Strategic Planning Guidance in Light of the Midterm Results
Estate planning is meant to be an ongoing process, not a one-time transaction. In the same way that you never stop budgeting, saving, and investing as you go through life, it is also sensible to see estate planning as a lifelong project. Let’s look at some of the considerations you should make now that the 2018 midterm elections are in the history books.
Planning in a Fluctuating Political Climate
Estate plans must change when you experience any major life changes, such as marrying someone new or welcoming a child to the family.
But you also need to respond effectively to large-scale changes that are external to your personal life, such as legislation that impacts the way your assets are taxed. Regardless of your political leanings, it’s safe to say the United States is continuing to experience a period of dramatic political and legal change.
Elections like the 2018 midterms — and the resulting political change — often create fear and anxiety about how the impact of new laws and tax policy will affect your life. But you can offset that uncertainty by focusing on making the smartest estate planning decisions possible in light of the results. We’re watching the situation as it moves forward and will keep you informed of legal and tax changes that affect you and your loved ones.
The Midterm Split: Democrats Won the House, Republicans Kept the Senate
Before the midterm elections, it was unclear how legislation like the 2017 Tax Cuts and Jobs Act would be affected. Now that we know the House and Senate are split between Democratic and Republican control, it remains to be seen how well the parties will work together on a common agenda.
So what does a divided federal government mean for you? The budget reconciliation strategy the Republicans used to pass the Tax Act will no longer be as viable an option, which could slow additional legislation the Republican-controlled Senate proposes. According to Kiplinger, “What is likely off the table with a Democratic House and Republican Senate is tax reform 2.0, which would make certain provisions of the 2017 tax law permanent, locking in individual and small business tax cuts. Social Security and Medicare reforms, which might have helped offset the effect of the tax cuts, are also likely off the table.”
When the new Congress first convenes in January, we will continue to monitor proposed legislation so you are informed about potential risks and opportunities for your estate plan.
Some Things Are Constant, No Matter Who’s in Charge
Amid so much political uncertainty, it’s important to remember there are many foundational constants in estate planning that are important no matter who’s in charge politically or what the tax laws look like. As part of your financial wellness team, we’re staying informed and will be here to guide you in matters of estate planning.
In order for you to grow and retain your wealth, careful estate planning is always a necessity — regardless of which party controls Congress. Many things may change, but a lot will remain the same: no one can legislate away irresponsible spending, divorce, lawsuits, bankruptcy, sibling rivalry, and the many non-tax reasons to utilize estate planning. An up-to-date comprehensive estate plan remains the best option for passing along your wealth and your values to the next generation.
Will your estate plan do what want it to do? Is it customized to help you thrive in the current U.S. legislative landscape? Let’s take a look. Give us a call today.
Estate planning is an ongoing process, not a one-time transaction. While your core objective is to help your clients remain financially sound in the face of whatever comes their way, our core objective is to ensure a client’s estate plan works when it needs to.
Planning in a Fluctuating Political Climate
Estate plans need to change when your clients experience any major life changes, such as marrying someone new or welcoming a child to the family. But clients also need to respond effectively to large-scale legal and economic changes that are external to their personal lives. Regardless of your political leanings, it’s safe to say the United States is experiencing a period of dramatic legal, economic, and political change.
Elections like the 2018 midterms — and the resulting political change — often create fear and anxiety about how the impact of new laws and tax policy will affect your clients’ lives. You have undoubtedly seized the opportunity to help guide your clients toward the smartest financial decisions they can make in light of the results. When you help them navigate the ways the changing political landscape will affect their wealth, you’ll increase loyalty and retain more assets under management.
The Midterm Split: Democrats Won the House, Republicans Kept the Senate
Before the midterm elections, it was unclear how legislation like the 2017 Tax Cuts and Jobs Act would be affected. Now, we know that the House and Senate are split between Democratic and Republican control. As a result, the large-scale changes the Act brought may have an uncertain future.
