Life insurance is often one of the most important parts of an estate plan. People usually purchase life insurance to prevent their spouse, children, or other dependents from suffering financial hardship if they die unexpectedly.
You may think that all you need to do is simply write in the name of the person you would like to receive the proceeds from your life insurance policy on the beneficiary designation section of your paperwork and forget about it. However, there are several important factors you should consider first.
Consider Naming a Trust as the Beneficiary
Many people designate the person they would like to benefit as a direct beneficiary of their life insurance policy. If you want to provide funds for your spouse’s retirement, it may make sense to name him or her as the primary beneficiary. However, depending upon your particular circumstances, goals, and who you are trying to protect, it may be more prudent to name a trust as the beneficiary. For certain individuals, it will be more beneficial if the life insurance proceeds are distributed according to the terms you have established in your trust rather than having a large cash payment made directly to them.
Minor children. Life insurance companies will not pay death benefits to children under the age of 18 (or the age of majority in your particular state). As a result, if you name your child as a primary beneficiary, but die when your child is still a minor, a court-appointed guardian, who may or may not be someone you would have chosen, will likely be put in charge of managing the payout of the insurance proceeds for your child’s benefit. The proceeds may not be managed in the way you would have chosen. In addition, any remaining proceeds will likely go directly into their pockets when your child becomes a legal adult–whether they are mature enough to handle such a windfall. This can be avoided if a trust is named as the primary beneficiary of the life insurance policy, with your child as a beneficiary of the trust. Then, the life insurance proceeds will be managed by the person you have chosen as the trustee and will be distributed to your child according to your wishes.
Some people may also mistakenly designate the child’s caretaker as the primary beneficiary to avoid the appointment of a guardian. However, this does not guarantee that the funds will actually be used for the child’s benefit, and the proceeds are vulnerable to claims made by the caretaker’s creditors. These problems can be avoided by designating a trust as the primary beneficiary and naming someone you trust as the trustee of that trust.
Recipients of government benefits. Although your intentions may be good, naming someone who is receiving need-based government benefits as a primary beneficiary of your life insurance policy may cause them to lose their eligibility for those benefits. A special needs trust can be created and named as the primary beneficiary of your life insurance policy. In that way, the insurance proceeds will be managed and distributed in a manner that will not compromise the government benefits, but will instead supplement them.
Beneficiaries who may be spendthrifts. If you are concerned that the potential beneficiary of your insurance proceeds is not financially responsible, making them a primary beneficiary may be asking for trouble. The proceeds could quickly be squandered. If you make a trust the primary beneficiary of your life insurance policy, and name the individual as the beneficiary of the trust, you can establish specific conditions for distributions to that person, for example, that the distributions must only be for health, maintenance, or educational purposes.
Think About Asset Protection
Designating a trust as the direct beneficiary of your life insurance policy can also protect its cash value and death benefit from creditors’ claims.
Protection against your creditors. All 50 states and the District of Columbia have statutes that protect the death benefit or cash value of life insurance, and sometimes both, from you and your estate’s creditor claims. In some states, however, the exemptions for cash value life insurance are limited to a specific dollar amount or to the amount reasonably necessary to support a beneficiary. In addition, although typically the death proceeds of the life insurance policy are never available to your creditors because they pass to your beneficiaries without ever becoming part of your estate, some states have laws that limit the exemption only to certain beneficiaries, such as a spouse, children, or other dependents. Designating a special trust called an irrevocable life insurance trust (ILIT) as the primary beneficiary of your policy can be a strategy to protect proceeds that are outside the scope of the statutory exemption.
In addition, keep in mind that it is essential that you actually name a beneficiary or beneficiaries for your life insurance policy, because if you do not and leave this designation blank, the proceeds of the life insurance policy will be payable to your estate by default. Because your estate is responsible for paying off your debts, the life insurance proceeds may be available to satisfy your creditors’ claims, and the individuals you want to benefit may never see a penny of it. On the other hand, you may choose to do this intentionally, to ensure that your estate has sufficient funds to pay off your debts. If your main goal is to provide for the needs of your family, however, you need to name them or a trust created for their benefit as the beneficiary of the policy.
Protection against your loved ones’ creditors. If your spouse is the primary beneficiary of your life insurance policy, the proceeds typically cannot be reached by your individual creditors. However, if your spouse has joint debts or obligations with you, for example, if he or she co-signed a mortgage loan, credit card, or personal loan with you, the proceeds may be available to creditors to satisfy those obligations, depending upon state law.
Also, it is important to keep in mind that although state law provides that the proceeds of your life insurance policy are exempt (at least partially) from your creditors, once those proceeds are in the hands of your direct beneficiaries, they typically are within the reach of their creditors. Even if your children or other loved ones do not currently have any creditors, they may eventually face lawsuits, bankruptcy, or divorce. If they are primary beneficiaries of your life insurance policy, the death benefit you intended for them to receive may be exposed to claims from those creditors.
An ILIT or other trust can also protect the death benefit through the inclusion of a “spendthrift trust” provision that prohibits trust beneficiaries from pledging the trust assets, including life insurance proceeds, as collateral. Their creditors are then only able to reach any distributions made to them from the trust.
Seek Advice About the Amount Your Beneficiaries Will Need
Seek the counsel of your financial advisor to determine the amount of life insurance benefits your loved ones will need for a financially secure future. Many factors should be taken into account, including your current income, other insurance policies, savings and investments, possible college and other future expenses, your total debt, including your mortgage, as well as the number of individuals who are financially dependent on you. It is important to establish a secure safety net, as well as provide financial stability during the transition period after your death, particularly if you are the primary breadwinner, and your spouse is the main caregiver for your children but will need to return to the workforce.
