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Ashleigh Laabs 2/11/22 Ashleigh Laabs 2/11/22

The donor-advised fund: A powerful vehicle for charitable giving

If charitable giving is important to you, consider a donor-advised fund (DAF). A DAF — typically sponsored and managed by a community foundation or commercial investment company — offers many of the benefits of a private foundation at a fraction of the cost.

Upsides of a DAF

A DAF allows you to make tax-deductible contributions to an investment account and to advise the fund regarding which charities your contributions and earnings should be used to support. Tax regulations require the sponsor to have the final say on how your charitable dollars are spent, but in most cases the fund will follow your recommendations.

The advantages of a DAF include:

Immediate charitable deductions. The ability to set up a DAF quickly and secure an immediate charitable income tax deduction, without the need to identify a specific charitable beneficiary, is attractive to many donors. Why does this matter? Perhaps this is an ideal year for you — from a tax perspective — to make significant charitable donations, but you haven’t determined which charities you want to support.

Simplicity and low cost. Setting up a DAF is nearly as cheap and easy as opening a mutual fund account. Minimum contributions average around $25,000, although some DAFs allow you to open an account with as little as $5,000.

Private foundations, on the other hand, usually involve six- or seven-figure contributions, take several months to set up, and come with significant legal fees and other expenses. And while a DAF’s sponsor handles investment management and administration, a private foundation requires you to establish a board, hold periodic board meetings, keep meeting minutes and file tax returns.

Higher deduction limits. Cash contributions to DAFs, like donations to other public charities, are deductible up to 60% of your adjusted gross income (AGI). Noncash contributions are deductible up to 30% of AGI. Deduction limits for private foundations are 30% and 20%, respectively.

Privacy. Unlike private foundations and other charitable giving vehicles, a DAF allows you to remain anonymous if you so desire. Technically, when a DAF sponsor donates to a charity, it’s distributing its own assets, so you can elect to keep your name out of it. Alternatively, you can name your DAF after your mission — for example, the Fund for Alzheimer’s Research.

Downsides of a DAF

Once you contribute assets to a DAF, they become the sponsor’s property. Your role in directing distributions is, as the name indicates, strictly advisory, and you have little or no control over investment management.

Evaluate the costs and benefits

Whether a DAF is right for you depends on how much you plan to give to charity, the amount of time and resources you wish to commit to philanthropic activities, your need to retain control over your charitable assets, and other estate planning objectives. We can help you evaluate the relative costs and benefits to determine if a DAF is right for you.

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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 2/3/22 Ashleigh Laabs 2/3/22

The 2021 gift tax return deadline is almost here, too

April 18, 2022, is the deadline for filing your federal income tax return. Keep in mind that the gift tax return deadline is on the very same date. So, if you made large gifts to family members or heirs last year, it’s important to determine whether you’re required to file Form 709.

Filing requirements

Generally, you must file a gift tax return for 2021 if, during the tax year, you made gifts that exceeded the $15,000-per-recipient annual gift tax exclusion (other than to your U.S. citizen spouse). (For 2022, the exclusion amount has increased to $16,000 per recipient or $32,000 if you split gifts with your spouse.)

You also need to file if you made gifts to a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2021. Other reasons to file include making gifts:

That exceeded the $159,000 (for 2021) annual exclusion for gifts to a noncitizen spouse,
Of future interests (such as remainder interests in a trust) regardless of the amount, or
Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your federal gift and estate tax exemption ($11.7 million for 2021). As you can see, some transfers require a return even if you don’t owe tax.

No return required

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as annual exclusion gifts, present interest gifts to a U.S. citizen spouse, educational or medical expenses paid directly to a school or health care provider, or political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Be ready

If you’re unsure whether you need to file a gift tax return or if you owe gift tax to the IRS, we can help. Act quickly, though, because the filing deadline is fast approaching.

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Ashleigh Laabs 1/31/22 Ashleigh Laabs 1/31/22

Does your trust need protection?

Designing an estate plan can be a delicate balancing act. On the one hand, you want to preserve as much wealth as possible for your family by protecting it from estate taxes and creditors’ claims. On the other hand, you want to have some control over your assets during your life.