So what does a divided government mean for your clients? The budget reconciliation strategy the Republicans used to pass the Tax Act will no longer be a viable option, which could slow any additional tax legislation supported by the Republican-controlled Senate. According to Kiplinger, “What is likely off the table with a Democratic House and Republican Senate is tax reform 2.0, which would make certain provisions of the 2017 tax law permanent, locking in individual and small business tax cuts. Social Security and Medicare reforms, which might have helped offset the effect of the tax cuts, are also likely off the table.”
Some Things Are Constant, No Matter Who’s in Charge
Amid so much political uncertainty surrounding the midterm elections, it’s important for your clients to remember there are many foundational constants in estate planning that are important no matter who’s in charge politically or what the tax laws look like. As part of your clients’ financial wellness team, we’re staying on top of the latest developments and will be here to guide them in matters of estate planning. We’re constantly watching the situation and will keep you and your clients informed of relevant legal and tax changes.
In order for your clients to grow and retain their wealth, careful estate planning is always a necessity — regardless of which party controls Congress. Many things may change, but a lot will remain the same: no one can legislate away irresponsible spending, divorce, lawsuits, bankruptcy, sibling rivalry, and the many non-tax reasons to complete estate planning. An up-to-date comprehensive estate plan remains the best option for passing along a client’s wealth and values to the next generation.
We are here to help you and your clients in these changing times. Give us a call today.
Strategies Your Clients Can Use Right Now
It may seem too early to talk about year-end planning. But the 2017 Tax Cuts and Jobs Act set many changes in motion for charitable giving. Whether a clients’ charitable giving stems from a concern for those who are less fortunate, the desire to support a particular cause, or an endeavor to gain recognition in their community, the changes to the income tax deductions will likely impact the charitably inclined.
The increase in the standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples) means far fewer people will itemize (a requirement to obtain the charitable deduction). Additionally, the $11.18 million estate tax exemption per person means far fewer people have taxable estates now than before the act came into effect. Because of the general reduction tax in tax liability after the Tax Cuts and Jobs Act, charitable planning no longer has the same tax-saving benefit it once did.
Even against these headwinds, there remain actionable solutions you can implement with your clients to maximize their charitable giving results. When you share these solutions with charitably-minded clients, you enhance the value you provide and deepen your relationships.
1. Bundle Gifts Together
When your clients make relatively small gifts each year, there often isn’t enough to make those gifts tax deductible. That’s why it’s helpful to bundle gifts so the amount becomes deductible in one year. For example, if a client gives $10,000 per year, they can instead give $30,000 in one year and inform the charity that the gift is for three years. This way, the client is “prepaying” three years of annual gifts. Utilizing this larger amount, the client can now obtain the income tax deduction for the one year that the gift is made.
Another option is to use a donor-advised fund (DAF) if a client isn’t 100% sure about which charities they want to support. These are similar to the private foundations established by the very wealthy, but they’re a more practical way to prepay gifts for people across the wealth spectrum. In a DAF, the client makes an irrevocable donation and receives an immediate tax deduction. Their gift then grows tax-free in the DAF. The client can then, at a later time, choose which charitable organizations to make grants to from the funds in the DAF.
2. Use IRA Rollovers and Other Retirement Plans
Retirement assets have both lifetime and at-death planning opportunities. Because of the estate and income taxes that occur when IRAs are passed on to beneficiaries, they’re an excellent – and tax-efficient – way to include charitable giving in your clients’ estate plans.
Instruct your client to designate a charity as a beneficiary on retirement plan assets (and leave life insurance or other property to family or non-charity beneficiaries). The charity will pay no income tax on the retirement plan or IRA proceeds, retaining the full value of the charitable gift. Let your clients know that donating their IRA value to a charity means bypassing loss of the IRA’s value through income tax as well, and they are likely to see the value in this resourceful strategy.
During life, there are planning opportunities too. Clients over 70 ½ can use the IRA to charity rollover to avoid the entire income tax deduction issue since funds directly given from an IRA to a charity are not added to taxable income. This way, the client gets an income tax benefit whether they itemize or not because the direct distribution to the charity effectively bypasses your client’s tax return.