We Can Help
It is important to check with us, as well as your financial advisor, to make sure that you have covered all the bases when it comes to life insurance policies and beneficiary designations. We can help you decide how to best protect your loved ones if you pass away by carefully considering who you should name as your beneficiaries, including whether it would be advantageous for a trust to be the primary beneficiary, and how much insurance to acquire. If you already have a life insurance policy, we can also provide guidance as you review and update your beneficiary designations. We look forward to helping you gain peace of mind by ensuring the financial security of your family.
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Modern Uses for Life Insurance Trusts
Since the enactment of the Tax Cut and Jobs Act of 2017, the utility of the irrevocable life insurance trust (ILIT) has been in question. The substantial increase in the federal estate tax exemption–$11.4 million for an individual and $22.8 million for a married couple in 2019—greatly reduced the need for estate planning aimed at lessening federal estate tax liability or offsetting estate taxes for many clients. As a result, your clients may be wondering if an ILIT is necessary.
An ILIT Can Still Be a Helpful Planning Tool
Depending upon the particular goals and circumstances of your clients, an ILIT can still be a useful planning tool. As a financial advisor, you can enhance your relationships with your clients by helping them to reassess their goals for both the present and the future, providing valuable guidance about how the ILIT may be able to meet their estate and financial planning needs. There are several factors that you should discuss with your clients:
Rapidly appreciating assets. Particularly for clients with a higher net worth whose current estates are valued below the federal estate tax exemption, it is important to examine the current composition of their estate to determine if it includes assets that are likely to appreciate rapidly, potentially pushing the value of the estate over the federal estate tax exemption. Even if there is currently no estate tax liability, an ILIT may be needed if the estate includes an interest in a successful and growing business, real estate in a location with increasing property values, or other rapidly appreciating assets that may soon be at risk of generating an estate tax liability.
State estate taxes. In 2019, 12 states and the District of Columbia have their own estate taxes (with maximum rates varying from 12 to 20 percent) with exclusion amounts ranging from $1 million in Massachusetts to $5.7 million in Maine. As of 2019, New York has increased its exclusion amount to match the federal exemption of $11.4 million. Although New Jersey repealed its estate tax in 2018, political prognosticators are predicting that it will be reinstated in the future. Obviously, for clients living in those areas, an ILIT may still be a useful tool for mitigating or eliminating state estate tax liability.
Sunset of the current estate tax exemption. It is important to remind your clients that the current federal estate tax exemption is not permanent. It may revert to the 2017 level of $5 million (adjusted for inflation) in 2026, only seven years from now. Many clients who needed an ILIT prior to tax reform are likely to need it again if Congress does not act to extend the current exemption amounts or make them permanent. Discuss these possibilities with your clients and help them assess the exemption level they would feel comfortable planning for in their estate plan.
Protection against your client’s creditors. All 50 states and the District of Columbia have statutes that protect the death benefit or cash value of life insurance, and sometimes both, from creditors’ claims. In some states, however, the exemptions are limited to a specific dollar amount or to the amount reasonably necessary to support the beneficiary. In addition, although typically, the proceeds of the life insurance policy are never available to your client’s creditors because they pass to their beneficiaries without ever becoming part of their estate, some states have laws that limit the exemption only to certain beneficiaries, such as a spouse, children, or other dependents. Designating an ILIT as the direct beneficiary of their policy can be a strategy to protect proceeds that are outside the scope of the statutory exemption.
Protection against creditors of your client’s loved ones. Although state law provides that the proceeds of life insurance policies are exempt (at least partially) from your client’s creditors, once those proceeds are in the hands of your client’s direct beneficiaries, they typically are within the reach of their creditors. Even if their children or other loved ones do not currently have any creditors, they may eventually face lawsuits, bankruptcy, or divorce. If they are direct beneficiaries of your client’s life insurance policy, the death benefit your client intended for them to receive may be exposed to claims from those creditors. As a result, designating an ILIT, rather than an individual, as the beneficiary of your client’s life insurance policy may be a good option. If the trust is the owner of the proceeds, the creditors of the beneficiaries will not be able to reach the death benefit to satisfy their debts. An ILIT can also protect the death benefit through the inclusion of a “spendthrift trust” provision that prohibits trust beneficiaries from pledging the life insurance proceeds, which are an asset of the trust, as collateral. Their creditors are then only able to reach any distributions made to them from the trust.
Liquidity. If your client has assets that are difficult to divide, for example, a business interest or the family home, a life insurance policy can provide liquidity that can be used to equalize an inheritance by providing cash to one or more children. Consequently, children who are not interested in the business will still receive an inheritance, and the family home will not need to be sold so the proceeds from the sale can be divided among the children. An ILIT is a good option under these circumstances because the insurance policy is beyond the reach of creditors.
What If the ILIT Is No Longer Needed?
If your client currently has an ILIT that was created primarily as a means of avoiding estate tax liability, and none of the factors mentioned above are major concerns, there are several strategies your client, as the grantor of an ILIT, could use to extricate life insurance from an ILIT now viewed as unnecessary. For example, your client could substitute cash of equivalent value for the life insurance policy in the ILIT or buy the policy back. Alternatively, the life insurance policy could simply be allowed to lapse by no longer providing funds for the premium payments, leaving the ILIT without any assets to manage. Policies that have cash value could be surrendered or sold in a life settlement transaction, and if the trustee has the discretion to do so, the cash could be distributed to the beneficiaries of the ILIT. It is also possible that the ILIT could be terminated pursuant to its own terms, with the consent of both the grantor and the beneficiaries, or through a court order requested by the beneficiaries.
