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Ashleigh Laabs 11/5/21 Ashleigh Laabs 11/5/21

Do you have a will?

The need for a will as a key component of your estate plan may seem obvious, but you’d be surprised by the number of people — even affluent individuals — who don’t have one. A reason for this may be a common misconception that a revocable trust (sometimes called a “living trust”) obviates the need for a will.

Purpose of a will

True, revocable trusts are designed to avoid probate and distribute your wealth quickly and efficiently according to your wishes. But even if you have a well-crafted revocable trust, a will serves several important purposes, including:

Appointing an executor or personal representative you trust to oversee your estate, rather than leaving the decision to a court,
Naming a guardian of your choosing, rather than a court-appointed guardian, for your minor children, and
Ensuring that assets not held in the trust are distributed among your heirs according to your wishes rather than a formula prescribed by state law.

The last point is important, because for a revocable trust to be effective, assets must be titled in the name of the trust. It’s not unusual for people to acquire new assets and put off transferring them to their trusts or simply forget to do so.

To ensure that these assets are distributed according to your wishes rather than a formula mandated by state law, consider having a “pour-over” will. It can facilitate the transfer of assets titled in your name to your revocable trust.

Make it your decision, not your state’s

Although assets that pass through a pour-over will must go through probate, that result is preferable to not having a will. Without a will, the assets would be distributed according to your state’s intestate succession laws rather than the provisions of your estate plan. Contact us with questions regarding your will or overall estate plan.

FMD’s estate planning team will work with you and your legal and financial advisers to design plans that align with your goals and objectives. When it comes to estate planning and wealth preservation, every one of our clients receives the quality of service and personal attention that are the hallmarks of FMD. To learn more about how we can help address your estate planning and wealth preservation needs, contact us today.

Ashleigh Laabs 11/5/21 Ashleigh Laabs 11/5/21

Opportunities and challenges: Valuation in the age of COVID-19

Valuation and estate planning go hand in hand. After all, the tax implications of various estate planning strategies depend on the value of your assets at the time they’re transferred.

The COVID-19 pandemic has had a significant impact on the value of many business interests and other assets, which may create some attractive estate planning opportunities. It also presents unique challenges for valuation professionals. As a result, it’s more important than ever to involve experienced valuation experts in the estate planning process.

What are the opportunities?

With the value of many assets depressed (in many or most cases temporarily), now may be an ideal time to gift them, either directly to family members or to irrevocable trusts and other estate planning vehicles. Transferring assets while values are low also allows you to use as little of your gift and estate tax exemption as possible, maximizing the amount available for future gifts or bequests. As the economy fully recovers and assuming your asset values rebound, your beneficiaries should enjoy substantial growth outside your taxable estate.

What are the challenges?

The pandemic has created a situation that’s truly uncharted territory for the valuation profession. Unlike other economic crises in recent years, most of the damage to the economy resulted from business closures and restrictions and other measures designed to help contain the virus.

For business valuations, the current environment presents several challenges, including:

Known or knowable. A fair market valuation generally doesn’t consider “subsequent events” — that is, events that occur after, and weren’t “known or knowable” on the valuation date. Experts generally agree that the COVID-19 pandemic wasn’t known or knowable as of December 31, 2019. Yet for valuation dates after that, determining whether the pandemic was known or knowable and should be considered in valuing a business or other asset can be a formidable task.

Valuation approaches. Generally, valuators consider all three of the major valuation approaches: the income, market and asset approaches. The pandemic may affect the relative appropriateness of each approach and the amount of weight they should be assigned.

For example, market-based methods, which rely on data about actual transactions involving comparable businesses, may be less relevant today if the underlying transactions predate COVID-19 (although it may be possible to adjust to reflect the pandemic’s impact).

Many valuators are emphasizing income-based methods, such as the discounted cash flow (DCF) method, which involves projecting a business’s future cash flows over a defined period (such as five years) and discounting them to present value. The advantage of DCF is that it provides a great deal of flexibility to model a business’s expected financial performance based on current conditions as well as assumptions about its eventual return to “normal” over the next several years.

Regardless of the method or methods used, it’s important for valuators to consider a business’s available cash and expected cash needs to assess its viability as a going concern. These considerations will be critical in evaluating a business’s risk and the impact of that risk on value.

What’s it worth?

Depressed asset values can create attractive estate planning opportunities. While the pandemic has dropped the value of some assets, others haven’t been affected or have even increased in value. Contact us with questions regarding the valuation of your assets.