3. Use Charitable Lead and Remainder Trusts
There are a variety of trusts that can provide significant benefit for your wealthy clients — especially if we work together proactively to plan the sale of an asset with significant gain. CLTs and CRTs are two notable examples.
Charitable Lead Trust (CLT): CLTs are a type of irrevocable trust that can help your clients achieve their charitable giving goals by providing money to a charity over a set period of time without their assets being eaten away by taxation. Once the stated period of time has elapsed, the remaining sum can be passed onto their chosen loved ones or other beneficiaries. In a CLT, the charity receives money now and for a specified period of time and then the remainder is left for your non-charitable beneficiaries.
Charitable Remainder Trust (CRT): CRTs are also a type of charitable trust. CRTs provide a stream of income to your client for a period of years or a lifetime, with the remainder going to the charity of their choice. Because of the tax benefits these trusts receive, they can be an excellent vehicle to convert highly appreciated assets into lifelong or retirement income for the right client while also achieving a clients’ charitable goals.
For your clients who are interested in starting or continuing their charitable giving efforts, the Tax Act has likely caused a fair bit of confusion and concern about a loss of tax benefits. By using these strategies, we can collectively help realign your clients giving plans with the new legislative realities caused by the Tax Act. We are here to help and collaborate as key players on your clients’ planning team.
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What You and Your Family Need to Know
Receiving a health diagnosis or learning that you need to undergo major surgery can cause substantial disruption in your day-to-day life. During this time, the last thing you may want to think about is estate planning.
Although you may have many things going through your head at the moment, now is a crucial time to make sure your estate plan is in order. Proactive planning can help put your mind at ease and let you focus on your treatment. Let’s review your estate plan together to make sure each of the following important components is up to date and reflects your current goals and wishes.
Healthcare documents
Your healthcare documents include your powers of attorney, advance directives, and HIPAA authorization. These documents let you appoint someone to receive information about your medical condition and to even help you make medical decisions if you’re unable to do so. You probably already know which of your loved ones you’d like at the helm if a situation arises. But whoever you’ve chosen needs to be given the explicit authority to act so that you can rest easy knowing they’ll be there to make decisions if you need them.
Financial power of attorney
While a healthcare agent or proxy can make decisions on your behalf in medical scenarios, a financial power of attorney concerns your money, investments, bills, and taxes. Although it relates to different decisions, it is just as important a designation. Having this document in place can give a trusted person (such as a spouse, child, or friend) the authority to help you with your finances and property so these issues don’t have to be a distraction while you focus on your health.
Updated trusts
An up-to-date and fully-funded trust lets you focus on your health while your successor trustee handles the affairs of your trust, which could include most, if not all of your assets. In this case, you’ll still receive the benefit of your trust but your successor trustee will manage the trust on your behalf. If there’s not sufficient time to fully fund a trust, then an up-to-date will can at least put you in control of who receives what upon your death. When time is of the essence a will may be the only realistic planning tool, but if you already have a trust it can be a relatively easy process to update and fully fund it.
A little planning goes a long way when it comes to medically-trying times. As busy as you may be when you’re handling your own medical issues or the medical issues of a loved one, even one conversation can be enough for us to define and implement the estate planning documents that will help you feel more prepared for whatever comes next. Please reach out to us so we can chat about your needs and helping you obtain peace of mind.
New Choices and Opportunities for Tax Savings
Are you a business owner curious about the new Section 199A deduction?
Although the deduction became effective on January 1, 2018, guidance on how it would be calculated was delegated to the Internal Revenue Service (IRS) by Congress. For months, tax professionals and their clients were only able to speculate based on the text of the statute and had no specific guidance to work with.
New Developments in August 2018
This shroud of uncertainty was lifted on August 8, 2018, when the IRS released proposed regulations that answered pressing questions about losses as well as how to account for multiple businesses. We can now more accurately project or estimate how much of a deduction you’re entitled to.
