BLOG

Ashleigh Laabs 4/27/22 Ashleigh Laabs 4/27/22

Understanding the terms of health care directives

Estate planning experts usually cite the need to include advance health care directives in a comprehensive estate plan. But there may be different legal names given to those directives, depending on one’s jurisdiction.

In any event, regardless of what they’re called in the state where you reside, it’s important to create these documents and keep your family in the loop. Let’s take a closer look at a few health care directives.

Health care power of attorney

Comparable to a durable power of attorney that gives an “agent” authority to handle your financial affairs if you’re incapacitated, a health care power of attorney (or medical power of attorney) enables another person to make health care decisions for you. This is also called a health care proxy in some states.

Choosing an agent is critical. You probably can’t anticipate every situation that might arise — virtually no one can — in which it’s likely that someone will have to make decisions concerning your health. Therefore, the agent should be a person who knows you well and understands your general outlook. Frequently, this is a family member, close friend or trusted professional. Remember to designate a successor in the event your first choice is unable to do the job.

Living wills

A living will is a legal document that establishes criteria for prolonging or ending medical treatment. It indicates the types of medical treatment you want, or do not want, in the event you suffer from a terminal illness or are incapacitated.

This document doesn’t take effect unless you’re incapacitated. Typically, a physician must certify that you’re suffering from a terminal illness or that you’re permanently unconscious. Address common end-of-life decisions in your living will. This may require consultations with a physician.

The requirements for living wills vary from state to state. Have an attorney who’s experienced in these matters prepare your living will based on the prevailing laws.

DNRs and DNIs

Despite the common perception, it’s not a legal requirement for you to have an advance directive or living will on file to implement a “do not resuscitate” (DNR) or “do not intubate” (DNI) order. To establish a DNR or DNI order, discuss your preferences with your physician and have him or her prepare the paperwork. The order is then placed in your medical file.

Putting directives into action

Advance directives must be put in writing. Each state has different forms and requirements for creating these legal documents. Depending on where you live, you may need to have certain forms signed by a witness or notarized. If you’re unsure of the requirements or the process, contact an attorney for assistance.

Review your advance directives with your physician and your health care agent to be sure you’ve accurately filled out the forms. Then let all the interested parties — including your attorney, physician, power of attorney agent and family members — know where the documents are located and how to access them.

_____________________________________________________________________________

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 4/27/22 Ashleigh Laabs 4/27/22

Opening up to SLAT opportunities

Estate tax planning can become complicated when multiple parties are involved. For example, you may be concerned about providing assets to a surviving spouse of a second marriage, while also providing for your children from your first marriage. Of course, you also want to take advantage of favorable estate tax provisions in the law.

Fortunately, there’s a relatively simple way to meet your objectives with few dire tax consequences. It’s commonly called a spousal lifetime access trust (SLAT).

A SLAT in action

Essentially, a SLAT is an irrevocable trust established by a grantor spouse for the benefit of the other spouse — called the beneficiary spouse — plus other family members, such as children and grandchildren. The beneficiary spouse is granted limited access to the trust’s funds. As a result, the assets generally are protected from the reach of the beneficiary spouse’s creditors. This ensures that the remainder beneficiaries — namely, the children and grandchildren — will have a nest egg to rely on.

According to the SLAT terms, lifetime distributions are made to the beneficiary spouse to meet his or her needs. Preferably, if other funds are available to the beneficiary spouse outside of the trust, those funds are used first instead of making regular distributions to the spouse. Otherwise, distributions from the SLAT to the beneficiary spouse will reduce the trust’s effectiveness over time.

Favorable tax provisions

One of the primary attractions of a SLAT is that it’s designed to minimize federal tax liabilities. First, the transfer of assets is treated as a taxable gift, but it can be sheltered from gift tax by a combination of the annual gift tax exclusion ($16,000 for 2022) and the gift and estate tax exemption ($12.06 million for 2022). However, be aware that use of the exemption during the grantor spouse’s lifetime reduces the available estate tax shelter at death.

Second, assets transferred by the grantor spouse to a SLAT are removed from his or her taxable estate. Thus, estate taxes aren’t a concern, thereby allowing the remaining estate tax exemption to be used for other assets.

Third, a SLAT is considered to be a “grantor trust” for income tax purposes. In other words, when a grantor spouse establishes a SLAT for the benefit of the beneficiary spouse, the trust’s taxable income is reported on the grantor’s personal tax return, but the trust entity pays zero tax. This may be advantageous because the assets can compound inside the trust without any income tax erosion. On the death of the grantor spouse, the trust is required to pay income tax.

Other planning considerations

As mentioned above, the transfer of assets to a SLAT is a gift, so the grantor must file a federal gift tax return. Finally, don’t forget that a SLAT is an irrevocable trust. Thus, once the grantor spouse transfers assets to the trust, he or she can’t get them back.

If you’re considering using a SLAT, contact us for additional details.

_____________________________________________________________________________

Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

Careful planning required for beneficiaries to borrow from a trust

Intrafamily loans allow you to provide financial assistance to loved ones — often at favorable terms — while potentially reducing gift and estate taxes. But what about families that lack the liquid assets to make such loans? Are there other options if they have a trust?