Ashleigh Laabs 10/17/21 Ashleigh Laabs 10/17/21

Don’t choose your executor too hastily

Haste makes waste. Or, in the case of estate planning, it can lead to other problems and, possibly, financial loss. Notably, if you don’t take enough time to choose the best executor for your estate, this “wrong call” can cost your family.

Many responsibilities

You may think that there’s not much to the job, but an executor’s responsibilities are extensive. As your personal representative, he or she will be entrusted with several significant duties, including collecting, protecting and taking inventory of your estate’s assets; filing the estate’s tax return and paying its taxes; handling creditors’ claims and the estate’s claims against others; making investment decisions; distributing property to beneficiaries; and liquidating assets, if necessary.

Whom should you choose as executor? Usually, it comes down to a decision between a family member or close friend and a professional.

Your first thought might be to choose a family member or a trusted friend. But this may be a mistake for one of these reasons:

The person may be too grief-stricken to function effectively,
If the executor stands to gain from the will, there may be a conflict of interest — real or perceived — which can lead to will contests or other disputes by disgruntled family members,
The executor may lack the financial acumen needed for the position, or
The executor may hire any necessary professionals, but they might not be the professionals you’d hire.

To avoid these risks, you might instead consider choosing an independent professional as executor, particularly if the professional is familiar with your financial affairs.

Form a team of executors

Finally, it’s common to appoint co-executors — one person who knows the family and understands its dynamics and an independent executor with the requisite expertise. Whether you decide to use co-executors or only one, be sure to designate at least one backup to serve in the event that your first choice is unable to do so.

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Don’t forget to take state estate taxes into account

A generous gift and estate tax exemption means only a small percentage of families are currently subject to federal estate taxes. But it’s important to consider state estate taxes as well. Although many states tie their exemption amounts to the federal exemption, several states have exemptions that are significantly lower — in some cases $1 million or less.

Moving out of state isn’t necessarily the answer

One way to avoid this tax burden is to retire in a state that imposes low or no estate taxes. But moving to a tax-friendly state doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve cut all ties with your former state, there’s a risk that the state will claim you’re still a resident and are subject to its estate tax.

Even if you’ve successfully established residency in a new state, you may be subject to estate taxes on real estate or tangible personal property located in the old state (depending on that state’s tax laws). And don’t assume that your estate won’t be taxed on this property merely because its value is less than the exemption amount. In some states, estate taxes are triggered when the value of your worldwide assets exceeds the exemption amount.

Establishing residency in your new state

If you’re relocating to a state with low or no estate taxes, learn about the steps you can take to terminate residency in the old state and establish residency in the new one. Examples include acquiring a residence in the new state, obtaining a driver’s license and registering to vote there, receiving important documents at your new address, opening bank accounts in the new state and closing old ones, and moving cherished personal possessions to the new state.

If you own real estate in the old state, consider transferring it to a limited liability company or other entity. In some states, interests in these entities may be treated as nontaxable intangible property.

Before putting up the “for sale” sign and moving to lower-tax pastures, consult with us about addressing your current and future states’ estate taxes in your estate plan.

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Estate planning pitfalls exist if a significant portion of your wealth is concentrated in a single stock

Estate planning and investment risk management go hand in hand. After all, an estate plan is effective only if you have some wealth to transfer to the next generation. One of the most effective strategies for reducing your investment risk is to diversify your holdings.

However, it’s not unusual for affluent people to end up with a significant portion of their wealth concentrated in one stock. There are several ways this can happen, including the exercise of stock options, participation in equity-based compensation programs, or receipt of stock in a merger or acquisition.

Ease risk by diversifying

To reduce your investment risk, the simplest option is to sell some or most of the stock and reinvest in a more diversified portfolio. But this may not be preferable if you don’t want to pay the resulting capital gains taxes. Or it may not be an option if there are legal restrictions on the amount you can sell and the timing of a sale. And in some cases, you may simply wish to hold on to the stock.

To soften the tax hit, consider selling the stock gradually over time to spread out the capital gains. Or, if you’re charitably inclined, contribute the stock to a charitable remainder trust (CRT). The trust can sell the stock tax-free, reinvest the proceeds in more diversified investments, and provide you with a current tax deduction and a regular income stream. (Be aware that CRT payouts are taxable — usually a combination of ordinary income, capital gain and tax-free amounts.)

Ease risk without selling the stock

What if you don’t want to sell the stock? You have a few options, including:

Using a hedging technique, such as purchasing put options to sell your shares at a set price.
Buying other securities to rebalance your portfolio. Consider borrowing the funds you need, using the concentrated stock as collateral.
Investing in a stock protection fund. These funds allow investors who own concentrated stock positions in different industries to pool their risks, essentially insuring their holdings against catastrophic loss.