Unfortunately, these two goals often conflict with each other. Generally, the most effective way to remove wealth from your taxable estate and shield it from creditors is to place it in one or more irrevocable trusts. But, as the name suggests, an irrevocable trust requires you to relinquish control over the trust assets. One potential solution to this problem is to appoint a trust protector.

Trust protector’s duties

A trust protector is often compared to a member of a corporation’s board of directors. A trustee manages the trust’s day-to-day affairs while the trust protector serves in an oversight capacity to prevent trustee mismanagement and to participate in certain major decisions.

A trust protector’s specific powers are set forth in the trust document. Among other things, powers may include adding, changing or eliminating beneficiaries’ interests; replacing a trustee; and amending the trust or redirecting distributions to comply with new laws or to reflect beneficiaries’ changing circumstances.

One advantage of using a trust protector is that you can confer powers on the protector that you wouldn’t be able to hold yourself without exposing your assets to creditors or triggering gift or estate taxes.

Bear in mind that a trust protector should be distinguished from a trust advisor, who’s available to advise the trustee but has no power to make binding decisions on trust matters.

2 primary benefits

Trust protectors offer two primary benefits:

1. They provide a check against mismanagement, fraud or abuse by the trustee. A trust protector might have the power to remove or replace the trustee, or veto certain decisions, if the trustee isn’t acting in the beneficiaries’ best interests.

2. They allow you to build some flexibility into an otherwise rigid estate planning tool. Many people are reluctant to transfer assets to an irrevocable trust for fear that changing tax laws or changing circumstances years or even decades later may affect the trust’s ability to achieve their original goals. At the same time, they may be hesitant to provide the trustee with too much discretionary authority over the trust. A trust protector can step in if circumstances change and modify the trust or take other actions to ensure that the trust continues to accomplish your estate planning objectives.

Scope of a trust protector’s powers

What powers should you grant your trust protector? The answer depends on the nature of your estate plan, your family’s situation, the capabilities of the trustee and your specific estate planning objectives. But in most cases, it’s advisable to limit the trust protector’s authority to relatively narrow circumstances. Contact us if you have questions regarding the role a trust protector should play in your estate plan.

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Ashleigh Laabs 1/24/22 Ashleigh Laabs 1/24/22

Educate Your Children On Wealth Management

If you’ve worked a lifetime to build a large estate, you undoubtedly would like to leave a lasting legacy to your children and future generations. Educating your children about saving, investing and other money management skills can help keep your legacy alive.

Teaching techniques

There’s no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level.

If your kids are old enough, consider sending them to a money management class. For younger children, you might start by simply giving them an allowance in exchange for doing household chores. This helps teach them the value of work. And, after they spend the money all in one place a few times and don’t have anything left for something they really want, they (hopefully) will learn the value of saving. Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.

For families that are charitably inclined, a private foundation can be a vehicle for teaching children about the joys of giving and the impact wealth can make beyond one’s family. For this strategy to be effective, children should have some input into the foundation’s activities.

Timing and amounts of distributions

Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children — either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.

Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21. This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.

Introduce incentives, but remain flexible

An incentive trust is one that rewards children for doing things that they might not otherwise do. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices. A trust that’s too restrictive may incite rebellion or invite lawsuits.

Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course. A so-called principle trust, for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. But no matter how carefully designed, an incentive trust won’t teach your children critical money skills.

Communication is key

To maintain family harmony when leaving a large portion of your estate to your children, clearly communicate the reasons for your decisions. Contact your estate planning advisor for more information.

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Ashleigh Laabs 1/19/22 Ashleigh Laabs 1/19/22

Avoiding Undue Influence Claims

A primary purpose of estate planning is to ensure that your wealth is distributed according to your wishes after you die. But if a family member challenges the plan, that purpose may be defeated. If the challenge is successful, a judge will decide who’ll inherit your property.

Will contests and similar challenges often occur when one’s estate plan operates in an unexpected way. For example, if you favor one child over the others or leave a substantial inheritance to a nonfamily member, those who expected to inherit that wealth may challenge your plan, often on grounds of undue influence. There are steps you can take, however, to reduce the risks of these challenges.

