administrative tasks? Sometimes, the need for flexibility calls for fewer, not additional, trustees.
 
If co-trustees are named, should they have authority to act independently?
While having multiple co-trustees can provide important checks and balances, should they nevertheless be given independent authority to act on behalf of the trust? Granting such authority may decrease the hassle of needing to have all co-trustees present but still provide the ability to spread responsibilities among the various co-trustees, thereby decreasing the workload of each co-trustee.
 
If multiple co-trustees are chosen, what method might be used to resolve a stalemate in trustee decisions?  
Even co-trustees who normally get along can sometimes disagree so strongly that a stalemate occurs. In such a case, what might be an appropriate way to resolve the impasse? Should another family member be named to break the tie? What about a trusted professional advisor, a mediator, or a trust protector? Or should differences like these only be resolved by a court? Often, leaving such decisions to a court can encourage disagreeing co-trustees to resolve the dispute on their own in an effort to avoid the expense and delay of going to court.
 
You might also request that your attorney include language in your trust that permits a dissenting co-trustee to abstain from participating in a decision, thereby limiting the dissenting co-trustee’s liability for any harm that might result from the other co-trustees’ decision. This approach allows the business of the trust to move forward, even over the objection of a co-trustee. However, the dissenting co-trustee would have the comfort of knowing that the overruling co-trustees would ultimately be the only ones responsible for those particular actions.
 
Conclusion
Whether you nominate a single successor trustee or multiple co-trustees, carefully considering the pros and cons of each approach can help ensure that your wishes for the handling of your estate and trust will be honored. Contact us today so we can review your current successor trustee selections or create an estate plan with the right people in charge to assist you when needed.

When we think of estate planning, we often think about preparing our accounts and property to go to our loved ones in a tax-efficient way, protected from probate, disgruntled heirs, beneficiaries’ creditors, divorcing spouses, bankruptcy, and the poor spending habits of children or other beneficiaries. We rarely consider preparing for receiving an inheritance of our own.
 
Believe it or not, there are some essential things you must consider when you anticipate receiving an inheritance. Understanding these issues can be crucial to protect that inheritance from unnecessary taxes and outside threats like creditors, divorcing spouses, and bankruptcy.
 
Understanding the Nature of the Property to Be Inherited
The first way to properly prepare to receive an inheritance is to discover what you will be inheriting. Is it real estate, a 401(k), or an individual retirement account (IRA)? Perhaps it is publicly traded stock, an interest in a family business, or just simply cash from a savings account or life insurance policy.
 
Whatever it is, there are steps you can take today to plan to receive and manage it properly. For example, if you will receive a large IRA account from a parent, do you understand the new rules associated with inherited IRAs as implemented by the SECURE Act passed in late 2019? If not, you should educate yourself now on how to maximize the tax benefits available under the law regarding required distributions. Without an understanding of these often complicated rules, you could make an irreversible mistake and withdraw all of the IRA funds at one time, thereby substantially increasing your tax liability in the year of withdrawal. There are a variety of nuances to these rules that a tax adviser or attorney can help you understand and navigate properly.
 
Likewise, if you are receiving rental property as a part of your inheritance, you should consider the business of being a landlord and if you even have an interest in continuing to operate such a venture. If not, you may want to prepare to find a buyer for the property who can offer you a fair price as soon as possible. Or, at the very least, look into hiring a property management company to take over as soon as you inherit the property.
 
Powers of Appointment
If your loved one has completed trust planning that includes establishing an irrevocable trust for you, such trusts frequently include important features that are generally referred to as powers of appointment. A power of appointment in a trust is a right, often given to the beneficiary of the trust, to gift trust property to someone else or, in some cases, to yourself. These powers are often limited to making gifts to only certain classes of people (such as the descendants of the trustmakers), or they may be limited to making gifts only at death (a testamentary power of appointment) or during life (a lifetime power of appointment). Some trusts include both types of powers. These can be powerful planning tools that have been given to you through trust documents. Failure to recognize the existence of these powers can lead to unintended consequences, or at the very least, crucial missed asset protection and tax-planning opportunities.
 
If you know that you have been granted a power of appointment, you should attempt to obtain a copy of the relevant trust documents to carefully review and determine the nature of these powers. An experienced estate planning attorney can help you with this task. With this information, your professional advisers can properly advise you on the planning opportunities and tax consequences of the powers of appointment that may be available to you.
 