Contact us to learn about additional asset-protection strategies so that you can preserve the greatest amount of your wealth for your heirs.

Ashleigh Laabs 9/27/21 Ashleigh Laabs 9/27/21

Is your power of attorney for property powerful enough?

Your estate plan may include a power of attorney for property that appoints another person to manage your investments, pay your bills, file your tax returns and otherwise handle your property if you’re unable to do so. But not all powers of attorney are created equal. Thus, it’s a good idea to periodically review your power of attorney with your advisor to ensure that it continues to serve its intended purpose. Questions to consider can include:

When does it take effect? If you live in a state that permits “springing” powers of attorney, your attorney-in-fact (that is, the person who holds your power of attorney) is authorized to act only on the occurrence of the event stated in the power of attorney. Typically, the power is designed to “spring” when you become incapacitated. If a power of attorney isn’t a springing power, the attorney-in-fact can act at any time after you’ve executed the document.

Is it durable? A durable power of attorney is one that continues in force after you’ve become incapacitated. Some states’ laws presume that a power of attorney is durable, but others don’t, in which case a power may be unenforceable unless it expressly states that it’s durable.

Is it powerful enough? Careful planning is required to ensure that your attorney-in-fact has the authority he or she needs to carry out your wishes. There are certain powers that you should expressly include to ensure such authority. For example, you must specify whether your attorney-in-fact has the power to make gifts or to make estate planning decisions, such as transferring assets to a trust.

Is it too old? Your attorney-in-fact’s ability to act on your behalf depends on whether third parties are willing to honor the power of attorney. Sometimes banks and others are reluctant to rely on a power of attorney that’s several years old. Therefore, consider signing a new one every two or three years.

If you have questions regarding power of attorney, please contact us. We’d be pleased to help answer your questions.

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What are your options to pay for long-term care?

Too often, people planning their estates focus on tax and asset-protection issues and overlook long-term health care needs. But the high cost of long-term care (LTC) can quickly devour resources you need to maintain your lifestyle during retirement and provide for your children or other heirs after your death. Here are a few insurance options available to help cover the costs of long-term care.

LTC insurance

An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing and transferring (in and out of bed, for example).

LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. In addition, if a policy is tax-qualified, your premiums may be deductible (as medical expenses) up to a specified limit.

To qualify, a policy must:

Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment, which has lasted or is expected to last at least 90 days.

It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI). Thus, some people may not have enough medical expenses to benefit from this advantage. Also weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.

Hybrid insurance

Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have several advantages over standalone LTC policies. For example, their health-based underwriting requirements typically are less stringent, and their premiums are usually guaranteed — that is, they won’t increase over time.

Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.

Employer-provided plans

Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.

Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals.

Ashleigh Laabs 9/14/21 Ashleigh Laabs 9/14/21

Estate planning in a socially distanced environment

As many states continue to struggle with the current surge in COVID-19 cases, the “new normal” demands continued social distancing in many areas of life. What does this mean for estate planning? Clearly, estate planning is as important today — or arguably more important — than ever. But how do you plan your estate and execute critical documents if you’re uncomfortable with face-to-face meetings or are required to self-quarantine?

Fortunately, many estate planning activities may be able to be done from the safety of your own home. Here are some options to consider, but keep in mind that requirements vary significantly from state to state, so it’s important to discuss your plans with your estate planning advisor.

Most planning can be done remotely

There are definite advantages to meeting with your advisor in person to talk about creating or updating your estate plan. But these discussions can be conducted in video conferences or phone calls, and document drafts can be transmitted and reviewed via email, secure online portals or even “snail mail.”

Traditionally, estate planning documents are executed in an attorney’s office in the presence of witnesses and a notary public. In-office document signings may still be possible with appropriate precautions, but there are other options that may allow you to avoid traveling to an attorney’s office.

The options available depend in part on the type of document being signed:

Wills. In most states, a typewritten will (as well as a modification or codicil to an existing will) must be signed in the physical presence of at least two witnesses. Typically, those witnesses must be disinterested — that is, they don’t stand to inherit or otherwise benefit under the will. But some states permit family members or other interested parties to serve as witnesses. In those states, it may be possible to conduct a will signing at home (with instructions from your attorney) and have members of your household witness it.

What about notarization? Wills are usually notarized as a best practice, but in most states it’s not required. However, wills are often accompanied by a self-proving affidavit, which must be notarized.