We Are Here to Help
The best estate plans are the product of a team effort. We can help you and your clients consider all the relevant factors to determine whether an ILIT will be beneficial for them and their loved ones. We look forward to collaborating with you to design the optimal estate plan for your client’s individual circumstances. Please give us a call today to learn more about how we can help.
Income Tax Strategies to Move Your Clients Forward
The 2019 estate tax exemption is $11.4 million per person, up from $11.2 million per person in 2018. According to the Tax Policy Center, only 4,000 estate tax returns were filed this year, with only 1,900 of those returns owing tax. Some industry experts estimate that less than one percent of all estates are taxable. Put another way, over 99 percent of all estates are exempt from estate tax. With the likelihood of clients having a taxable estate being relatively low right now (this is subject to change, of course), it only makes sense that clients focus on income tax planning. As a trusted advisor, you hold a crucial role in ensuring that our clients receive the best comprehensive strategy.
Basics of Income Tax
What is the income tax?
Income tax is a tax paid on an individual or entity’s income that meets certain requirements.
Taxable income can be broken into two types. Earned income includes financial gains such as wages, tips, a salary, or bonuses. It also includes other monetary gains unrelated to a job, such as gifts, lottery winnings, alimony (if your divorce agreement was executed before 2019), etc. Unearned income, by contrast, includes income from interest, rent, dividends, or other sources.
How much is taxed?
We have a progressive federal tax system. This means that people earning less each year than a certain federally set limit pay less tax, and people earning six figures or more annually pay a higher tax rate.
What are the current rates?
The 2019 rates for single filers start as low as 10% for the lowest income tax bracket (up to $9,525).
Those earning $9,526 to $38,700 can expect to pay 12%.
For people in the $38,701 to $82,500 income bracket, the rate is 22%.
Those reporting income of $82,501 to $157,500 will pay 24%.
In the $157,501 to $200,000 bracket, the tax is 32%.
In the range of $200,001 to $500,000 earnings, taxpayers will be charged 35%.
For the highest income bracket, $500,001 and up, the current tax rate is 37%.
Setting Goals
As the professional your client has trusted with their financial future, your goal is simple: to help them pay the least amount of income tax possible, or even to avoid it entirely. This goal can be extrapolated to help your clients pass assets to intended beneficiaries in the most tax-advantageous manner.
During your routine client meetings, you have probably covered the basics of estate planning, such as wills, trusts, and gifting using the annual exclusion amount ($15,000 for 2019). However, these measures have no immediate negative income tax impact. For those clients with income tax concerns, we need to move beyond the basics and into more advanced planning techniques, a few of which are discussed below.
Basis Planning
If a client has low basis assets (i.e. assets that have significantly appreciated since their original purchase or acquisition date), planning for the ultimate cost basis of such assets at the client’s death is an important and often overlooked tax-saving strategy. In fact, gifting assets during a client’s lifetime can result in a loss of the stepped-up basis that would have otherwise occurred at their death. Married couples living in community property states benefit from a double step-up in basis upon the first death, resulting in lower tax liability for the surviving spouse.
Charitable Remainder Trust
If your client is charitably inclined, another option is charitable planned giving. By using a Charitable Remainder Trust (CRT), the grantor retains or names non-charitable beneficiaries to receive an annual income stream (as either an annuity or unitrust amount), and at the end of the term (which can be a single life, joint lives, or multiple lives), the remainder goes to the designated charity. When the grantor funds the CRT, he will be allowed to take a charitable deduction on his income tax return (with certain limits). There will also be no capital gains due when the appreciated property is transferred to the trust or when the trust sells the asset in order to have the liquidity to make the annual payments to the beneficiary. Funding a CRT with highly appreciated assets is, therefore, a great planning strategy.
When annual distributions are made from the trust, the current beneficiary will be subject to income tax.
Charitable Lead Trusts
The Charitable Lead Trust (CLT) can be a valuable option as well. A CLT is funded with income-producing assets that have been ultimately earmarked for heirs. Upon the funding of the trust, the grantor may be entitled to an immediate income tax deduction for the charitable contribution. The amount of the deduction will be based on amount ultimately given to the charity and the interest rates at the time. With this type of trust, the charity is the current beneficiary and gets a stream of annual payments (as either an annuity or a unitrust) for a set period of time. At termination of the CLT, the trust assets pass to the heirs, free of any transfer tax on appreciation realized after the date the trust was created, but only as long as the rate of return on the assets exceeds the Applicable Federal Rate (AFR) that was in effect when the CLT was first established.
The taxable gift to the heirs is calculated in the year the CLT is created if the stream of payments is an annuity. If the CLT is a unitrust, it’s calculated at the termination of the CLT.
A CLT is not exempt from income tax, because the ultimate beneficiary of the trust is not a charity. However, this can be a very beneficial strategy for a client who has a substantial amount of income in one year. All taxable income earned by the trust in future years will then be taxed to the grantor, saving your client money.
Don’t Hesitate to Reach Out
With estate tax exposure being a concern for so few clients, income tax needs to be our next priority. Familiarizing yourself with the above strategies will help you advise your clients and assist in creating the most comprehensive and tax-efficient estate plans for your clients. Never hesitate to reach out and collaborate with us on powerful advanced planning techniques that can really make a difference for your clients.
When Is It Critical to Review Your Estate Plan, and Why?
Just like other important life tasks, your estate plan deserves your time and attention. It’s important that you work with us to review your estate plan at least once a year. Think of this as your estate plan’s annual physical exam, and remember—prevention is the best cure.
An annual exam isn’t necessarily the only time we see a doctor. Similarly, an annual planning meeting isn’t the only time you need to consider your estate plan. The occurrence of special life events may mean it is time to pick up the phone and call us.