One lesser-known possibility is for trust beneficiaries to borrow money from a trust. This strategy requires careful planning, however, because the trustee must consider his or her fiduciary duty to the trust and its other beneficiaries in approving and structuring such a loan.

Benefits of intrafamily loans

An intrafamily loan can be a great way to help out your children or other family members financially while also transferring significant amounts of wealth, free of gift and estate tax. Why not simply make an outright gift? Actually, a gift is the better option, so long as your unused exemption is enough to cover it and you don’t need the funds or the interest income. But if transfer taxes are an issue or you’re not prepared to part with the money just yet, a loan can be an attractive alternative.

Generally, to pass muster with the IRS, the interest rate on an intrafamily loan must be at least the applicable federal rate for the month in which the loan is made. Otherwise, the IRS may view the loan as a disguised distribution, which can result in a variety of unpleasant tax complications. The loan should also be documented by a promissory note and otherwise treated as an arm’s-length transaction.

Trust loans vs. distributions

If an intrafamily loan isn’t an option, it may be possible for a trust beneficiary to obtain a loan from the trust. You might wonder why a beneficiary would borrow from the trust rather than take a distribution. There are several situations in which a loan may be necessary or desirable, including:

The trust’s terms place conditions on distributions that aren’t currently satisfied,
The borrower seeks an amount that exceeds limits on distributions imposed by the trust (an income-only trust, for example),
The trust has multiple beneficiaries and the borrower seeks an amount that would be unfair to other beneficiaries if taken as a distribution, or
A loan is preferable for tax planning purposes.

Be sure to check whether trust loans are permissible. Many trust instruments explicitly authorize loans.

Handle with care

There’s a critical difference between intrafamily loans and trust loans: The trustee has a fiduciary duty to manage the trust in a prudent and impartial manner. If you lend money to family members from your personal assets, you’re generally permitted to structure the transaction as you see fit.

However, a trustee considering a loan request must act in the best interests of the trust and all of its beneficiaries. So, for example, a trustee who approves a loan to a current beneficiary who’s a bad credit risk is likely breaching his or her fiduciary duty to the remainder beneficiaries.

_____________________________________________________________________________

Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

What estate planning strategies are available for non-U.S. citizens?

Are you, or is your spouse, a non-U.S. citizen? If so, several traditional estate planning techniques won’t be available to you. However, if you’re a U.S. resident, but not a citizen, the IRS will treat you similarly to a U.S. citizen.

If you’re considered a resident, you’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $12.06 million federal gift and estate tax exemption and the $16,000 per recipient annual exclusion in 2022. And you can double the annual exclusion to $32,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however.

Understanding residency

Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. A person acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.

Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.

Estate tax law for nonresident aliens

If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $16,000 annual exclusion (although you can’t split gifts with your spouse).

The bad news is that your estate tax exemption drops from $12.06 million to a miniscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property (such as cars, boats and artwork) located in the United States.

Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.

We can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure.

_____________________________________________________________________________

Ashleigh Laabs 4/19/22 Ashleigh Laabs 4/19/22

Power up your trust with Crummey powers

The unified gift and estate tax exemption is set at an inflation-adjusted $12.06 million for 2022, up from $11.7 million for 2021. This means that for many families, estate tax liability isn’t a factor. However, for others, the annual gift tax exclusion continues to be an important estate planning strategy — especially since future tax law changes could lower the gift and estate tax exemption. For this reason, using a Crummey trust in your estate plan remains an important estate planning strategy. Here’s why.

Using the annual exclusion

Under the annual gift tax exclusion, you can give gifts to each recipient, valued up to a specific limit, without incurring any gift tax. The limit for 2022 is $16,000 per recipient. (This amount is indexed for inflation, but only in $1,000 increments.)

Therefore, if you have, for example, three adult children and seven grandchildren, you can give each one $16,000 this year, for a total of $160,000, and pay zero gift tax. The exclusion is per donor, meaning that for a married couple the amount is doubled.

If you give outright gifts, however, you run the risk that the money or property could be squandered, especially if the recipient is young or irresponsible. Alternatively, you can transfer assets to a trust and name a child as a beneficiary. With this setup, the designated trustee manages the assets until the child reaches a specified age.

But there’s a catch. To qualify for the annual exclusion, a gift must be a transfer of a “present interest.” This is defined as an unrestricted right to the immediate use, possession or enjoyment of the property or the income from it. Without certain provisions in the trust language, a gift to the trust doesn’t qualify as a gift of a present interest. Instead, it’s treated as a gift of a “future interest” that’s not eligible for the annual gift tax exclusion.

Giving Crummey powers to a trust

This is where a Crummey trust can come to the rescue. It satisfies the rules for gifts of a present interest without requiring the trustee to distribute the assets to the beneficiary.

Typically, periodic contributions of assets to the trust are coordinated with an immediate power giving the beneficiary the right to withdraw the contribution for a limited time. However, the expectation of the donor is that the power won’t be exercised. (The trust document cannot expressly provide this.)