Another option in some states is a “holographic,” or handwritten, will, which generally doesn’t require witnesses or notarization.

Trusts. In many states, you can sign a trust document without witnesses or notarization, and it may even be possible to sign it electronically. One potential strategy for avoiding traditional will-signing requirements is to sign a holographic “pour over” will that transfers all assets to a revocable trust, which can accomplish many of the same objectives as a traditional will.

Monitor legal developments

Requirements for signing estate planning documents have been evolving in recent years, and the COVID-19 pandemic may accelerate the process more. A few states permit electronic wills (e-wills) and online notarization, which makes it possible to execute these documents without the need for physical interaction with anyone. These technologies are still in their infancy, but they’re being considered by lawmakers in many states. Contact us with any questions regarding your estate planning documents.

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3 essential estate planning strategies not to be ignored

With most tax planning, there are certain strategies that are generally effective and shouldn’t be ignored. The same holds true for estate planning. Here are three essential estate planning strategies to consider that may help you achieve your goals.

1. Use an ILIT to hold life insurance

Do you own an insurance policy on your life? Then be aware that a substantial portion of the proceeds could be lost to estate taxes if your estate is large enough to be liable for them. The exact amount will depend on the estate tax exemption available at your death as well as the estate tax rates that apply.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. One effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT) to buy and hold the policy.

If you already own your life insurance policy, you can transfer the policy to an ILIT. But watch out for the “three-year rule,” which provides that certain assets, including life insurance, transferred within three years of your death are pulled back into your estate and potentially taxed.

2. Place assets in a credit shelter trust

Designating your spouse as your sole beneficiary may seem like a good strategy. But doing so can waste your estate tax exemption.

Suppose you leave everything to your spouse. There will be no current estate tax at your death because of the unlimited marital deduction (assuming your spouse is a U.S. citizen). When your spouse dies, however, the assets transferred to him or her at your death will be included in his or her taxable estate (assuming the assets remain intact). A portion of your spouse’s estate could be subject to estate tax, depending on a variety of factors such as the size of your spouse’s total estate and the estate tax exemption available at his or her death.

You can preserve your exemption and reduce or even eliminate estate taxes by placing assets in a credit shelter trust. If properly structured, the trust provides your spouse with income for life — and access to the principal as needed — but the assets aren’t included in his or her estate. Plus, your own exemption shields the trust assets from estate tax.

3. Take advantage of a gifting strategy

Don’t underestimate the tax-saving power of making gifts. Currently, the annual exclusion is $15,000 per recipient ($30,000 if you split gifts with your spouse).

Annual exclusion gifts can be more effective because, unlike lifetime exemption gifts, they don’t reduce the amount of wealth you can transfer tax-free at death under your estate tax exemption. Gifting, whether under the annual exclusion or lifetime exemption, also removes future appreciation from your taxable estate.

Work with a pro

There’s much you need to consider when developing or reviewing your estate plan. Contact us so you can keep your plan on the right track.

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With a self-directed IRA, you choose your own investments

If you’re the type who would rather order ala carte rather than a set entrée, you might prefer a “self-directed” IRA. With this option, you may be able to amp up the benefits of a traditional or Roth IRA by enabling them to hold nontraditional investments of your choosing that can potentially offer greater returns. However, self-directed IRAs present pitfalls that can lead to unfavorable tax consequences.

Estate planning benefits

IRAs are designed primarily as retirement-saving tools, but if you don’t need the funds for retirement, they can provide a tax-advantaged source of wealth for your family. For example, if you name your spouse as beneficiary, your spouse can roll the funds over into his or her own IRA after you die, enabling the funds to continue growing on a tax-deferred basis (tax-free in the case of a Roth IRA).

You control the investments

A self-directed IRA is simply an IRA that gives you complete control over investment decisions. IRAs typically offer a selection of stocks, bonds and mutual funds.

Self-directed IRAs (available at certain financial institutions) offer greater diversification and potentially higher returns by permitting you to select virtually any type of investment. The investment types include real estate, closely held stock, limited liability company interests and partnership interests, loans, precious metals, and commodities (such as lumber and oil & gas).

Self-directed IRAs offer the same estate planning benefits as other IRAs, but they allow you to transfer virtually any type of asset to your heirs in a tax-advantaged manner. Self-directed Roth IRAs are particularly powerful estate planning tools because they offer tax-free investment growth.