Not all influence is undue

It’s important to recognize that a certain level of influence is permissible, so long as it doesn’t rise to the level of “undue” influence. For example, there’s generally nothing wrong with a daughter who encourages her father to leave her the family vacation home. But if the father is in a vulnerable position — perhaps he’s ill or frail and the daughter is his caregiver — a court might find that he’s susceptible to undue influence and that the daughter improperly influenced him to change his will.

Protecting your plan

Here are steps you can take to reduce the chances of undue influence claims and increase the odds your wishes are carried out:

Use a revocable trust. Rather than relying on a will alone, create a revocable, or “living,” trust. These trusts don’t go through probate, so they’re more difficult and costly to challenge.

Establish competency. Claims of undue influence often go hand in hand with challenges on grounds of lack of testamentary capacity. With your attorney, establish that you were “of sound mind and body” at the time you sign your will. It can go a long way toward combating an undue influence claim.

Avoid the appearance of undue influence. If you reward someone who’s in a position to influence you, take steps to avoid the appearance of undue influence. For example, prepare your will independently — that is, under conditions that are free from interference by family members or other beneficiaries.

To deter challenges to your plan, consider including a no-contest clause, which provides that, if a beneficiary challenges your will or trust unsuccessfully, he or she will receive nothing. Keep in mind, however, that you may want to leave something to people who are likely to challenge your plan; otherwise, they have nothing to lose by contesting it.

No guarantees

If your estate plan leaves any family members less of an inheritance than they expect, there’s a risk they’ll contest it. Although there’s no guaranteed way to protect your plan, these strategies can minimize the chances that a disgruntled beneficiary will challenge your plan in court. Your attorney can address any concerns you have about your family possibly challenging your estate plan.

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Ashleigh Laabs 1/10/22 Ashleigh Laabs 1/10/22

With proper planning, a charitable remainder trust can replicate a “stretch” IRA

With proper planning, a charitable remainder trust can replicate a “stretch” IRA

The “stretch” IRA generally no longer exists. But if you have a substantial balance in a traditional IRA, a properly designed charitable remainder trust (CRT) can allow you to replicate many of its benefits.

SECURE Act’s effects on stretch IRAs

For years, a stretch IRA was an effective tool that allowed your children or other beneficiaries to stretch inherited IRA savings over their life expectancies. This was a big advantage, because it allowed funds to continue growing and compounding on a tax-deferred basis potentially for decades. However, the SECURE Act generally killed the stretch IRA, beginning on January 1, 2020, by requiring most beneficiaries of inherited IRAs (other than certain eligible individuals described below) to withdraw all of the funds within 10 years.

Requiring heirs to withdraw IRA funds more quickly means they’ll have to pay income taxes on those funds when they take distributions whether they need the money or not. This also may result in pushing them into higher tax brackets. Note that these rules don’t apply to spouses who inherit IRAs. As before, they may roll the funds into their own IRAs and defer distributions until they reach age 72.

In addition to your spouse, the SECURE Act designates several other potential beneficiaries for which a stretch IRA is still an option:

A person who isn’t more than 10 years younger than you (whether related to you or not),
A disabled or chronically ill person (as defined by the SECURE Act), or
A minor child, provided he or she is the sole beneficiary of a separate share of the IRA, either outright or in trust.

For a minor child, annual distributions may be based on the child’s life expectancy until he or she reaches the age of majority (usually 18 or 21), after which the remaining IRA funds must be distributed within the next 10 years.

The charitable solution

Leaving your IRA to a CRT may come close to duplicating the benefits of a stretch IRA. And even though the trust must preserve some of its assets for charity, the tax savings enjoyed by your heirs often make up for the loss of principal.

Here’s how it works: You provide in your estate plan that on your death your IRA will be transferred to a CRT. This is an irrevocable trust that pays out a percentage of its assets to your children or other beneficiaries for life (or for a term of up to 20 years) and then distributes its remaining assets to one or more charities. A CRT is a tax-exempt entity, so any assets you contribute to the trust — including IRAs — aren’t subject to tax unless they’re distributed to noncharitable beneficiaries.