Keeping Inheritance Separate from Marital Property
A common mistake made by married individuals who receive an inheritance is to commingle that inheritance with the property of both spouses. How can this be a mistake? An example may best illustrate the point:
 
Imagine Robin receives a cash inheritance from her deceased father of $300,000 and she and her spouse Morgan decide to use the inheritance to buy a vacation cabin in the mountains. When purchasing the property, the title company assumes that because they are a married couple, they want to take title to the property as joint tenants with rights of survivorship and the deed gets prepared and recorded accordingly. Further imagine that over the years, they furnish the property together, maintain it, and enjoy many family vacations there. One night, however, Morgan has a little too much to drink at a bar, gets behind the wheel, and causes a deadly accident that results not just in a DUI, but also in a wrongful death lawsuit. Because Morgan’s name is on the title to the property as a joint owner, Robin and Morgan discover that the family cabin is an asset that can be used to satisfy the lawsuit judgement against Morgan. As a result, they are forced to sell the cabin and use half of the proceeds to satisfy the judgement.
 
This unfortunate circumstance can be the result of Robin’s failure to keep her inheritance as separate property. By commingling her property with Morgan, she made it much easier for the judgment creditor in the lawsuit to reach what otherwise would have been considered Robin’s separate inheritance property.
 
Commingling inherited property can also lead to a similar result if Robin and Morgan ultimately divorce and the family court judge has to determine how to divide the marital property. Failing to keep the inherited property separate during marriage can often lead to that property being divided between spouses at divorce.
 
Inheritor’s Trust
A fourth way for you to prepare to inherit property is by using an inheritor’s trust. This is a special type of trust that can be established by the individual who will be leaving an inheritance to you. An inheritor’s trust is designed to receive the inheritance that you would otherwise receive directly. It must be carefully designed and implemented to work properly, and an experienced estate planning attorney should most certainly be used in the effort. A properly drafted inheritor’s trust includes the following key elements:

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

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

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

• You are the beneficiary of the inheritor’s trust

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

An inheritor’s trust includes the following benefits:

• The inheritance can be excluded from your taxable estate, potentially saving your family estate taxes

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

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

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

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

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

An inheritor’s trust can be a powerful tool to use when you anticipate receiving a large inheritance and would like to make sure that the inheritance is protected from certain tax consequences or threats from creditors.
 
If you would like to learn more about any of these concepts, give us a call. We would love to discuss these ideas in greater depth with you so we can help you build and protect your wealth more effectively.

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

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

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

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

The Trouble with Outright Gifts

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

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

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

Using Trusts for Gifting to Grandchildren

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

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

Health and Education Exclusion Trusts

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

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

Generation-Skipping Transfer Taxes

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

Keeping Parents in the Loop

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

Conclusion

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

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

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

2. Addressing climate change and alternative energy solutions

3. Financial regulation and student debt

4. Anticompetition practices among the leading companies in Big Tech

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

6. Improving international relations

7. Immigration

8. Race, gender, and social issues

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

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

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

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

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

These large spending bills, both passed and proposed, will need to be funded in some manner. Some of the possibilities for funding this spending include the following changes to the tax laws that could have a significant impact on your estate planning:[5]

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

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

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

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

Flexibility Is Key in These Uncertain Times
We are living in a time of significant uncertainty when it comes to estate planning and the economy. As a result, it is more important than ever to ensure that your estate plan is designed in a way that enables you to move quickly and take advantage of estate and tax planning opportunities that arise.
 
Additionally, there remain many non-tax-related reasons to keep your estate plan up-to-date and relevant to your circumstances:

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

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

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

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

[9] Id.

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

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

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

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

These examples illustrate just a few of the more common reasons why and how powers of appointment can be creatively used to build flexibility into an estate plan. There are many other ways to use these incredibly useful tools. It is important to note, however, that they can also create significant risk and lead to unintended consequences.
 
For example, what if John, in the example above, turned out to be vindictive and, out of spite, exercised his testamentary limited power of appointment to grant everything to one of Karen’s children who had a terrible gambling problem, and who then lost everything in one weekend in Atlantic City? Certainly, this would not have been what Karen had intended. But, a power of appointment can lead to this type of result if the power holder chooses to exercise their power irresponsibly.
 