Beware the prohibited transaction rules

The most dangerous traps for self-directed IRAs are the prohibited transaction rules. These rules are designed to limit dealings between an IRA and “disqualified persons,” including account holders, certain members of account holders’ families, businesses controlled by account holders or their families, and certain IRA advisors or service providers.

Among other things, disqualified persons may not sell property or lend money to the IRA, buy property from the IRA, provide goods or services to the IRA, guarantee a loan to the IRA, pledge IRA assets as security for a loan, receive compensation from the IRA, or personally use IRA assets.

The penalty for engaging in a prohibited transaction is severe: the IRA is disqualified and all of its assets are deemed to have been distributed on the first day of the year in which the transaction takes place, subject to income taxes and, potentially, penalties.

This makes it virtually impossible to manage a business, real estate or other investments held in a self-directed IRA. So, unless you’re prepared to accept a purely passive role with respect to the IRA’s assets, this strategy isn’t for you.

If you’re considering a self-directed IRA and have additional questions, contact us.

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A family bank professionalizes intrafamily lending

Because of the COVID-19 pandemic and the resulting economic turndown in some areas, you may have family members in need of financial support. If you’re interested in lending money to loved ones in need, consider establishing a “family bank.” These entities enhance the benefits of intrafamily loans, while minimizing unintended consequences.

Intrafamily loans

Lending can be an effective way to provide your family with financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift. This means, among other things, documenting the loan with a promissory note, charging interest at or above the applicable federal rate, establishing a fixed repayment schedule, and ensuring that the borrower has a reasonable prospect of repaying the loan.

Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can encourage responsible financial behavior, promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.

Family banks

Too often, however, people lend money to family members with little planning and regard for potential unintended consequences. Rash lending decisions can lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where the family bank comes into play.

A family bank is a family-owned, family-funded entity designed for the sole purpose of making intrafamily loans. Often, family banks are able to make financing available to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources or to lend at more favorable terms. By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences.

Build a strong governance structure

The key to avoiding family conflicts and resentment is to build a strong family governance structure that promotes communication, group decision-making and transparency. It’s important to establish clear guidelines regarding the types of loans the family bank is authorized to make and allow all family members to participate in the decision-making process. This ensures that family members are treated fairly and avoids false expectations.

Ease financial hardships

It’s possible that someone in your extended family has faced difficult financial circumstances recently. Contact us to learn more about intrafamily loans and family banks.

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Keep family matters out of the public eye by avoiding probate

Although probate can be time consuming and expensive, one of its biggest downsides is that it’s public — anyone who’s interested can find out what assets you owned and how they’re being distributed after your death. The public nature of probate may also draw unwanted attention from disgruntled family members who may challenge the disposition of your assets, as well as from other unscrupulous parties.

The good news is that by implementing the right estate planning strategies, you can keep much or even all of your estate out of probate.

Probate, defined

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs.

Is probate ever desirable? Sometimes. Under certain circumstances, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

Choose the right strategies

There are several tools you can use to avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “payable on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. However, keep in mind that while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

For homes or other real estate — as well as bank and brokerage accounts and other assets — some people avoid probate by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” But this has three significant drawbacks: 1) Once you retitle property, you can’t change your mind, 2) holding title jointly gives the joint owner some control over the asset and exposes it to his or her creditors, and 3) there may be undesirable tax consequences.

A handful of states permit TOD deeds, which allow you to designate a beneficiary who’ll succeed to ownership of real estate after you die. TOD deeds allow you to avoid probate without making an irrevocable gift or exposing the property to your beneficiary’s creditors.

Discuss your options

Because of probate’s public nature, avoiding the process to the extent possible is a goal of many estate plans. Implementing the proper strategies in your plan can protect your privacy and save your family time and money. Contact us with questions or to discuss your options.

Ashleigh Laabs 7/23/21 Ashleigh Laabs 7/23/21

Can a broken trust be fixed?

An irrevocable trust has long been a key component of many estate plans. But what if it no longer serves your purposes? Is it too late to change it? Depending on applicable state law, you may have several options for fixing a “broken” trust.

How trusts break

There are several reasons a trust can break, including:

Changing family circumstances. A trust that works just fine when it’s established may no longer achieve its original goals if your family circumstances change. Some examples are a divorce, second marriage or the birth of a child.

New tax laws. Many trusts were created when gift, estate and generation-skipping transfer (GST) tax exemption amounts were relatively low. However, for 2021, the exemptions have risen to $11.7 million, so trusts designed to minimize gift, estate and GST taxes may no longer be necessary. And with transfer taxes out of the picture, the higher income taxes often associated with these trusts — previously overshadowed by transfer tax concerns — become a more important factor.