If you experience any of these significant life events, get in touch with us, and we’ll make sure you are up to date.
Marriage
Have you recently gotten married? Congratulations! Marriage means new ways of sharing and managing finances and assets. As a result, this is an important time to revisit your estate plan. With this life change, you’ll need to contact us to make any changes to your beneficiary designations, update your will/trust, and update your powers of attorney. This is especially important if this is a second marriage and/or there are children from a previous relationship involved. Proper estate planning is the only way to ensure that you are protecting your loved ones the way you want.
New Job
A new job presents an exciting new set of challenges and opportunities to explore. It also brings very real financial changes. You may be receiving new benefits that require new beneficiary designations on your estate plan. When you are filling out these new forms, it is important that the beneficiaries are named appropriately so your estate plan will work as designed. In addition, you’ll need to make sure your estate plan reflects the change to your financial status, whether that’s a pay increase or a pay cut.
Loss of a Job
Similarly, leaving employment brings big changes to your financial situation and to your estate plan. It’s important to update your plan to reflect the loss of employer-provided benefits such as life insurance, as well as the change in financial status.
Retirement
Welcome to your golden years! Retirement brings lifestyle changes, more time for loved ones, and important financial developments. Your estate planner can help you change your plan to reflect that you’ve stopped earning income and have entered the phase where you will be beginning to use your retirement account. Also, with this new-found freedom, you may find yourself traveling more, making documents such as a Financial Power of Attorney and Health Care Power of Attorney more crucial.
Moved
If you have moved across state lines, you’ll need to consult with a local estate planning attorney to make sure that the provisions in your estate planning document are still applicable in your new state. A new home is a new asset, and it is important that this asset is titled appropriately to carry out your overall estate plan.
Divorce
Divorce is, of course, a difficult time. But it is critical to look out for your financial health and future if it occurs. You should make any needed updates to the beneficiaries on your estate plan and ensure your beneficiary designations on any life insurance or retirement accounts are changed so that your ex-spouse does not end up with your assets upon your passing.
Death
There is so much to take care of after the loss of a loved one. Take some time, but don’t forget that your estate plan will need to be updated to reflect the change that has taken place. You may need to remove the deceased loved one as a beneficiary from any will, trust, life insurance policy, or retirement account and determine what will now happen to that share. It is also important to verify that your deceased loved one was not appointed as a fiduciary, or if so, to make the necessary adjustments to your documents.
Received Inheritance
The death of a loved one not only brings a loss but may result in an inheritance. An inheritance can mean property, money, real estate, and more. An increase in assets may necessitate a change in your estate planning strategy. Also, depending on the form of the inheritance you’ve received, there may be additional asset management or asset protection concerns that your estate planner will need to address with you.
Birth or Adoption
Welcoming a new child to the family is an unforgettable time. You may feel inspired to look toward the future, and you should! This is a great time to plan to provide for your new family member’s future. Due to the new arrival’s young age, it is important to consider how you would like to provide for the child and who is going to be in charge of handling the assets while he or she is a minor.
We’d Be Honored to Help
Whatever life brings you, we are here to help you weather the storms and celebrate the milestones. We’d be honored to help you ensure your estate plan is up to date to reflect these life changes. Give us a call today!
Niche Trusts: As Unique as You Are
You’re not a carbon copy of your neighbor. Likewise, your estate plan shouldn’t be a carbon copy of theirs.
A qualified estate planning team’s approach to counseling will be tailored to your specific needs. As your team works together to produce, tailor, or edit your estate plan, one key tool to consider is the niche trust.
What is a trust?
Usually when we speak about a trust, we mean an “express trust.” An express trust is a three way relationship between the grantor, the beneficiary or beneficiaries, and the third party, or trustee. The grantor has assets he or she wishes to distribute in a specified way to the beneficiary, and the trustee holds those assets on behalf of the beneficiary.
Your assets, financial needs, and wishes are particular to you, so your attorney’s use of trusts needs to be a nuanced strategy. Enter the niche trust. These trusts are designed for very special situations and fulfill certain particular needs. Your attorney can help you decide which of them may be right for you.
Health and Education Exclusions Trust (HEET)
This trust is tailored to help you avoid paying gift tax on tuition and medical care expenses for individuals two or more generations younger than you (grandchildren, great-grandchildren, etc.). Tuition payments made from a HEET Trust directly to an educational institution on behalf of one of these beneficiaries are not subject to gift tax. Similarly, payments made directly to a medical care provider that are not reimbursed by the donee’s insurance are not subject to gift tax. However, in order to qualify for these benefits, at least one beneficiary of the trust must be a charitable organization.
These payments, if made on behalf of a “skipped person” from a non-Generation Skipping Transfer Tax (GSTT)-exempt trust are not considered GSTT transfers. This is a great option if you have already used your GST exemption.
Pet Trust
This trust can either stand alone or be part of a revocable living trust. Pet trusts are used to provide for the care of pets after you pass or during any period of incapacity, and to appoint someone to care for them. A pet trust also nominates someone to handle disbursement of funds to cover pet care.
Gun Trust
A gun trust is used to pass firearms to heirs in compliance with state and federal regulations and outside of probate. Due to the regulations and penalties for violating state and federal firearms regulations, it is crucial that you work with a qualified estate planning attorney when planning for the distribution of firearms.
Incentive Trust
With an incentive trust, assets are held for the benefit of a beneficiary who must meet certain requirements before a distribution will be made. These trusts are put in place by you, the grantor, and certain requirements defined by you must be met prior to the distribution of any of the principal or income. For example, you could stipulate the funds be distributed:
Only when the beneficiary has graduated from college.
Only if a beneficiary abstains from illegal drug use.