How Can This Information Help You?
Now that you have a better grasp on the uses and limitations of this powerful estate planning tool, you can better identify in your own circumstances the situations that would call for use of a power of appointment. You can also identify the existence of powers of appointment in your own estate planning documents or in the documents of your loved ones, and consider whether these are in fact appropriate for the circumstances.
 
If you would like to learn more about how powers of appointment can be used to help you achieve your estate planning goals while maintaining significant flexibility in your planning, please do not hesitate to reach out to us. We are eager to help you make the best planning decisions for your unique needs. Give us a call today.

[1] I.R.C. § 2041(b)(1).

What Is a Trust Protector?
Traditionally, the three roles that must be filled when setting up a trust are the settlor (also called a grantor, trustor, or trustmaker), the trustee, and the beneficiary. All three roles are necessary to create a trust that functions properly. Although it is relatively common to use trust protectors in foreign asset protection trusts, a trust protector is a fairly new role in trusts drafted in the United States for estate planning purposes. However, as the number of trusts designed to last for generations grows, estate plans need more built-in flexibility. Giving a trust protector, through the terms of the trust, certain powers over the trust, such as removing or appointing trustees, adding or removing beneficiaries, and amending or even terminating the trust, ensures that your intentions for creating the trust are fulfilled despite changing law or circumstances.
 
How Is a Trust Protector Selected?
A settlor may select as a trust protector any individual or group of individuals, such as family members, business associates, friends, attorneys, accountants, or other professional advisors. The naming of a trust protector may be specific, such as “my neighbor John Doe,” or general, such as “a CPA selected by the majority of the owners of the [ABC CPA Firm].” The settlor provides for and selects a trust protector in the trust agreement.
 
Who Makes a Good Trust Protector?
Because of the many and varied powers that a trust protector can hold, you should name a trust protector who has attributes, knowledge, or skills suitable for the responsibilities of the role. For example, if the trust protector has the power to amend the terms of the trust to account for changes in tax law, the trust protector should have some understanding of tax law and how it will impact the trust. If a trust protector has the power to veto or direct trust distributions to beneficiaries, the selected trust protector should understand the family history and desires of the settlor. Different powers may require the selection of different trust protectors or possibly a committee of trust protectors.
           
What Does a Trust Protector Do?
Based on your wishes, the purposes of the trust, and applicable laws, the trust protector can hold many different powers, including administrative powers traditionally held by a trustee, such as the power to make distributions, and judicial powers traditionally held by a court, such as the power to remove beneficiaries. Trust protector powers can include the power to

• remove a trustee or appoint a successor trustee,

• add or remove beneficiaries,

• amend the trust agreement,

• exercise the voting rights of closely held business interests owned by the trust,

• interpret the terms of the trust,

• veto or direct trust distributions,

• terminate the trust, and

• appoint and remove members of a distribution or investment committee.

This list is not exhaustive, and you should include any of these or other trust protector powers only after careful consideration of your desires and purposes for creating the trust.
 
Reasons for Including a Trust Protector in Your Trust-Based Estate Plan
There are several reasons to include a trust protector in your trust-based estate plan:

• Trust protectors offer increased flexibility and peace of mind. The administration of a perpetual trust that may last for generations can be a daunting task because no one knows what the future may hold. Including trust protector provisions in your trust agreement can ensure that your trust achieves your goals despite changing circumstances and laws.

• Trust protectors can provide additional oversight and support for a trustee. A trust protector can ensure that a trustee is properly administering the trust and carrying out the trust’s purposes. If the trustee is delinquent in its duties, a trust protector may remove the trustee and appoint a better-suited trustee. A trust protector can also help a trustee correctly interpret trust provisions and address changes in the law or beneficiary circumstances.

• Trust protectors provide an easier and less costly means of modifying a trust. If a trust needs to be modified after the settlor’s death, usually the only route is through the court system, a complicated and costly process. Giving a trust protector the power to modify the terms of a trust can prevent the need to go to court to modify the trust. 

Can I Name a Trust Protector for a Testamentary Trust?
A testamentary trust, usually created through a will, comes into existence after the settlor dies and the will has been probated. A testator (the person who makes the will) can, and in many cases should, include trust protector provisions in a testamentary trust to ensure that their  intent for the trust is properly carried out over time.
 