Mistakes. Potential errors include naming the wrong beneficiary, omitting a critical clause from the trust document, including a clause that’s inconsistent with your intent, and failing to allocate your GST tax exemption properly.

These are just a few examples of the many ways you might end up with a trust that fails to achieve your estate planning objectives.

How to fix them

If you have one or more trusts in need of repair, you may have several remedies at your disposal, depending on applicable law in the state where you live and, if different, in the state where the trust is located. Potential remedies include:

Reformation. The Uniform Trust Code (UTC), adopted in more than half the states, provides several remedies for broken trusts. Non-UTC states may provide similar remedies. Reformation allows you to ask a court to rewrite a trust’s terms to conform with the grantor’s intent. This remedy is available if the trust’s original terms were based on a legal or factual mistake.

Modification. This remedy may be available, also through court proceedings, if unanticipated circumstances require changes in order to achieve the trust’s purposes. Some states permit modification — even if it’s inconsistent with the trust’s purposes — with the consent of the grantor and the beneficiaries.

Decanting. Many states have decanting laws, which allow a trustee, according to his or her distribution powers, to “pour” funds from one trust into another with different terms and even in a different location. Depending on your circumstances and applicable state law, decanting may allow a trustee to correct errors, take advantage of new tax laws or another state’s asset protection laws, add or eliminate beneficiaries, and make other changes, often without court approval.

Seek professional guidance

The rules regarding modification of irrevocable trusts are complex and vary dramatically from state to state. And there are risks associated with revising or moving a trust, including uncertainty over how the IRS will view the changes. Before you make any changes, talk to us about the potential benefits and risks.

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A fresh look at CRTs, CRATs and CRUTs

A charitable remainder trust (CRT) allows you to support a favorite charity while potentially boosting your cash flow, shrinking the size of your taxable estate, and reducing or deferring income taxes. In a nutshell, you contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse (or others you designate) — with an income stream for life or for a term of up to 20 years. At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.

When you fund the trust, you’re entitled to claim a charitable income tax deduction equal to the present value of the remainder interest (subject to applicable limits on charitable deductions). Your annual payouts from the trust can be based on a fixed percentage of the trust’s initial value — this is known as a charitable remainder annuity trust (CRAT). Or they can be based on a fixed percentage of the trust’s value recalculated annually — in what’s known as a charitable remainder unitrust (CRUT).

CRUT advantages

Generally, CRUTs are preferable for two reasons. First, the annual revaluation of the trust assets allows payouts to increase if the trust assets grow, which can allow your income stream to keep up with inflation. Second, donors can make additional contributions to CRUTs, but not to CRATs.

The fixed percentage — called the unitrust amount — can range from 5% to 50%. A higher rate increases the income stream, but it reduces the value of the remainder interest and, therefore, the charitable deduction. Also, to pass muster with the IRS, the present value of the remainder interest must be at least 10% of the initial value of the trust assets.

The determination of whether the remainder interest meets the 10% requirement is made at the time the assets are transferred. If the ultimate distribution to charity is less than 10% of the amount transferred, there’s no adverse tax impact related to the contribution.

NIMCRUTs can provide an income boost

By designing a CRUT with a “net income with makeup” feature — known as a NIMCRUT — you can reduce or even eliminate payouts early in the trust term and enjoy larger payouts in later years when you’re retired or otherwise need an income boost.

Each year, a NIMCRUT distributes the lesser of the unitrust amount (say, 5%) or the trust’s net income. The trustee can invest the trust assets in growth investments that produce little or no income, allowing the trust to grow tax-free and deferring distributions to later years. The deferred payouts accumulate in a “makeup account.”

When you’re ready to begin receiving an income, the trustee shifts the assets into income-producing investments. You can use the funds in the makeup account to increase your distributions beyond the unitrust amount (up to the amount of net income).

Handle with care

CRTs, CRATs and CRUTs require careful planning and solid investment guidance to ensure that they meet your needs. Contact us to discuss your options before taking action.

Ashleigh Laabs 7/12/21 Ashleigh Laabs 7/12/21

Heading across state lines with your trust requires planning

In some cases, it may be desirable to move a trust to a more favorable jurisdiction. But moving a trust from one state to another can present significant risks, so don’t attempt to do so without considering all the benefits, limitations and risks, and obtaining professional advice.