While being able to put stipulations on a beneficiary’s inheritance may sound appealing, it is important to note that conditions for the disbursement of assets cannot be illegal or against public policy.
Gifting Trust
Using either the annual gift tax exclusion or lifetime gift tax exemption, a gifting trust holds and invests property for the benefit of family members. This can be a great strategy for transferring family wealth to someone in a lower income bracket.
If you want to use the annual gift tax exclusion to shelter gifts to the trust for gift tax purposes, you will need to include a Crummey power. A Crummey power is a technique that allows a person (beneficiary of the trust) to receive a gift that would not usually be eligible for gift tax exclusions, and makes that gift eligible. To accomplish this, after each annual gift is made, the beneficiary will be given the opportunity to withdraw the amount. However, in most cases, the beneficiary will leave the money so as to ensure you will keep making the annual gifts according to the original plan. Because gifts can be made annually, you can stop at any time.
Supplemental Needs Trust (3rd Party)
In a supplemental needs trust, assets are set aside for the benefit of a beneficiary whose disabilities may allow that person to receive public assistance for medical and other care expenses. In order to guarantee your beneficiary will not lose government benefits or fail to qualify for those for which they would otherwise be eligible, it is important to consult with an experienced estate planning attorney.
Standalone Retirement Trust
This trust is designed to receive “qualified retirement accounts” like IRAs and 401(k)s. Standalone retirement trusts can be set up as either revocable or irrevocable, and provide additional protections for the inherited retirement account. While the future of the lifetime “stretch” for non-spouse beneficiaries is still in question, this type of trust is still a great alternative to allowing a beneficiary to immediately cash out an inherited retirement account. This can be an important consideration when planning for retirement if you anticipate having a large sum remaining upon your death.
Qualified Personal Residence Trust (QPRT)
With a QPRT, a personal residence is the main asset of the trust. You keep the right to live in the home for a specified number of years, and after that term ends, the home is transferred to your named beneficiaries. This means if you survive the term of the trust, you must move out or begin paying rent to the trust in order to remain living there. This type of trust can reduce the burden of gift tax that will be incurred when the residence is transferred to the named beneficiary.
We Are Here to Help
All of these trusts are tools in building a comprehensive, personalized estate plan that will make your estate’s future a bright one. Estate planning must be a collaboration, taking into account your wants and needs and drawing on the expertise of planners and attorneys. Don’t hesitate to reach out today to work with us. Together, we can make your estate plan dreams a reality.
Niche Trusts: A Chance to Collaborate
If there’s one thing we can all agree on, it is that each client is unique.
Likewise, our approach to counseling these clients should be tailored to each one’s specific needs.
Let’s work together to develop special plans that fit each client’s special circumstances.
One key tool to consider is the niche trust.
Usually, when we speak about a trust, we mean an “express trust.” An express trust is a three-way relationship between the grantor, the beneficiary or beneficiaries, and the third party, or trustee. The grantor has assets he or she wishes to distribute in a specified way to the beneficiary, and the trustee holds those assets on behalf of the beneficiary.
The assets, financial needs, and wishes of each client are particular to that person, so the use of trusts needs to be part of a nuanced strategy. Enter the niche trust. These trusts are designed for very special situations and fulfill particular needs. It’s important to be informed about the types of trusts that are available to use as tools. Let’s explore some of them here.
Health and Education Exclusions Trust (HEET)
This trust is tailored to help clients avoid paying gift tax on tuition and medical care expenses for individuals two or more generations younger than the client. Tuition payments made directly to an educational institution on behalf of one of these beneficiaries are not subject to gift tax. Similarly, payments made directly to a medical care provider that are not reimbursed by the donee’s insurance are also not subject to gift tax. However, in order to qualify for these benefits, at least one beneficiary of the trust must be a charitable organization.
These payments, if made on behalf of a “skipped person” from a non-Generation Skipping Transfer Tax (GSTT)-exempt trust are not considered GSTT transfers.
TIP: This is a great option if your client has already used their GST exemption.
Pet Trust
This trust can either stand alone or be part of a revocable living trust. It is used to provide for the care of pets after the grantor passes or during his or her incapacity, and to appoint someone to care for them. A pet trust also nominates someone to handle the disbursement of funds to cover pet care.
Gun Trust
A gun trust is used to pass firearms to heirs in compliance with state and federal regulations outside of probate.
TIP: Due to the punishment for violating state and federal firearms regulations, it is crucial to seek the assistance of a qualified estate planning attorney when planning for the distribution of firearms.
Incentive Trust
With an incentive trust, assets are held for the benefit of a beneficiary who must meet certain requirements before a distribution will be made. The requirements are put in place by the grantor and must be met prior to the distribution of any of the principal or income. For example, a grantor could stipulate the funds be distributed:
Only when the beneficiary has graduated from college.
Only if a beneficiary abstains from illegal drug use.
While some clients may like the idea of being able to put stipulations on a beneficiary’s inheritance, it is important to note that conditions for the disbursement of assets cannot be illegal or against public policy.
Gifting Trust
Using either the annual gift tax exclusion or the grantor’s lifetime gift tax exemption, a gifting trust holds and invests property for the benefit of family members. This can be a great strategy for transferring family wealth from an individual in a high income tax bracket to a lower one.
TIP: If you want to use the annual gift tax exclusion to shelter gifts to the trust for gift tax, you will need to include a Crummey power. A Crummey power is a technique that allows a person (beneficiary of the trust) to receive a gift that would not usually be eligible for gift tax exclusions, and makes that gift eligible. To accomplish this, after each annual gift is made, the beneficiary will be given the opportunity to withdraw the amount. However, in most cases, the beneficiary will leave the money in trust, so as to ensure the grantor will keep making the annual gifts according to the original plan. Because gifts can be made annually, the grantor can stop at any time.