Does Every State Allow Trust Protectors?
State law varies in its treatment and classification of, and guidance for, trust protectors. Though many states have adopted a uniform set of laws governing trust protectors, or a modified version of these uniform laws, other states have not addressed trust protectors at all. It is important to consult an attorney familiar with your state’s laws to understand whether trust protector provisions are right for you and your goals.
 
Please contact us to learn more about naming a trust protector and discuss whether it is a good idea for you. We are happy to answer any questions you may have and help you craft an estate plan that is perfect for you and for your loved ones.

If you have already done your estate planning, you have taken a significant step toward ensuring that your loved ones will know how to manage your affairs if you become incapacitated or die. However, simply having a will or a trust and related estate planning documents is often not enough. A detailed inventory of all of your accounts and property is crucial for helping your loved ones manage your legal and financial affairs effectively.
 
Most estate planning attorneys have received calls from distressed children who knew that a deceased parent had a will or a trust, but had no idea what accounts, insurance policies, or items of real and personal property the parent owned. If an inventory was never prepared and shared with the parent’s attorney, the child likely had to spend countless hours meticulously combing through the parent’s file cabinets, drawers, tax returns, mail, and online accounts to identify what the parent owned.
 
Needless to say, this is not something that anyone wants to happen. Even if you do not have a will or a trust in place, you do not need to wait to prepare an inventory of your property until you have created these legal documents. In fact, assembling an inventory can be an excellent first step when it comes to your estate planning. This preliminary effort will allow your attorney to immediately begin focusing on the creation of a will or a trust that takes into account each of your accounts and pieces of property and how they should be coordinated with your estate planning goals. If you take this step, your attorney is guaranteed to be impressed and grateful for your preparation.
 
How to Create an Inventory
Creating an inventory of your accounts and property does not need to be very complicated. It can be a simple word processing document or even a handwritten list. Many individuals create spreadsheets in software programs like Microsoft Excel, Numbers, or Google Sheets. There are also numerous online services that can help you create a thorough inventory of your property. Many of these services enable you to automatically share your inventory with chosen individuals at a time that you designate before death or disability strikes. The bottom line is that any of these methods can work well—the important thing is that you create an inventory. Below is an example of an inventory formatted as a spreadsheet with columns and rows:
 

 
Of course, this is just an example of what an inventory could look like. You should include any information that you think will be helpful to someone who is put in charge of collecting your property after you have passed away. You might include additional details, such as where the property is located. For example, if you keep certain items of jewelry in a safe, or a boat you own is stored in dry storage, this would be crucial information to include.
 
In addition, though you will not share this with your attorney, consider using a software program or other service to store passwords for online accounts and even store digital copies of your important documents.
 
Probate and Your Property
As you create your inventory, you will review how each item is titled or who is named as the beneficiary on certain accounts, which will enable you to identify those items of property that will have to go through probate. Probate is the court process that appoints an executor or personal representative to inventory your probate property and distribute the property according to state law or the terms of your will, if you have one. Generally speaking, any account or property that meets the following conditions will have to go through the probate process: (a) is owned only in your name, (b) is not owned jointly with another person, (c) is not titled in the name of a trust or business entity (like an LLC or partnership), and (d) does not have a named pay-on-death (POD) or transfer-on-death (TOD) beneficiary associated with the property.
 
Probate can be an expensive, time-consuming, and public process that most people would rather avoid. If avoiding probate is a goal of yours, preparing an inventory well before you pass away can alert you to those items of property that will require a probate so that you can take steps prior to your incapacity or death to transfer ownership or retitle them.
 
Additional Benefits of a Complete Inventory
By creating an inventory with the type of information demonstrated in the example above, you can help your loved ones understand their next steps with regard to taking control of your property for management and distribution. Certain items and accounts, such as the following, may be distributed according to the unique legal aspects of that type of property:

• Property owned in joint tenancy with rights of survivorship (such as real estate or bank accounts) will pass automatically to the surviving joint owner and outside of a trust or probate.

• Some bank or investment accounts may have POD or TOD designations that allow those accounts to skip the probate process and be paid directly to a named beneficiary such as a child, spouse, trust, or charity.

• Life insurance proceeds typically will not have to go through probate if you have properly completed the beneficiary designation form by naming your loved ones, a trust, or a charitable organization as beneficiaries on the policy.