These new proposed regulations introduced many new options for you as a business owner. They also bring new pitfalls as an overabundance of options can lead to confusion without the help of an expert. The complexity of the 199A proposed regulations calls for careful, strategic planning with your estate planning and financial professionals. To help you prepare for a tax-optimizing discussion, here are the highlights you should be aware of before we dive in with more detail one-on-one:
Aggregation
If you own more than one qualifying non-specified service trade or business (non-SSTB), the decision of whether or not to aggregate the qualified business income (QBI) from each business provides you with an opportunity to deduct more depending on your specific circumstances. The great news is that the proposed regulations give you the choice, so if not aggregating makes your deduction larger, we can choose to not aggregate.
End-of-Year Acquisitions
To keep individuals from buying properties for the purpose of gaining a larger deduction, the proposed regulations include a so-called anti-abuse rule excluding “property acquired at the end of the year” in the calculation of unadjusted basis immediately after acquisition if it was purchased within 60 days of the end of the tax year and sold soon after. If you’re thinking about investing in your business, make sure to consult with us and your tax professional so we can help you receive the largest possible deduction.
Clarification on Losses
Of course, everyone anticipates that business will generate profit, but that does not always happen. The new 199A regulations bring more clarity to the rules around how losses in one or more qualified trade or business are to be treated.
“Reasonable Method” Allocation
If you have multiple directly-controlled trades or businesses, you now have a new planning opportunity thanks to the “reasonable method” item allocation. If you operate multiple businesses, now is the time to make sure we can follow the rules and maximize your deduction.
SSTB Guidelines
There is an SSTB “taint” extending to trades or businesses over certain gross receipt thresholds. Luckily, the 199A proposed regulations narrow the definition of which businesses count as SSTBs. Non-SSTB businesses would do well to be extracted from SSTB as soon as possible — particularly if you can bypass the “taint” rule.
Former Employees
Unfortunately, the proposed regulations include a problematic rule for former employees with a new status (such as partners in a partnership or independent contractors) that are still being deemed employees for the purposes of 199A, which applies if they are providing substantially the same services to the former employer. This is presumably the case even if the new tax status is otherwise allowed under the tax laws. For example, a former employee who becomes a part owner in the business may be denied the 199A deduction even though she’s treated as an owner for all other non-199A purposes. This poor outcome may be overcome with proper planning and documentation. This is one area of the 199A which requires particular attention for affected people.
Multiple Trusts
There is an additional anti-abuse rule about the treatment of multiple trusts to attempt to get around QBI limits. This is similar to the reciprocal trust doctrine you may have also heard us talk about in that the QBI deduction-maximizing arrangement will be disregarded if the economics of the trusts aren’t sufficiently different.
Underpayment of Tax Penalty
IRC § 6662 already imposes a 20% accuracy-related penalty on underpayments of tax attributable to, among other things, negligence or disregard of rules or regulations; and any substantial understatement of income tax. However, Section 199A lowered the threshold for when the 20% substantial understatement penalty kicks in from an understatement of the greater of 10% or $5,000 to the greater of 5% or $5,000 “in the case of any taxpayer who claims the deduction allowed under [IRC §] 199A.” The statute does not state that the understatement must specifically relate to the IRC § 199A deduction for this lower threshold to apply; it applies if the taxpayer merely claims the IRC § 199A deduction, regardless of whether the understatement arose out of the IRC § 199A deduction or some other reporting error.
The Time to Act Is Now!
These new proposed regulations fill in many missing details from the Tax Cuts and Jobs Act of 2017 that added the new deduction, but these rules are complex and easy to mishandle. It is imperative to get help as early as possible to obtain optimum results.
It’s time to review your situation and determine whether any changes need to be made to your entity or operations to take advantage of the new proposed regulations. If you own a business, you should contact us immediately for an entity review. Or if we’ve already begun this process but put it on hold while waiting for guidance, now is the perfect time to get back in touch. Please call us today for more details, and we’ll discuss the best ways to make the most out of the 199A deduction.
5 Strategies to Help Pay for a Child’s Academic Future
Higher education costs are just that – higher. The steady increase in educational expenses means your clients have much steeper bills for their children’s college tuitions than they had for their own. To illustrate how stark this contrast is, the average cost of tuition has increased 213 percent in the last 30 years.[1] To make matters worse, there is no end in sight for this trend.