Supplemental Needs Trust (3rd Party)
In a supplemental needs trust, assets are set aside for the benefit of a beneficiary whose disabilities may allow that person to receive public assistance for medical and other care expenses. In order to guarantee that the beneficiary will not lose government benefits or fail to qualify for those they would otherwise be eligible for, it is important to consult an experienced estate planning attorney.
Standalone Retirement Trust
This trust is designed to receive “qualified retirement accounts” like IRAs and 401(k)s. It can be set up as either revocable or irrevocable, and provides additional protections for the inherited retirement account. While the future of the lifetime “stretch” for non-spouse beneficiaries is still in the balance, this type of trust is still a great alternative to allowing a beneficiary to immediately cash out an inherited retirement account. This can be an important consideration when planning for retirement. If it is anticipated that a large sum will be left over in the account upon the passing of a client, planning needs to be done to address this.
Qualified Personal Residence Trust (QPRT)
With a QPRT, a personal residence is the main asset of the trust. The grantor keeps the right to live in the home for a specified number of years, and after that term ends, the home is transferred to the beneficiaries. This means if the grantor survives the term of the trust, the grantor must move out or begin paying rent to the trust in order to continue living there.
This can reduce the burden of gift tax that will be incurred when the residence is transferred to the beneficiary.
Let’s Work Together
All of these trusts are tools in building a comprehensive, personalized estate plan that will make your client happy. The important thing to keep in mind is that estate planning must be a collaboration, taking into account the wants and needs of the client and drawing on the expertise of planners and attorneys. The result will be a robust and individualized plan that will not let your client down. Don’t hesitate to reach out today to work with us.
Your Vacation Checklist
You’ve packed sunblock and a beach novel. You’ve planned your itinerary and bought plane tickets. But have you ensured that your estate plan is up to date?
Don’t leave home without making sure your financial health and the future of your loved ones is provided for. It’s even more crucial than getting a pet sitter and locking the front door.
Creating an Estate Plan
If you don’t have an estate plan yet, don’t panic. Now is a great time to connect with a qualified estate planning attorney who can sit down with you and get you started with an appropriate plan for your financial future.
Here are some questions to begin the process:
Do you have a will? An attorney can help you create an accurate and intentional will if you do not already have one.
Have you considered using a trust? Trusts have considerable benefits, from keeping assets safe from creditors to dividing an estate equally without worrying about the status of individual assets.
Are your children protected? An attorney can help you designate a guardian to care for your minor child in the event you are unable to. An attorney can also help you name an adult who will manage your minor child’s inherited property if you pass away. These may or may not be the same people.
Have you considered life insurance? If you anticipate leaving behind significant debt or hefty estate taxes, or if you have small children, you may want to consider a life insurance policy. Knowing your dependents are provided for will give you peace of mind.
Is your business protected? If you own a business, have you named a proxy to manage your interest if you cannot? Do you have a business succession plan? If you co-own a business, have you drawn up a buyout agreement? An attorney can help with that as well.
Pour-Over Wills: A Useful Tool
Considering a trust-based estate plan? It’s a great way to ensure that your assets are divided and protected in exactly the way you want. It can also help your beneficiaries avoid the expensive and lengthy process of probate, when an estate must be organized and distributed through a probate court. But as you may know, gathering the needed documents may be time-consuming.
If you need to complete an estate plan before leaving on a vacation and are unable to fully fund your trust, you may want to consider using a pour-over will in the interim.
A pour-over will stipulates that all assets that have not yet been funded into your trust will be put there when you pass away. Your trust becomes the beneficiary of any assets that you may not have had time to transfer there. In a crunch, it can serve as a stop-gap measure while your trust-based plan is being funded.
Trust, but Verify
Have you already created an estate plan? That’s great! It’s still important to verify that all provisions made in the estate plan are exactly as you want them.
Here are some items to confirm before leaving town:
Are your assets accurately inventoried? Have you left out any important assets or neglected to report changes?
Are your beneficiary designations accurate? Are your assets going where you would like them to?
When was the last time you reviewed your selection of fiduciaries? Being named as someone’s Personal Representative, Successor Trustee, Agent under a Power of Attorney, etc. can be a time consuming job. It is important that you review your selections periodically to ensure that those people are still the best choice to act on your behalf.
Contact Us Today
Estate planning with a trusted attorney is an important part of ensuring your financial health and preserving the legacy you’d like to leave to your loved ones. As you’re preparing for summer travel, don’t neglect your estate plan. We can help you put a plan in place that will reassure you and your family. Contact us today to plan for your tomorrow.
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The Revocable Living Trust: Helping Clients, Growing Your Practice
Prevention Is the Greatest Cure
Your clients trust you with their financial future and the legacy they want to leave behind. They rely on you to anticipate challenges, foresee trouble, and take preventative measures. When it comes to a client’s financial wellbeing, it is up to the trusted advisor to know what problems are likely to arise and to have solutions ready to help avoid conflict in the family, waste of resources, and other common pitfalls.
One crucial tool to keep assets safe and to ensure they are distributed in the way your client wants is through the use of a revocable living trust.
What Is a Revocable Living Trust?
A revocable living trust (RLT), sometimes called a revocable trust or living trust, is an alternative to a will. It’s a document that instructs a trustee on how to manage the client’s assets during the client’s lifetime and how to manage or distribute the assets upon the client’s incapacity and death. Diverse assets such as life insurance proceeds or policies, real estate holdings (including the client’s personal residence), bank accounts, and investments can be managed with an RLT.