The longer distributions can be stretched out, the closer a CRT comes to replicating a stretch IRA. It’s important to note, however, that the trust’s ability to do so depends on the age of your beneficiaries when you die. Contact us for more information.

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Ashleigh Laabs 1/4/22 Ashleigh Laabs 1/4/22

Making funeral arrangements in advance can ease family turmoil after your death

It’s difficult for many people to think about their mortality, so it’s not surprising to learn that many put off planning their own funerals. Unfortunately, this lack of planning may result in emotional turmoil for surviving family members when someone dies unexpectedly.

Also, a death in the family may cause unintended financial consequences. Why not take matters out of your heirs’ hands? By planning ahead, as much as it may be disconcerting, you can remove this future burden from your loved ones.

Communicate your wishes

First, make your funeral wishes known to other family members. This typically includes instructions about where you are to be buried or cremated, if you prefer a formal or religious ceremony, and even the clothing you’ll be buried in.

It may also cover a memorial service in lieu of, or supplementing, a funeral. If you don’t have a next of kin or would prefer someone else to be in charge of funeral arrangements, you can appoint another representative.

Be aware that the methods for expressing these wishes vary from state to state. With the help of your attorney, you can include a provision in your will, language in a health care proxy or power of attorney, or a separate form specifically designed for communicating your funeral arrangements.

Whichever method you use, it should, at a minimum, state 1) whether you prefer burial or cremation, 2) where you wish to be buried or have your ashes interred or scattered (and any other special instructions), and 3) the person you’d like to be responsible for making these arrangements. Some people also request a specific funeral home.

Consider the ins and outs of a prepaid funeral

There’s a division of opinion in the financial community as to whether you should prepay funeral expenses. If you prepay and opt for a “guaranteed plan,” you lock in the prices for the arrangements, no matter how high fees may escalate before death. With a “nonguaranteed plan,” prices aren’t locked in, but the prepayment accumulates interest that may be put toward any rising costs.

When weighing whether to use a prepaid plan, the Federal Trade Commission recommends that you ask the following questions:

What happens to the money you’ve prepaid?
What happens to the interest income on prepayments placed in a trust account?
Are you protected if the funeral provider goes out of business?

Before signing off on a prepaid plan, learn whether there’s a cancellation clause to the plan in the event you change your mind.

Open a POD bank account

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who will handle your funeral arrangements as beneficiary. When you die, he or she will gain immediate access to the funds without the need for probate. Contact us if you have questions about how to address your funeral in your estate plan. We’d be pleased to assist you.

Ashleigh Laabs 12/28/21 Ashleigh Laabs 12/28/21

Have you named contingent beneficiaries?

Although your will or revocable trust governs the distribution of many or most of your assets, certain assets — such as retirement plans, insurance policies, and bank or brokerage accounts — require you to name a beneficiary (or beneficiaries). This can be an advantage, because when you die, the funds can pass directly to your beneficiaries without going through probate. But to avoid unpleasant surprises, it’s critical not only to choose your beneficiaries carefully, but to also name contingent beneficiaries in case a primary beneficiary dies before you.

Outcome depends on asset type

Suppose a beneficiary predeceases you but you don’t get around to updating the beneficiary form before you die. If you haven’t named a contingent beneficiary, then the disposition of the funds depends on the type of asset.

For retirement plans, the plan document might call for the funds to go to your spouse or, if you’re not married, to your estate. Leaving retirement plan assets to your estate can have undesirable consequences. For one thing, they’ll pass according to the terms of your will, which may be contrary to your wishes. Plus, they’ll have to be distributed and taxed under a five-year rule, depriving your beneficiaries of opportunities to defer those taxes for 10 years or more.

For other types of assets, the funds will likely end up in your estate, which can lead to unfortunate results. Suppose, for example, that your will leaves your entire estate, valued at $1 million, to your son. You also have a $1 million life insurance policy naming your daughter as beneficiary. If your daughter predeceases you and you haven’t updated the beneficiary designation or named a contingent beneficiary (your grandchild, for example), then your son will receive everything, effectively disinheriting your daughter’s family.