• Accounts and property titled in the name of a trust (i.e., owned by the trust) can be distributed outside of probate according to the terms of the trust agreement.

• Retirement accounts usually require the listed beneficiaries to file a claim with the account custodian before the account will be paid out. Probate courts and trusts usually have no control over retirement accounts.

• Vehicles will typically need to be transferred through the local department of motor vehicles, which requires an affidavit along with a death certificate and the physical car title.

• Certain items of personal property (e.g., furniture, jewelry, art, collections, etc.), if above the value determined by state law, may be subject to probate, unless they are transferred into a trust before death.

What to Do with Your Inventory Once Created
After creating your inventory, make sure to store a copy where your loved ones will be able to easily find it should something happen to you. Consider the following locations:

• an estate planning portfolio or binder

• a file folder that is clearly marked and easily accessible to your loved ones

• your client file with your estate planning attorney

• an electronic document format that can be shared with your trusted loved ones online

• a clearly labeled USB drive in your safety deposit box or safe (as long as you let your loved ones know what to look for, where to find it, and how to access it)

• your client file with your other professional advisors (so that they can help your loved ones easily identify all of your property if your loved ones call them first after your death)

Once you have created and shared your inventory, you should create a plan for updating it. Over time, accounts get closed or consolidated with other accounts, property is sold or acquired, stocks get converted to cash, and retirement accounts get depleted. If you do not regularly update your inventory, there is a chance that you could create confusion and send your loved ones down rabbit holes as they try to handle your affairs.
 
Some people find it helpful to choose a specific date each year when they will review and update their inventory and also review their estate planning documents. Whatever will work best for you, make a plan, implement it, and then stick with it. Your loved ones will praise your name for years to come if you do. If you need assistance or have questions reviewing your important documents, feel free to give us a call.

For most people, it is perfectly natural to think about estate planning only in terms of planning for death. While planning for your death is very important, if that is all you plan for, your planning can quickly become woefully inadequate. As medical knowledge and technology have improved over the decades, so too has modern medicine’s ability to keep people alive for much longer. It is no accident that in many areas of the country, long-term care facilities such as assisted living centers and nursing homes are being built at record pace.[1] 
 
At first blush, staying alive longer would seem to be a good thing. And for many people, it is. However, simply living longer does not always result in ideal circumstances. Longevity coupled with physical or mental incapacity can be extremely challenging if you fail to make arrangements for someone to assist you during that period of time. On the other hand, with proper incapacity planning, you can rest assured knowing that your affairs are in good hands, out of the public eye, and being handled without the expense of lawyers, courts, and unnecessary complications.
 
What Is Incapacity?
Before we discuss how to plan for incapacity, it is important to clarify what it means to be incapacitated. Each state has its own method for determining legal incapacity, and most have enacted laws that define what incapacity is. For example, in states that have adopted the Uniform Probate Code, an incapacitated person is typically defined as follows:
 

“Incapacitated person” means an individual who, for reasons other than being a minor, is unable to receive and evaluate information or make or communicate decisions to such an extent that the individual lacks the ability to meet essential requirements for physical health, safety, or self-care, even with appropriate technological assistance.[2]

 
Although some states have defined incapacity more broadly or more narrowly, in most states, this is a common definition of legal incapacity. From a purely practical perspective, however, incapacity can be described as an ongoing condition where you simply do not have the mental ability to take care of routine tasks for yourself without assistance from someone else. Such tasks might include paying your bills, cooking your meals, bathing, grooming or dressing yourself, taking your own medications, or being unable to protect yourself from financial or physical exploitation.
 
Why a Will Alone Will Not Cut It
Almost all estate plans created in this country include a will. A will is a legal document that allows you to memorialize your wishes for what you would like to happen after you have died.  For example, a will allows you to

• authorize someone to handle your final affairs after your death (an executor or personal representative);

• name who will receive your accounts and property and in what shares, including successor or backup beneficiaries; and

• designate guardians of your minor children.

Did you notice a theme in the list above? They are all things that must be handled only after you have died. That is an important point. A will only becomes effective once you are dead.
 
So does a will help you if you become incapacitated? The short answer is no. A will is not any help if you become incapacitated. To provide some level of incapacity planning in your will-based estate plan, you must obtain additional legal documents, including at least a financial power of attorney and an advance directive.
 