It’s understandable that the price of higher education is one of the biggest worries looming in your clients’ minds. A defined goal, such as a large purchase or a child’s educational needs, provides much more motivation to clients than an amorphous, abstract goal.
As their financial advisor, you are uniquely positioned to help your clients utilize educational savings tools they may not otherwise be familiar with. Not only will this effort help your clients — it’ll also lead to greater trust in your ability to help your clients strategically position themselves for better financial outcomes overall.
Here are five ways you can aid your clients in mitigating the financial toll taken by rising higher education expenses:
1. Counsel clients about avoiding gift tax issues with direct tuition payments
By paying tuition directly to the educational institution itself, your clients can avoid losing a portion of their assets to the gift tax. This may seem like an obvious strategy, but it’s one that may not be top-of-mind for clients who are more accustomed to using complex financial products and might assume that the benefits of a trust would outweigh direct payment to the institution.
2. Discuss the new Section 529 rules of the 2017 Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act updated the Section 529 Qualified Tuition Programs rules. The changes expand the breadth of qualified expenses. A 529-eligible investment account could already be used for college tuition, textbooks, required supplies, and some room and board. Now, kindergarten through grade twelve expenses can be qualified expenses. There are still some areas of uncertainty and some new restrictions, including a new $10,000 per pupil limit on non-college expenses. For the right clients, these plans may offer some tax savings and can be a great tool to include in the overall education financing plan.
3. Explore revocable educational trusts
Revocable educational trusts offer clients a way to stay in complete control of the money they are putting toward their children’s educations while still keeping it “set aside” for this purpose, as opposed to when they opt for UGMA and UTMA (Uniform Gift to Minors Act and Uniform Transfer to Minors Act) methods. In UGMA and UTMA accounts, the included assets are the minor’s property. With revocable educational trusts, however, your clients will remain in charge of the assets intended for their children’s educational expenses. If the client needs the money for another purpose, the trust can simply be revoked and the assets used for some other purpose.
4. Establish a HEET (Health and Education Exclusion Trust)
Health and Education Exclusion Trusts are a great strategy for wealthy clients, especially grandparents. Assets given to grandchildren by their grandparents are generally subject to heavy taxes under the GSTT (Generation-Skipping Transfer Tax). The way a HEET bypasses this taxation is by leveraging a rule in the tax laws that exempts payments directly to medical providers and educational institutions and by including a charitable beneficiary. This technique allows your wealthy clients with grandchildren to accomplish both their philanthropic goals and their contributions to their grandchildren’s education in one planning maneuver.
5. Encourage prospective students to find scholarships early
Lastly, encourage your clients to talk to their children about applying for scholarships early and often. Even if the prospective student is only a sophomore or junior, they should still begin looking into scholarship opportunities and planning accordingly. Although information about scholarships is widespread, applying for as many scholarships as possible is often an overlooked financing strategy.
The question of how to best pay for their children’s college tuition is a stressful one for most clients. As their financial advisor, you have a great opportunity to substantially impact their approach in a way that will both help them achieve their goals and reflect positively on your skills in the process. If you have any questions about the finer points of the strategies discussed here or any other estate planning issue, please be in touch. We’re here to help you and your clients.
[1] https://www.cnbc.com/2017/11/29/how-much-college-tuition-has-increased-from-1988-to-2018.html
Use This Time to Revisit The Parts of Your Estate Plan That Impact Your Children Most
With all the considerations about your children’s wellbeing weighing on your mind from day to day, it can be easy to forget about some of the most important factors in keeping them well cared for and secure: naming a guardian in your estate plan.
When was the last time you reflected on your selection of a guardian? If the answer is hard to pinpoint, it’s probably time to revisit this issue. Children change a lot from year to year as they mature from infants into their teenage years. Their care needs and who would make a good guardian can change over time as well. Is the person you previously appointed as their guardian still the best choice? Because your children’s lives are constantly evolving, something that worked even a few years ago may be out-of-date now.