Have a backup plan

To ensure that your wishes are fulfilled, name at least one contingent beneficiary for each primary beneficiary. Your contingent beneficiaries can be virtually anyone you choose, including distant family members, friends or even charitable organizations. Contact us if you have questions regarding beneficiary designations. We’d be pleased to help.

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Ashleigh Laabs 12/19/21 Ashleigh Laabs 12/19/21

A blended family requires smart estate planning

If you’re married and have children from a previous marriage plus children or stepchildren from your current marriage, your family is considered a blended family. And because you’ll likely wish to pass your wealth on to all of your biological children but also provide for your spouse and perhaps any stepchildren, estate planning can get tricky. Two estate planning strategies to consider involve a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT).

QTIP trust: The upside and downside

One of the most effective estate planning tools for blended families is a QTIP trust. This trust is designed to qualify for the estate tax marital deduction, so that assets you transfer to the trust aren’t taxed after your death.

Unlike an ordinary marital trust, however, a QTIP trust provides your spouse with income for life but can preserve the principal for your children from your previous marriage. Note that, when your spouse dies, the trust assets are included in his or her taxable estate.

Under the right circumstances, a QTIP trust is a great tool for balancing competing estate planning goals and preserving family harmony. But in some cases — particularly when one spouse is considerably older than the other — it can hinder estate planning efforts.

For example, Pete and Kim got married 10 years ago and have two children, ages six and four. Pete is age 50 and has two children from a previous marriage, ages 17 and 24. Kim is age 34 and this is her first marriage. Pete wants to make sure that Kim and their young children are provided for after his death, but he also wants to share his wealth with his older children. In addition, it’s important to him that everyone in the family feels they’ve been treated fairly.

A QTIP trust would allow Pete to spread his wealth among the family, however, it has a big disadvantage: Pete’s older children would have to wait until Kim died to receive their inheritance. And with a relatively small age difference between the older children and their stepmother, that could be a long time. Pete worries that such an arrangement would create tension.

ILIT: The alternative

As an alternative, Pete’s advisor suggests an ILIT. The ILIT purchases insurance on Pete’s life, and Pete makes annual exclusion gifts to the trust to cover the premiums. If the ILIT is designed properly, there won’t be any estate tax on the insurance proceeds.

When Pete dies, the ILIT collects the death benefit and pays it out to his children from his first marriage. The older children receive their inheritance immediately, and Pete’s other assets remain available to provide for Kim and the younger children.

Communication is key

Whether you choose a QTIP trust, an ILIT or another strategy, explain your plans — and the reasons behind them — to your children and spouse. Communication is important to maintaining blended family harmony. Contact us with any questions regarding estate planning and your blended family. We’d be pleased to assist you.

Ashleigh Laabs 12/19/21 Ashleigh Laabs 12/19/21

Is your estate plan up to date following a divorce?

If you’ve recently divorced, your time likely has been consumed with attorney meetings and negotiations, even if everything was amicable. Probably the last thing you want to do is review your estate plan. But you owe it to yourself and your children to make the necessary updates to reflect your current situation.

Keep assets in your control

The good news is that a divorce generally extinguishes your spouse’s rights under your will or any trusts. So there’s little danger that your ex-spouse will inherit your property outright, even if those documents haven’t been revised yet. If you have minor children, however, your ex-spouse might have more control over your wealth than you’d like.

Generally, property inherited by minors is held by a custodian until they reach the age of majority in the state where they reside (usually age 18, but in some states it’s age 21). In some cases, a surviving parent — perhaps your ex-spouse — may act as custodian. In such a case, your ex-spouse will have considerable discretion in determining how your assets are invested and spent while the children are minors.

One way to avoid this result is to create one or more trusts for the benefit of your children. With a trust, you can appoint the person who’ll be responsible for managing assets and making distributions to your children. It’s the trustee of your choosing — not your ex-spouse’s.

Consider a variety of trusts

As part of the post-divorce estate planning process, you might include a variety of trusts, including, but not limited to a:

Living trust. With a revocable living trust, you can arrange for the transfer of selected assets to designated beneficiaries. This trust type typically is exempt from the probate process and is often used to complement a will.