An RLT allows a client to name him or herself as the initial trustee and to name a successor trustee in the event that the client becomes incapacitated or dies. By being named trustee, the client retains full control and also retains the benefit of his or her assets.
In addition to serving as the trustee, the client has the ability to alter the trust as he or she sees fit (hence being called a revocable trust), to add or remove beneficiaries, and use the assets as he or she wishes. Because the assets in an RLT are still under the control of the client, he or she will pay taxes on any income within the trust accordingly.
RLTs Avoid Probate
One major benefit of using an RLT as an estate planning strategy is that it avoids probate. This is accomplished by ensuring that all assets that otherwise would have been in your client’s name at death are funded into the trust. Then, when the client dies, there are no assets in the name of the client and no need for a probate. The terms of the trust will dictate what happens to the assets, not a court or state law.
Probate can be a long and expensive process and can restrict beneficiaries’ access to assets from a few months up to several years. Estates whose assets span more than one state could end up going through probate in each state. Why put beneficiaries through this process when it can be avoided simply by creating an RLT?
Protecting Inheritances
Passing financial security on to the next generation is a popular goal for many clients. However, inheritances can be vulnerable to many life events and changes a beneficiary might experience. Assets can be spent too quickly, devalued, lost in a divorce, seized by creditors, or become vulnerable in a lawsuit.
A properly drafted RLT allows clients to put restrictions in place to ensure their hard-earned money continues to benefit the next generation. Whether it is the use of a spendthrift provision or no-contest clause, or merely establishing an age that a beneficiary has to attain before receiving any distribution, the client is in control.
Providing Privacy
If a client has a traditional will, the terms in the will become public record as soon as the probate is opened. With an RLT, by contrast, assets are distributed privately. Without court supervision, there is no need for the RLT to be filed with the probate court. In turn, the transactions involved in administering the trust are not entered into the public record and cannot be searched, thus providing privacy to both the client and the beneficiaries.
What Could Go Wrong?
Most clients have a clear idea as to how they want their estate to be divided, but without proper estate planning, a lot can go wrong. Lack of foresight in estate planning will always come to bear sooner or later. Let’s take a look at some common shortcuts and their consequences—and how an RLT can help avoid these headaches.
A client’s child is added directly to their bank account. This may seem like a straightforward way of designating a recipient for an asset, but what happens if the child incurs significant debt? The bank account will be seized by creditors, and the child will not see a penny. There is also the added risk that the creditor may decide to take the money as soon as the child is added to the account, despite the fact that the child never made any contributions to the account, and the client is still alive. The creditor will deem the child to be the owner of the account and can use those funds to satisfy the outstanding debt. By contrast, if the bank account is funded into an RLT, it can be protected from the beneficiary’s creditors during the client’s life and after their death.
A client leaves their home to their child through the use of a transfer-on-death (TOD) deed. The client intends for the child to receive a certain share of the estate by deeding them the home upon the client’s death. What happens if the home is sold before the client passes away? Instead of an equal share in the estate, the child will receive nothing. By funding all assets into an RLT and designating shares for each beneficiary to receive, you will not have to worry about individual assets. In this instance, if the home is an asset of the trust and is sold, the proceeds will be deposited into a bank account owned by the trust, so even if the child does not get the house, they can still get the value of the house as part of their share.
A client names a beneficiary directly in their life insurance policy. Again, in this case, there is no protection against the beneficiary’s creditors. And what happens if the policy premiums are not paid? If the policy lapses, there will be no asset for the beneficiary to inherit. This too can be avoided with the care and specificity of an RLT. As mentioned before, having the proceeds payable to the RLT means that the client can stipulate how the funds will be distributed to beneficiary instead of an outright distribution. Also, if the policy lapses, as a beneficiary of the trust, he or she will still receive a share of the overall trust assets.
Honoring the Client’s Wishes
As we have seen, any of these events could disrupt the client’s original intent of dividing assets as desired. An RLT is a much safer and simpler option. Instead of having to worry about how separate assets are titled and making sure beneficiary designations and account owners are updated every time the client changes his or her mind about who is to receive them, an RLT allows for one set of instructions that control everything.
With assets being held in a trust and distributed over a period of time, an RLT encourages the continued management of the estate by qualified financial advisors. If the assets are allowed to be distributed outright, it is highly likely that the beneficiaries will cash out.
Your clients depend on you to help them plan and make sound decisions about their financial health. Working together, we can help develop a comprehensive financial and estate plan that will help build financial stability for today and tomorrow. Do not hesitate to reach out for more information about how we can collaborate to best serve our clients.
Want a Greater Sense of Purpose? Plan Your Legacy
When you think about the legacy you’ll leave, what comes to mind? Perhaps it’s security for your family or a positive contribution to your community. It could also be a tribute to the arts. Whatever it is, you don’t have to wait until you pass on to actualize your legacy. Now is the time to begin planning and implementing your wishes.
It’s Not Too Soon
One way to ensure your legacy lives on is through estate planning with a trusted team of advisors and attorneys. Estate planning allows you to make informed, wise decisions about what you’ll leave behind—but it’s not too soon for your legacy to come alive. Additionally, leaving a legacy doesn’t always have to be about money. Being known as a person who donated their time or talent to their favorite organization is just as important. Estate planning can help you focus on what matters most to you and can enable you to begin to build your legacy while you are still living.
Imagining Your Legacy
Here are some thoughts to consider as you begin this process. Take some time to pause and reflect on what matters to you, what you hope to leave behind, and how you can put your legacy into action today.
When you think about the kind of legacy you want to leave, you’ll be more likely to make smarter decisions about your career, your investments, your health, etc. because you have an eye on the future and your role in it.