Back-to-school time is a perfect reminder to revisit your estate plan and guardianship designations. Here are the specific areas we’ll want to address:
Review and refresh of guardianship nominations: Is the guardian you’ve chosen for your children in the event that something happens to you still the person you would want to fill that role? Are they still available to do so, and would your children be satisfied with this choice of guardian?
Review and refresh intent letters: If you’ve used intent letters in your estate plan to provide additional meaning and context to your guardianship designations and other estate planning documents, it’s a great time to make sure those are reflective of your current goals and wishes as well.
Review and refresh your estate plan: It’s always a good idea to keep your estate plan as up to date as possible. The addition of a new child to your family by birth or adoption may mean your plan requires substantial changes. This is also the case if one of your children has turned 18. If either of these events occurred since our last assessment of your plan, it is imperative that you don’t wait to make any necessary alterations to your plan.
Review college savings plans and strategies: Do you have a child who is preparing to attend college in the coming years? We can explore various planning strategies to help financially plan for the cost of tuition and help your family make strategic choices about higher education planning. It’s never too early to begin researching scholarship opportunities if you have a child already in high school. There are also a variety of accounts, such as 529s, UTMA/UGMA, ESAs, and HEETs that can be used to reduce the financial toll of tuition.
Back-to-school time means a flurry of activity for most parents. While shopping for supplies and attending school functions may dominate your to-do list, remember to set up an appointment with us to review your estate plan for any necessary updates that could impact yo
Key Points to Discuss With Your Clients
Like all things, tax laws are constantly changing. An important part of serving your clients is responding quickly and strategically to new developments in the tax law landscape. But at the same time, a knee-jerk reaction is rarely the best course of action—often resulting in unforeseen complications in the future.
The best decisions are made by professional teams working together to analyze all angles of a situation to come up with the best strategy in response to the Tax Cuts and Jobs Act (TCJA), a historic amendment to the Internal Revenue Code of 1986.
The TCJA affects many Americans in a variety of areas of life, and your clients might not be aware of what its impact will be on their long-term financial plan. Of course, this law is going on seven months old, but too many people struggle with taking action in their financial and tax planning lives, so the historic nature of these changes cannot be overstated.
The law’s benefits will accrue most for those who take a proactive approach — rather than those who wait until the last minute. Here are several reasons it needs to be top-of-mind for both you and your clients:
The increase in the standard deduction and the general lowering of individual tax rates means that your clients have likely been enjoying more take-home pay.
The elimination of the personal exemption means that depending on your client’s marital status and number of dependents, they may not be able to lower their taxable income as much as they had in the past. Some clients may face a higher tax burden, as a result, even after taking into account the lowered rates.
The limitations on deductions for state and local income taxes (SALT) means that for those clients in states or communities with high income taxes, their taxable income may not be reduced as much as it had been in the past because they cannot get credit for all the other forms of income tax they have paid. However, if any of your clients are concerned about this, we may have some strategies (such as Incomplete Non-Grantor Trusts) to help alleviate the new tax burden.
The reduction of the alternative minimum tax for individuals means that fewer individuals must deal with this burdensome and often-complicated tax.
With the increase in the unified credit to $10,000,000, adjusted for inflation, there has been a reduction in the overall number of estates affected by the estate tax. If your clients had previous planning centered around saving estate tax, those plans need to be re-evaluated to make sure that they are still working towards the client’s long term objectives now that estate tax may not be a concern. Your clients may also want to take advantage of the increase by making lifetime gifts, particularly if they had previously used up their exemption in previous years.
With the effective repeal of the individual mandate of the Affordable Care Act effective in 2019, your clients will now have the choice of whether or not to carry health insurance coverage without suffering the penalty of a fine. However, with no requirement for coverage, it is speculated that the cost of insurance in the marketplace could increase without the additional participants. Clients should carefully balance the costs of paying for their own healthcare against the cost of maintaining insurance, even after the mandate is gone.
The new tax developments are especially pertinent to your business-owning clients. With the possible 20% income tax deduction for pass-through entities, they’ll want to review entity selection for their business operations as soon as possible. Now is also the time to consider gifting of interests to reduce the limitations inherent in the qualifying business income calculation and to utilize the increased gift tax exemption.