Credit shelter trust. This trust type typically is used to maximize estate tax benefits when you have children from a prior marriage and you also want to provide financial security for a new spouse. Essentially, the trust maximizes the benefits of the estate tax exemption.

Irrevocable life insurance trust (ILIT). If you transfer ownership of life insurance policies to an ILIT, the proceeds generally are removed from your taxable estate. Furthermore, your family may use part of the proceeds to pay estate costs.

Qualified terminable interest property (QTIP) trust. A QTIP trust is often used after divorces and remarriages. The surviving spouse receives income from the trust while the beneficiaries — typically, children from a first marriage — are entitled to the remainder when the surviving spouse dies.

Make the necessary revisions

If you’re currently in the middle of a divorce, contact us to help you make the necessary revisions to your estate plan, as well as to discuss changing the titling or the beneficiary designations on retirement accounts, life insurance policies and joint tenancy accounts.

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

Prepare for a new year by reviewing your estate plan

Hopefully, you already have a sound estate plan in place to protect the interests of your heirs and minimize potential estate tax liability. But that doesn’t mean you’re completely in the clear. You can’t just fill out the paperwork, lock up the documents in a file cabinet or store them electronically, and forget about it. Consider your estate plan to be a “work in progress.”

Notably, your circumstances could be affected by certain life events that should be reflected in your estate plan. And the plan should be reviewed periodically anyway to ensure that it still meets your main objectives and is up to date. Although you can examine the plan whenever you choose, the end of the year and the start of a new year is often an opportune time for individuals to take stock of their situations.

Reflect life-changing events

What sort of life events might require you to update or modify estate planning documents? The following list isn’t all-inclusive by any means, but it can give you a good idea of when changes may be required:

Your divorce or remarriage,
The birth or adoption of a child or grandchild,
The death of a spouse or another family member,
The illness or disability of you, your spouse or another family member,
When a child or grandchild reaches the age of majority,
When a child or grandchild has education funding needs,
Changes in long-term care insurance coverage,
Taking out a large loan or incurring other debt,
Sizable changes in the value of your assets,
Sale or purchase of a principal residence or second home,
Your retirement or the retirement of your spouse,
Receipt of a large gift or inheritance,
Sale of a business interest, or
Changes in federal or state income tax or estate tax laws.

As part of your estate plan review, examine the critical components — including the key legal documents incorporated within the plan.

Update your letter of instruction

As you review your estate plan, be sure to reread your letter of instruction and make any necessary revisions. Although a letter of instruction isn’t legally binding, it can be incredibly useful.

The letter may provide an inventory and location of assets; account numbers for securities, retirement plans, IRAs and insurance policies; and a list of professional contacts that can help your heirs after your death. It may also be used to state personal preferences (for example, specifics for funeral arrangements).

Prepare for a new year

Don’t put off your estate plan review any longer. Identify any items that should be changed and arrange to have the necessary adjustments made soon after 2022 arrives, if not sooner. We can help you complete your review and make any needed updates.

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

Consider all the angles of joint ownership

Estate planners generally tout the virtues of owning property jointly — and with good reason. Joint ownership offers several advantages for surviving family members. But this shouldn’t be viewed as a panacea for every estate planning concern. You must also be aware of all the implications.

2 types of joint ownership

As the name implies, joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.

From a legal standpoint, there are two main options for married couples:

Joint tenants with rights of survivorship (JTWROS). This is the most common form and often is used for a personal residence or other real estate. With JTWROS, one spouse’s share of the property can be sold without the other spouse’s consent. The property is subject to the reach of creditors of all owners.
Tenancy by the entirety (TBE). In this case, one spouse’s share of the property can’t be sold without the other spouse joining in. But TBE offers more protection from creditors in noncommunity property states if only one spouse is liable for the debt. Currently, a TBE is available in slightly more than half the states.

Property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. Generally this would apply to co-owners who aren’t married to each other, though in certain situations married couples may opt to be tenants in common.

Key benefits

The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased person’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as being intrusive. Jointly owned property, however, simply passes to the surviving owner.