Your legacy can serve as an inspiration and example for others. If you plan wisely and give generously, your children and beneficiaries are more likely to emulate those behaviors. Your example can have a positive and impactful influence on others, perpetuating a living legacy even before you pass on.
If you plan your legacy now, you can actually see the benefits of your planning come alive. Donations that you make now, with the advice and support of a trusted estate planning team, can begin to benefit others immediately, while you’re around to witness it. It’s an immensely gratifying way to begin enjoying your legacy.
In 2017, the largest source of charitable giving was individuals, at a whopping $281.86 billion. That’s 72% of total giving for 2017. You can be a part of this trend, and with the help of your advisors, you can contribute intelligently and strategically to the causes you care about most.
Getting Started with Charitable Giving
Giving to charity is one of the most important financial choices you will make during your life. You may choose to contribute to your alma mater, your center of religious worship, or to a charitable organization or foundation.
It’s up to you to decide what matters most, but your estate planning team can help you maximize your contributions. We can also advise you on balancing maintenance of your lifestyle with your current charitable giving, so that you’re able to enjoy the act of giving.
Of course, because the gift tax does not apply to gifts made to charities, charitable giving can be an important strategy to minimize federal estate and gift taxes. It can be an integral part of a good estate plan.
Lifetime gifts to charities may make you eligible for an income tax deduction. Eligibility for these deductions is limited to a percentage of your adjusted gross income. And there’s another yearly limit for gifts of appreciated securities or property. As you can see, due to the complexity of planning charitable giving, it’s best to get qualified advice before making donations.
Get in Touch Today
With careful planning and strategy, you can create a legacy that will inspire your children, contribute to the causes closest to your heart, and complement your financial and estate plans. We are here to be your trusted partners in this process. Please get in touch today to get started.
Portability and Married Couples: A Viable Option
For maximum benefit, estate planning should happen as a team effort, with CPAs, insurance professionals, financial advisors, and attorneys working together strategically and cooperatively. When it comes to helping married couples plan, today’s strategies need to be considerably more thoughtful than in previous years. Although the estate tax exemption is ever increasing, portability is still an important option, particularly for high net worth clients.
Portability Is Here to Stay
In fact, there’s really no downside to including portability in a plan, other than having to file a federal estate tax return. In the past, planners did not know whether portability was here to stay and were hesitant to rely on its benefits. However, at the beginning of 2013, portability laws became “permanent” under the American Tax Relief Act of 2012 (ATRA). It is now an essential part of estate and financial planning.
Portability provides estate tax planning (without the use of credit shelter trusts) by permitting spouses to transfer their unused estate tax applicable exclusion amount to their surviving spouse. The surviving spouse can then use the deceased spouse’s unused exclusion (“DSUE”) amount for either gift or estate tax minimization or even elimination. In fact, they get to use all of the DSUE plus their own estate tax exclusion amount. This can be very beneficial if assets appreciated greatly after the death of the first spouse, or if the estate tax exclusion amount for the second spouse is lower due to legislative changes.
The Best of Both Worlds
Fortunately, your clients can have the best of both worlds. Portability and trust protections are not mutually exclusive. You can still utilize planning strategies, such as a QTIP (i.e., qualified terminable interest property) trust, providing asset protection and family line protection. So long as the portability election is properly made, the DSUE is reserved for estate tax minimization.
Remember, since the DSUE is a monetary asset, it must be included in estate and financial plans, as well as pre- and post-nuptial agreements.
It is also important to note that some states still have a state estate tax, some with exclusion limits below the federal exclusion. This means that tax planning is still relevant, even if the value of an estate is below the federal estate tax threshold.
What You Need to Know
An individual can use more than one DSUE. Potentially, the number of DSUEs is unlimited.
Portability is not automatic. The election must be made on an estate tax return (Form 706) within nine months of death or within any extensions granted.
Even if the surviving spouse does not have assets in excess of the Section 6018 filing threshold (federal estate tax exclusion amount), it is prudent to consider a protective 706.
Portability offers federal estate tax planning without requiring an equalization of assets between spouses or their trusts.
Portability allows a second step up in basis at the death of the second spouse, whereas the credit shelter trust alone provides a step up in basis only at the death of the first spouse.
Trust planning remains relevant for tax planning, asset protection, and family line protection. In fact, trust planning and portability can be used together and are not mutually exclusive.
How Can You Benefit Your Clients Most?
Of course, you will want to ensure your clients get the best of both worlds: trust planning and portability. We would be happy to consult with you and to provide analyses of your clients’ plans.
Here are some ways you can immediately benefit your clients:
Contact your married couple clients and offer a financial analysis of their credit shelter planning. Would portability be a better fit for tax purposes? Do the documents include a trust protector or independent trustee to allow for future flexibility if the laws change yet again? Do they know to request a 706 filing at the death of the first spouse?
Meet with surviving spouses and determine whether there are outstanding income tax implications. Can you achieve a step up in basis? Has a 706 electing portability been filed? Is there still time to file? Is there an exception that would allow late filing? Does the deceased spouse’s trust include a trust protector or independent trustee to allow for tax planning flexibility?
Offer prenuptial portability counseling to single clients who may be contemplating remarriage.
Your clients need to know that they will lose their DSUE from their previous spouse if their new spouse dies during their lifetime.
It may be appropriate to financially compensate a spouse whose DSUE is reduced by remarriage. Life insurance can fund such compensation plans if other liquid assets are not available or if the client prefers.
A marital agreement can include a provision that guarantees that portability will be elected, as there may be a conflict between a second spouse and children from the deceased spouse’s previous relationships.
Reach Out to Collaborate
Contact our office for assistance in analyzing your clients’ plans for portability benefits. We’re here to help you avoid pitfalls and maximize benefits. Give us a call today!