Reasons to move a trust

There are many reasons for moving a trust to another jurisdiction, such as:

Avoiding or reducing state income taxes on the trust’s accumulated ordinary income and capital gains,
Taking advantage of trust laws that allow the trustee to improve investment performance,
Extending the trust’s duration,
Obtaining stronger creditor protection for beneficiaries, and
Reducing fees and administrative expenses.

Many people retire to states with more favorable tax laws. But just because you move to a state with lower income or estate taxes doesn’t mean your trusts move with you.

For individual income tax purposes, you’re generally taxed by your state of domicile. The state to which a trust pays taxes, however, depends on its situs.

Can your trust be moved?

Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for revocable trusts. In fact, it’s possible to change situs for a revocable trust by simply modifying it. Or, if that’s not an option, you can revoke the trust and establish a new one in the desired jurisdiction.

If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved. Some trusts expressly authorize the trustee or beneficiaries to move the trust from one jurisdiction to another.

If the trust document doesn’t designate a situs or establish procedures for changing situs, then the trust’s situs depends on several factors. These include applicable state law, where the trust is administered, the trustee’s state of residence, the domicile of the person who created the trust, the location of the beneficiaries and the location of real property held by the trust.

The actual process of moving the trust may entail creating a new trust to which the existing trust’s assets are transferred, merging the existing trust into a new trust or modifying the existing trust to designate the new state as its situs.

Depending on the trust’s terms and applicable state law, the move may require court approval or the unanimous consent of the trust’s beneficiaries.

Understanding the risks

Depending on your circumstances, moving a trust can offer tax savings and other benefits. Keep in mind, however, that the laws governing trusts are complex and vary considerably from state to state. We can help you determine whether the benefits outweigh the risks.

Ashleigh Laabs 7/6/21 Ashleigh Laabs 7/6/21

Does your estate plan address your grandchildren in a fair manner?

Many people, when planning their estates, simply divide their assets equally among their children. But “equal” may not necessarily mean “fair.” It all depends on your family’s circumstances. Specifically, providing for grandchildren is one area where equal treatment may inadvertently result in unfairness.

Consider this scenario

Bob has two adult children, Ted and Carol. Ted has two children and Carol has four. Suppose Bob’s estate plan calls for his $8 million estate to be divided equally between his two children.

When he dies, Ted and Carol each receive $4 million. But after they die, Ted’s two children receive $2 million each from their grandparent’s inheritance, while Carol’s four children receive only $1 million each. (This assumes, of course, that Ted and Carol each preserve the full amount of their inheritances.)

Possible solutions

To help ensure that Bob’s grandchildren are treated equally, he can purchase a life insurance policy, with the proceeds divided equally among his grandchildren. Alternatively, he can arrange policies on the lives of Ted and Carol designed to provide equal amounts to each grandchild. One advantage of this approach is that, because Ted and Carol are younger, the available death benefits would be greater. Bob could use gifts or loans to help Ted and Carol pay the premiums.

Life insurance allows Bob to provide more for his grandchildren, on an equal basis, while still dividing his other assets equally between his children. Depending on how Ted and Carol spend their inheritances, Ted’s children may still receive more than Carol’s on a per capita basis, but the additional assets provided by life insurance will likely make Bob’s estate plan appear “more fair” in the eyes of his grandchildren.

If you have concerns about how to properly address certain family members in your estate plan, please contact us. We’d be happy to assess your situation and offer the proper guidance.

Ashleigh Laabs 6/24/21 Ashleigh Laabs 6/24/21

Make health care decisions while you’re healthy

Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it’ll be too late.

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Clarifying the terminology

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

Living will

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

Living wills often contain a do-not-resuscitate order (DNR), which instructs medical personnel to not perform CPR in the event of cardiac arrest.

HCPA

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

Document storage and upkeep

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where to find them.

Also, keep in mind that health care providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically. Contact us for additional information.

Ashleigh Laabs 6/22/21 Ashleigh Laabs 6/22/21

Members of the sandwich generation find themselves in a unique situation

The “sandwich generation” is a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include one’s aging parents as well.

Steps to ease complex issues

Including your parents as beneficiaries of your estate may raise a number of complex issues. As you discuss these issues with your advisor, consider these five planning tips:

Plan for long-term care (LTC) costs. The annual cost of LTC — which may include assisted living facilities, nursing homes or home health care — can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Social Security, and Medicare provides little, if any, assistance. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance, investments or other strategies.
Make gifts. One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which currently allows you to give each parent up to $15,000 per year without triggering gift taxes.
Pay medical expenses. You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.
Set up trusts. There are many trust-based strategies you can use to assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children after your parents die. Another option is to set up trusts during your lifetime that leverage your $11.7 million exemption. Properly designed, these trusts can remove assets — together with all future appreciation in their value — from your taxable estate. They can provide income to your parents during their lives, eventually passing to your children free of gift and estate taxes.
Buy your parents’ home. If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home’s equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.