Disadvantages

Joint ownership is a convenient and inexpensive way to establish ownership rights. But the long-standing legal concept has its drawbacks, too. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. Comparable rules may also apply on the state level.

For example, if parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person makes a withdrawal.

Lessons to be learned

Joint ownership is a valuable estate planning tool, especially because it avoids probate. But it’s not the solution for all problems. Nor should this technique be considered a replacement for a will. We can help coordinate joint ownership with other aspects of your estate plan.

Ashleigh Laabs 11/29/21 Ashleigh Laabs 11/29/21

Converting a traditional IRA to a Roth IRA can benefit your retirement and estate plans

Converting a traditional IRA to a Roth IRA can benefit your retirement and estate plans

Retirement planning and estate planning often go hand in hand: The more you save in retirement, the more you’ll have to pass on to the next generation. If you currently have a substantial balance in a traditional IRA, you may be considering whether you should convert the IRA to a Roth IRA. To answer that question, know that there are estate planning benefits to using a Roth IRA and that now is a good time to make the conversion.

Estate planning benefits

The main difference between a traditional IRA and a Roth IRA is the timing of income taxes. With a traditional IRA, your eligible contributions are deductible on your tax return, but distributions of both contributions and earnings are taxable when you receive them. With a Roth IRA, on the other hand, your contributions are nondeductible — that is, they’re made with after-tax dollars — but qualified distributions of both contributions and earnings are tax-free if you meet certain requirements.

Generally, from a tax perspective, you’re better off with a Roth IRA if you expect your tax rate to be higher when it comes time to withdraw the funds. That’s because you pay the tax up front when your tax rate is lower.

Also, from an estate planning perspective, a Roth IRA has two distinct advantages. First, unlike a traditional IRA, a Roth IRA doesn’t mandate required minimum distributions (RMDs) beginning at age 72. If your other assets are sufficient to meet your living expenses, you can allow the funds in a Roth IRA to continue growing tax-free for the rest of your life, multiplying the amount available for your loved ones. Second, after your death, your children or other beneficiaries can withdraw funds from a Roth IRA tax-free. In contrast, an inherited traditional IRA will come with a sizable income tax bill.

Timing is everything

The Tax Cuts and Jobs Act (TCJA) reduced individual income tax rates from 2018 through 2025. By making the conversion now, the TCJA both enhances the benefits of a Roth IRA and reduces the cost of converting. You’ll have to pay federal taxes when you convert from a traditional IRA to a Roth (and possibly state taxes too). But as previously discussed, Roth IRAs offer tax advantages if you expect your tax rate to be higher in the future.

By temporarily lowering individual income tax rates, the TCJA ensures that your tax rate will increase in 2026 (unless Congress lowers tax rates). Future tax rates are irrelevant, of course, if you plan to hold the funds for life and leave them to your loved ones. In that case, you’re generally better off with a Roth IRA, which avoids RMDs and allows the full balance to continue growing tax-free.

Proceed with caution

If you’re contemplating a Roth IRA conversion, discuss with us the costs, benefits and potential risks. Bear in mind, too, that certain provisions of the Build Back Better Act currently being discussed by Congress would restrict, and, in some circumstances, eliminate Roth conversions for certain taxpayers. Contact us to help determine if a Roth IRA conversion is right for you.

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Why a gifting strategy still matters

The IRS recently announced next year’s cost-of-living adjustment amounts. For 2022, the federal gift and estate tax exemption has cracked the $12 million mark: $12.06 million to be exact. Arguably more notable, the annual gift tax exemption has increased by $1,000 to $16,000 per recipient ($32,000 for married couples). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

With the federal gift and estate tax exemption so high, making lifetime gifts to your loved ones may seem less critical than it was in the past. But even if your wealth is well within the exemption amount, a lifetime gifting program offers significant estate planning and personal benefits.

Tax-free gifts

A program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential future estate tax liability. Tax-free gifts include those within the annual gift tax exclusion — for 2021 the exclusion amount is $15,000 per recipient ($30,000 for married couples) — as well as an unlimited amount of direct payments of tuition or medical expenses on another person’s behalf.