For clients with “specified service businesses,” such as attorneys, doctors, dentists, and consultants, it makes sense to consider separating any “non-service” businesses out of their service business, such as real estate or clerical activity. Utilizing multiple trusts may also help to facilitate business-owner clients achieve a larger QBI (qualifying business income) deduction.
Planning Goes Beyond Taxes Too
The implications of the TCJA go much further than taxes alone. Your clients will always need extensive guidance around asset protection, privacy, retaining control, avoiding issues like guardianship and probate, and ensuring that their loved ones are cared for for years to come. These aspects of financial and estate planning are constant regardless of fluctuations of tax reform. Clients who haven’t considered these issues should discuss them with an estate planning attorney as soon as possible.
These are sophisticated, complex, and multi-faceted planning strategies. For the right client, they can save tens of thousands of income tax. But they can cost dearly if implemented incorrectly. For this reason, collaboration with us and the rest of your clients’ financial team is increasingly indispensable for success. Help your clients plan for whatever comes next with the guidance of a well-rounded advisory team.
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Important Estate Planning Tips You Should Act on Now
Like all things, tax laws are constantly changing. Together, we need to respond quickly and strategically to the new developments in the tax law landscape. While you shouldn’t wait to review your estate plan in light of the passing of the Tax Cuts and Jobs Act (TCJA), making a knee-jerk reaction is rarely the best course of action, either.
The best decisions are made when we carefully analyze all angles of your estate to come up with the best strategy for you and your family. The law’s benefits will accrue most for those who take a proactive approach rather than those who wait until the last minute. Here are several reasons the tax changes need to be top-of-mind:
The increase in the standard deduction and reduction in individual tax rates means that you may now be taking home more of your weekly/month pay. Taking some of this money and investing it into your future may be a great action to take.
The elimination of the personal exemption means that depending upon your marital status and number of dependants, you may not be able to lower your taxable income as much as you had in the past. For some people, this might mean a higher tax bill, in spite of the decreased individual rates.
The limitations on deductions for state and local income taxes (SALT) means that for those in states or communities with high income taxes, your taxable income may not be reduced as much as it had been in past because you won’t be able to get credit for all of the other forms of income tax you have paid. However, if this is a concern for you, we may have some strategies (such as an Incomplete Non-Grantor Trusts) to help alleviate the new tax burden.
With the increase in the unified credit to $10,000,000, indexed for inflation, there has been a reduction in the overall number of estates affected by the estate tax. If you had previous planning centered around saving estate tax, we need to re-evaluate to make sure that the plan still works for your long term objectives now that estate tax may not be a concern. You may also want to take advantage of the increase by making lifetime gifts, especially if you had previously used up your exemption in previous years.
With the effective repeal of the individual mandate of the Affordable Care Act effective in 2019, you will now have the choice of whether or not to carry health insurance coverage without suffering the penalty of a fine. However, with no requirement for coverage, it is speculated that the cost of insurance in the marketplace could increase without the additional participants. As open enrollment occurs this fall, consider how you would cover medical expenses as you make coverage decisions.
The new tax developments are especially pertinent to you if you’re a business owner. With the possible 20% income tax deduction for pass-through entities, you’ll want to review entity selection for your business operations as soon as possible. Now is also the time to consider gifting of interests to reduce the limitations inherent in the qualifying business income calculation and to utilize the increased gift tax exemption.
If you have a “specified service business” as an attorney, doctor, dentist, or consultant, it may make sense to separate any “non-service” businesses out of your service business, such as real estate or clerical activity. Utilizing multiple trusts may also help you achieve a larger QBI (qualifying business income) deduction.
Don’t Just Think About Taxes!
The implications of the TCJA go much further than taxes alone. You will always need an estate plan that takes a thoughtful approach to asset protection, privacy, retaining control, avoiding issues like guardianship and probate, and ensuring that your loved ones are cared for in years to come. These aspects of estate and financial planning are constant regardless of fluctuations of tax reform.
Collaboration will us, as your estate planners, is critical for long-term success. We’re ready to help you plan for whatever comes next. Give us a call to set up a chat today about how we can fully protect you and your family.