Financial Power of Attorney
A financial power of attorney (POA) is a legal document that you sign before you become incapacitated that allows you to appoint a trusted individual to act as your agent (meaning the appointed individual can act on your behalf). In this document, you spell out what an agent may do: a general POA allows an agent to handle most of your financial affairs whereas a limited POA restricts an agent’s actions to certain things or for a limited amount of time. Legally, your agent must act in your best interests when handling your property and legal affairs. A POA can, and in many cases should, grant the power to take the following actions:

• handle your deposit and banking accounts

• withdraw funds from your retirement accounts

• enter into contracts

• collect your mail

• deal with your various insurance companies

• make investment decisions on your behalf

• sell, mortgage, lease, and manage real property

You can also determine when your agent is allowed to act on your behalf. It can be restricted to only after you have become incapacitated (a springing POA) or take effect as soon as you sign the document (an immediate POA). When planning for your incapacity, it is important that your POA be durable, which means that your incapacity will not affect the validity or effectiveness of the document.
 
If you have a will-based estate plan and no financial POA (or an invalid one), your loved ones will have to go to court to have someone appointed to take care of these matters for you through a process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for your loved ones during a stressful and emotional time.
 
Advance Directives
An advance directive is a document or set of documents in which you can appoint an individual to act on your behalf regarding medical decisions and, if authorized under your state law, also memorialize some of your medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is one kind of advance directive that allows you to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on your behalf when you are unable to communicate your wishes yourself (i.e., if you are unconscious, even temporarily).
 
Another kind of advance directive is a living will, which is a legal document in which you can specify the kinds of end-of-life decisions that you want your doctors or healthcare agent to make on your behalf. In some states, an advance healthcare directive will contain both a power of attorney and end-of-life instructions; other states require separate legal documents. Regardless of the format, these documents are a critical component of making your estate plan incapacity proof. By naming someone you trust to make healthcare decisions for you, similar to the decisions you would have made if you could still communicate your wishes, you can ensure that you receive the care and medical treatment that is most appropriate for you.
 
If you do not have an advance healthcare directive, your loved ones will be forced to go to the court and have a judge decide who can make medical decisions for you if you are not able to make or communicate your wishes.
 
Trust-Based Estate Planning and Incapacity
For those who want to make their estate plans truly incapacity proof, a revocable living trust can be a powerful legal tool. This type of trust has become the foundation of many well-constructed estate plans in this country. A living trust is a legal agreement between a trustmaker (a person with the money and property, sometimes called a trustor, settlor, or grantor) and a trustee (the person charged with managing, investing, and handing out the money and property). For most revocable living trusts, the trustmaker changes the ownership of the trustmaker’s accounts and property from the trustmaker as an individual to the trustee of the revocable living trust, who is often initially the trustmaker himself or herself. The trustee agrees to manage and protect the money and property for the benefit of beneficiaries. In a revocable living trust, the trustmaker is also the beneficiary during the trustmaker’s lifetime. Holding the property in this type of legal structure creates a great deal of flexibility to deal with incapacity issues as they arise.
 
For example, if you created a revocable living trust, named yourself as trustee, and transferred most of your property into the trust, you could use and enjoy your property just as you do today. But if you suddenly became incapacitated, a successor trustee (named by you beforehand in your trust document) could quickly and seamlessly step into your shoes as trustee to continue managing the trust property for your benefit throughout any period you were incapacitated. All of this could be accomplished outside of the courtroom, maintaining privacy and eliminating burdensome court and attorney fees in the process. Then, when you die, your successor trustee would have the authority to continue to manage the trust property or give it to remaining living beneficiaries (typically, your loved ones that you leave behind). Again, this can be done completely outside of the court system, thereby eliminating significant cost, delay, and invasion of your and your loved ones’ privacy.
 
Do not forget that this incapacity planning is only as good as the individuals you choose to serve in these roles. If the person or people you named can no longer fulfill their responsibilities, you will need to change your legal documents as soon as possible to ensure that the best possible people are serving in these crucial roles.
 
Finally, it is important to remember that a trust-based plan should still include a will, financial POA, and advance healthcare directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.
 
By carefully crafting each of these legal documents with our help, you can feel confident that your loved ones and the property that you have worked your whole life to obtain will be in good hands if incapacity strikes. We are here to help you think through and implement each decision that goes into making your estate planning truly incapacity proof. Give us a call today.