Even though estate tax may not seem that important now because it’s not applicable to a vast majority of families, there are no guarantees that a future Congress won’t reduce the exemption amount. Indeed, the gift and estate tax exemption is scheduled to be reduced to an inflation-adjusted $5 million on January 1, 2026. And a provision in an earlier version of the Build Back Better Act currently being discussed by Congress also slashed the exemption amount. However, as of this writing, that provision is no longer included in the bill.

The good news is that lifetime gifts remove assets from your estate, including all future appreciation in value, providing some “insurance” against changes in the law down the road.

Taxable gifts

Taxable gifts — that is, gifts over the annual exclusion amount — may also provide advantages. Although these gifts are subject to tax (or applied against your exemption amount), they can reduce your tax liability by removing future appreciation from your estate.

When contemplating lifetime gifts, be sure to consider income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amount on the date of death. This would allow your heirs to sell appreciated assets without triggering capital gains taxes.

Assets transferred during life, on the other hand, retain your tax basis, so the recipients could end up with a large tax bill should they sell them.

Beyond taxes

Even if gift-giving offered no tax advantages, there are many nontax benefits to making lifetime gifts. For example, it allows you to help loved ones or transfer business interests to the next generation.

Get with the program

Regardless of your level of wealth and whether you’re likely to be subject to estate tax, making gifts continues to offer substantial tax and nontax benefits. We’d be pleased to help you take advantage of these benefits.

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Estate planning for the young and affluent can be tricky

Events of the last decade have taught us that tax law is anything but certain. So how can young, affluent people plan their estates when the tax landscape may look dramatically different 20, 30 or 40 years from now — or even a few months from now? The answer is by taking a flexible approach that allows you to hedge your bets.

Conflicting strategies

Many traditional estate planning techniques evolved during a time when the gift and estate tax exemption was relatively low and the top estate tax rate was substantially higher than the top income tax rate. Under those circumstances, it usually made sense to remove assets from the estate early to shield future asset appreciation from estate taxes.

Today, the exemption has climbed to $10 million, indexed annually for inflation ($11.7 million for 2021) and the top gift and estate tax rate (40%) is roughly the same as the top income tax rate (37%). If the gift and estate tax regime remains the same and your estate’s worth is within the exemption amount, estate tax isn’t a concern and there’s no gift and estate tax benefit to making lifetime gifts.

But there may be a big income tax advantage to keeping assets in your estate: Under current law, the basis of assets transferred at death is stepped up to their current fair market value, so beneficiaries can turn around and sell them without generating capital gains tax liability.

Unpredictable future

For young and affluent people, designing an estate plan is a challenge because it’s difficult to predict what the estate and income tax laws will look like — and what their own net worth will be — decades from now. If you believe that the value of your estate will remain lower than the exemption amount, then it may make sense to hold on to your assets and transfer them at death so your children can potentially enjoy the income tax benefits of a stepped-up basis.

But what if your wealth grows beyond the exemption amount so that estate taxes become a concern again? Or what if the exemption goes down? Indeed, Congress is currently considering legislation that would halve the gift and estate tax exemption to $5 million, indexed annually for inflation (which likely would be somewhere around $6 million for 2022). If that happens, you may have to remove assets from your estate to ease estate tax liability.

Or what if the step-up in basis rules change, reducing or eliminating the income tax benefits of holding assets until death? Major changes to the rules had been proposed earlier this year. These changes aren’t included in the latest version of the legislation, but they could be proposed again in the future.

Building flexibility into your plan

A carefully designed trust can make it possible to remove assets from your estate now, while giving the trustee the authority to force the assets back into your estate if that turns out to be the better strategy. This allows you to shield decades of appreciation from estate tax while retaining the option to include the assets in your estate should income tax savings become a priority.

For the technique to work, the trust must be irrevocable, the grantor (you) must retain no control over the trust assets (including the ability to remove and replace the trustee), and the trustee should have absolute discretion over distributions.

This trust type offers welcome flexibility, but it’s not risk-free. Contact us for more information.

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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.

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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.

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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.

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