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How You Can Keep Claims From Threatening Their Property
Most of us do not expect to be sued. However, lawsuits are filed every day the courthouses are open. If your clients’ estate plans don’t include adequate asset protection, they could end up losing a substantial amount of their wealth in the event of a claim – even a “frivolous” one.
It’s well worth talking to your clients about what asset protection strategies their current plan includes. Many existing plans may need a revamp, while other clients will need to implement a new plan entirely. Shielding their assets and property against legal claims takes sophisticated planning and teamwork. We’re here to help you develop a tailored asset protection strategy for each of your clients.
Several issues and strategies merit examination in your asset protection conversation with your clients.
Domestic Asset Protection Trust (DAPT): DAPTs can protect your clients from a legal claim that may arise in the future by allowing them to place their assets into a special trust that protects them from the reach of a creditor. DAPTs aren’t available in every state, and the most popular states for DAPTs are Alaska, Delaware, Nevada, and Wyoming. DAPTs are a sophisticated strategy that’s not right for everyone. But, for the right clients, they are a potent tool for protecting assets. Like any sophisticated legal and financial strategy, it’s best to work with a team.
Planning Tip: Another option is an offshore asset protection trust established under foreign laws. However, placing your clients’ assets out of the U.S. adds significant tax reporting burdens. Also, court orders for asset repatriation can lead to a client being held in contempt of court. Because of the ongoing tax compliance, fiduciary fees, and overall complexity of these foreign trusts, offshore planning is usually not a great option for most clients.
Lifetime Trusts: Lifetime trusts protect your clients’ beneficiaries’ inheritances. Think of this tactic as asset protection for the next generation. Although it does not provide any asset protection benefit for your current clients, these trusts can secure the financial well-being of their children after they’re gone. Additionally, assets left in lifetime trusts need long-term management, providing you a valuable opportunity to be introduced to and work with the next generation.
Inheritor’s Trusts: Inheritor’s trusts are an excellent choice for clients who expect to receive an inheritance. Rather than acquire assets outright or through a less-than-ideal trust set up by their family (usually parents or grandparents), your clients can strategically secure their inheritances with this type of trust. These trusts work best when they are coordinated with the client’s overall plan. Any client – especially well-off ones – expecting a large inheritance should consider this option.
Risk Management Planning: Setting up a corporation, LLC, limited partnership, buying appropriate insurance, negotiating contracts effectively, using retirement plans and other exempt accounts, and other strategies are all part of what we could call risk management planning. Some of these may be built into your clients’ estate plan while others may be part of your client’s business plans. Many clients have not taken the time to develop a risk management strategy fully, but it is well worth the effort since many of these strategies are “low hanging” fruit, especially compared to more sophisticated strategies like DAPTs.
No matter what kind of asset protection strategies you help your clients implement, make sure they don’t sleep on it. Planning of this type should not be delayed or neglected. Effective strategies like these only protect your clients when they’re put into place early enough — well ahead of a lawsuit, credit claim, or bankruptcy. For clients who have already implemented one or more strategies, it is also a great time to review and ensure the plan will work as expected. Many trusts – even “irrevocable” ones – can be modernized (and their benefits possibly enhanced) using tools like a modification or decanting. Of course, the traditional concerns of estate planning, such as client privacy, freedom to determine who will be in charge of their assets, and reduction of income and estate taxes, must be addressed. Asset protection lets you improve your value to clients by enhancing client control over their property.
Planning tip: The Tax Cuts and Jobs Act of 2017 also impacts your clients’ asset protection needs. Far fewer individuals and married couples will have to pay inheritance taxes because of it. However, it also means that lawsuits — even “frivolous” ones — can still spell trouble for your clients. Bankruptcy and divorce can also come into play here, so protective planning to protect and preserve assets is extremely important, even as estate taxes have receded in importance.
We’re here to help you and your clients.
Your clients trust that you have the expertise to guide them toward their financial goals, and that often means pulling an estate planner into the conversation as part of their team of experts. Give us a call today to chat about how we can build asset protection into your clients’ plans.