Find the right balance

As you review these and other options for assisting your aging parents, be cautious of pitfalls. For example, if you give your parents too much, these assets could end up back in your estate and potentially be exposed to gift or estate taxes. Contact us for help in addressing both your children and parents in your estate plan.

Ashleigh Laabs 6/10/21 Ashleigh Laabs 6/10/21

Help guide your family with a road map for your estate plan

You’ve likely spent a lot of time working with your advisor to plan your estate. While documents such as your will, various trusts and a power of attorney are essential, consider adding a “road map” to your plan.

Plot it out

Essentially, the road map is an informal letter or other document that guides your family in understanding and executing your estate plan and ensuring that your wishes are carried out.

Your road map should include, among other things:

The location of your will, living and other trusts, tax returns and records, powers of attorney, insurance policies, deeds, automobile titles, and other important documents,
A personal financial statement that lists stocks, bonds, real estate, bank accounts, retirement plans, vehicles and other assets, as well as information about mortgages, credit cards and other debts,
An inventory of digital assets — such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, and social media accounts — including login credentials or a description of arrangements made to provide your representative with access,
The location of family heirlooms or other valuable personal property,
A list of important professional contacts, including your estate planning attorney, accountant, insurance agent and financial advisors,
Computer passwords and home security system codes,
Safe combinations and the location of any safety deposit boxes and keys, and
Information about funeral arrangements or burial wishes.

Explain your thinking

The road map may also be a good place to explain to your loved ones the reasoning behind certain estate planning decisions. Perhaps you’re distributing your assets unequally, distributing specific assets to specific heirs or placing certain restrictions on an heir’s entitlement to trust distributions. There are many good reasons for using these strategies, but it’s important for your family to understand your motives to avoid hurt feelings or disputes.

Finally, like other estate planning documents, your road map won’t be effective unless your family knows where to find it, so it’s a good idea to leave it with a trusted advisor and a copy in a place where your heirs will likely find it.

Ashleigh Laabs 6/3/21 Ashleigh Laabs 6/3/21

Estate planning in the FAST lane

Traditionally, estate planning has focused on more technical objectives, such as minimizing gift and estate taxes and protecting assets against creditors’ claims or lawsuits. These goals are still important, but affluent families are increasingly turning their attention to “softer,” yet equally critical, aspirations, such as educating the younger generation, preparing them to manage wealth responsibly, promoting shared family values and encouraging charitable giving. To achieve these goals, many are turning to a family advancement sustainability trust (FAST).

Decision-making process

Typically, FASTs are created in states that 1) allow perpetual, or “dynasty,” trusts that benefit many generations to come, and 2) have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters. A directed trust statute makes it possible for both family members and trusted advisors with specialized skills to participate in governance and management of the trust.

A common governance structure for a FAST includes four decision-making entities:

An administrative trustee, often a corporate trustee, that deals with administrative matters but doesn’t handle investment or distribution decisions,
An investment committee — consisting of family members and an independent, professional investment advisor — to manage investment of the trust assets,
A distribution committee — consisting of family members and an outside advisor — to help ensure that trust funds are spent in a manner that benefits the family and promotes the trust’s objectives, and
A trust protector committee — typically composed of one or more trusted advisors — which stands in the shoes of the grantor after his or her death and makes decisions on matters such as appointment or removal of trustees or committee members and amendment of the trust document for tax planning or other purposes.

Funding options

It’s a good idea to establish a FAST during your lifetime. Doing so helps ensure that the trust achieves your objectives and allows you to educate your advisors and family members on the trust’s purpose and guiding principles.

FASTs generally require little funding when created, with the bulk of the funding provided upon the death of the older generation. Although funding can come from the estate, a better approach is to fund a FAST with life insurance or a properly structured irrevocable life insurance trust (ILIT). Using life insurance allows you to achieve the FAST’s objectives without depleting the assets otherwise available for the benefit of your family.

A flexible tool

A FAST is a flexible tool that can be designed to achieve a variety of goals. How you use one depends on your family’s needs and characteristics. Properly designed and implemented, a FAST can help prepare your heirs to receive wealth, educate them about important family values and financial responsibility, and maximize the chances that they’ll reach their potential. Contact us for additional details.

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