[2] Unif. Prob. Code § 5-102(4) (2019).

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

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

While there is reason to be optimistic that 2021 will bring a COVID-19 vaccine and the promise of a return to some level of normalcy, it is unlikely that this return to normalcy will occur on January 1, 2021. In the meantime, life marches on. We are just as busy as ever with supervising kids attending school and other activities (in-person or virtually), pursuing new employment opportunities or adapting to new work environments, and adjusting savings and investment goals. With so much going on in your life, it can be easy to forget the details that can help you prepare for whatever 2021 may bring. That is why we are here: to remind you of those things that can make your life easier when it comes to your estate, financial, and tax planning. Here are a few important things to consider as the year comes to a close.

Maximize Contributions to Retirement Accounts

This year brought plenty of employment disruptions for many of us. These disruptions may have resulted in a job change and the establishment of a new 401k account with your employer. Or they may have caused you to reduce or even suspend making regular paycheck contributions to your retirement account given the uncertainty of the job market as the pandemic escalated. As a result, you may not have maximized your annual contributions to your retirement accounts in 2020. Depending on your current employment status, perhaps you have forgotten to restart your contributions and are at risk of missing out on the opportunity to maximize your annual contribution limits. Although the IRS has routinely allowed for contributions to be made even after the first of the year for the preceding year, it is typically good practice to make such contributions before the end of the year if possible.

Tax Return Preparation

December is the perfect time to begin pulling together your tax records in preparation for filing your 2020 tax returns. The sooner you can begin to get a sense of what your tax bill will be for 2020, the sooner you can prepare to write that check to the IRS or carefully plan how you will use any tax refund if you are entitled to one. In either case, preparing now for tax season can be an easy way to reduce stress over the holidays by knowing that you are ready to begin working on your returns just as soon as January 1 comes around.

You can begin gathering the following information and documentation in preparation for filing your tax returns:

• Social Security numbers and birthdates for everyone to be listed on your return

• W-2 forms, any 1099 forms, bank or financial institution tax statements, miscellaneous income records (e.g., gambling or lottery winnings)

• Property tax payment records

• Charitable donations

• Receipts for medical expenses and health insurance coverage records

• Business expense records

• Mileage records

• Home office expenses

Last-Minute Gifts

A frequently forgotten tax benefit that exists for all US citizens is the ability to gift up to $15,000 per person (in 2020) without incurring any gift tax liability and without the need to file a gift tax return. This annual gift tax exclusion amount is noncumulative, so it is a use-it-or-lose-it tax benefit. Because the pandemic has caused financial hardship for many people, utilizing the annual gift tax exemption may be a great way for you to help family and friends without incurring tax liability. And despite some of the recent presidential election drama, it appears increasingly likely that Joe Biden will be inaugurated as the forty-sixth president in January, which presents a distinct possibility that the lifetime unified gift and estate tax exclusion amount will be decreased in the near future.

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

For example, forming an irrevocable life insurance trust continues to be a highly effective way to leverage the annual gift tax exclusion by using the annual cash gifts to purchase life insurance on you, your spouse, or both of you. At your death, the life insurance benefits pass income tax-free to the trust and can then be managed and used on behalf of your trust beneficiaries in a much more protective and strategic manner.

If you have questions about how to best leverage this annual gift tax exclusion, we would welcome a phone call to visit with you about it and help you understand the available options.

It Might Be Time to Review Your Estate Planning

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

With all of the changes that 2020 has brought, it is more important than ever to review your estate planning documents. If it has been a few years, you will want to make sure that your plan still reflects your wishes. Give us a call to schedule a review of your plan if you or your loved ones have experienced any of the following life changes:

• Marriage or divorce

• Birth or death in the family

• Moving

• New job

• Retirement or loss of employment

• Acquiring new accounts or property

If you currently have a trust-based estate plan, carefully reviewing your financial accounts before the end of the year to determine how your accounts are titled and how the beneficiary designations have been made can ensure that you catch critical mistakes and identify accounts unintentionally left out of your living trust.

Taking the steps described above can go a long way toward preparing you for the upcoming year. When you are prepared, there is not much room left for uncertainty and fear. Instead, you can feel confident heading into the holiday season that you will be ready for whatever 2021 has in store for you.

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

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

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

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