As a result, the beneficiary’s limited withdrawal right allows the gift to the trust to be treated as a gift of a present interest. Thus, it qualifies for the annual gift tax exclusion. Note that it’s the existence of the legal power — not the exercise of it — that determines the tax outcome.

Avoiding pitfalls

To pass muster with the IRS, the beneficiary must be given actual notice of the withdrawal right, along with a reasonable period to exercise it. Generally, at least 30 days is required. Contact us with additional questions regarding the use of a Crummey trust.

_____________________________________________________________________________

Ashleigh Laabs 3/25/22 Ashleigh Laabs 3/25/22

A beneficiary designation or joint title can override your will

Inattention to beneficiary designations and jointly titled assets can quickly unravel your estate plan. Suppose, for example, that your will provides for all of your property to be divided equally among your three children. But what if your IRA, which names the oldest child as beneficiary, accounts for half of the estate? In that case, the oldest child will inherit half of your estate plus a one-third share of the remaining assets — hardly equal.

The same goes for jointly owned property. When you die, the surviving owner takes title to the property regardless of the terms of your will. Unfortunately, many people don’t realize that their wills don’t control the disposition of nonprobate assets.

What are nonprobate assets?

Nonprobate assets generally are transferred automatically at death according to a beneficiary designation or contract. So they override your will. They include life insurance policies, retirement plans and IRAs, as well as joint bank or brokerage accounts. Even savings bonds come with beneficiary forms.

To ensure that your estate plan reflects your wishes, review beneficiary designations and property titles regularly, particularly after significant life events such as a marriage or divorce, the birth of a child, or the death of a loved one.

What about POD and TOD designations?

Payable-on-death (POD) and transfer-on-death (TOD) designations provide a simple and inexpensive way to transfer assets outside of probate. POD designations can be used for bank accounts and certificates of deposit. TOD designations can be used for stocks, bonds, brokerage accounts and, in many states, even real estate.

Setting one up is as easy as providing a signed POD or TOD beneficiary designation form. When you die, your beneficiaries just need to present a certified copy of the death certificate and their identification to the bank or brokerage, and the money or securities are theirs.

However, just like other beneficiary designations, POD and TOD designations can backfire if they’re not carefully coordinated with the rest of your estate plan. Too often, people designate an account as POD or TOD as an afterthought, without considering whether it may conflict with their wills, trusts or other estate planning documents.

Another potential problem with POD and TOD designations is that, if you use them for most of your assets, the assets left in your estate may be insufficient to pay debts, taxes or other expenses. Your executor would then have to initiate a proceeding to bring assets back into the estate.

Whether you have large retirement accounts or life insurance policies, hold joint accounts or use POD or TOD designations as part of your estate plan, we can review the rest of your plan to identify potential conflicts.

_____________________________________________________________________________

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

Defined-value gifts: Plan carefully to avoid unpleasant tax surprises

For 2022, the federal gift and estate tax exemption has reached its highest level ever. In fact, you can transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes. This is a limited time offer, however, as the exemption amount is scheduled to drop to $5 million (adjusted for inflation) in 2026. (However, Congress could pass legislation to reduce it even sooner or to extend it longer.)

Many are considering making substantial gifts to the younger generation to take advantage of the current exemption while it lasts. Often, these gifts consist of hard-to-value assets — such as interests in a closely held business or family limited partnership (FLP) — which can be risky. A defined-value gift may help you avoid unexpected tax liabilities.

Hedging your bets

Simply put, a defined-value gift is a gift of assets that are valued at a specific dollar amount rather than a certain number of stock shares or FLP units or a specified percentage of a business entity.

Structured properly, a defined-value gift ensures that the gift won’t trigger an assessment of gift taxes down the road. The key to this strategy is that the defined-value language in the transfer document is drafted as a “formula” clause rather than an invalid “savings” clause.

A formula clause transfers a fixed dollar amount, subject to adjustment in the number of shares or units necessary to equal that dollar amount (based on a final determination of the value of those shares or units for federal gift and estate tax purposes). A savings clause, in contrast, provides for a portion of the gift to be returned to the donor if that portion is ultimately determined to be taxable.

Language matters

For a defined-value gift to be effective, it’s critical to use precise language in the transfer documents. In one recent case, the U.S. Tax Court rejected an intended defined-value gift of FLP interests and upheld the IRS’s assessment of gift taxes based on percentage interests. The documents called for the transfer of FLP interests with a defined fair market value “as determined by a qualified appraiser” within a specified time after the transfer.

The court found that the transfer documents failed to achieve a defined-value gift, because fair market value was determined by a qualified appraiser. The documents didn’t provide for an adjustment in the number of FLP units if their value “is finally determined for federal gift tax purposes to exceed the amount described.”

Seek professional advice

If you plan to make substantial gifts of interests in a closely held business, FLP or other hard-to-value asset, a defined-value gift can help you avoid unwanted gift tax consequences. Turn to us before taking action because to be effective, the transfer documents must contain specific language that provides for adjustment of the number of shares or units to convey the desired value. We’d be pleased to help.

_____________________________________________________________________________

Ashleigh Laabs 3/7/22 Ashleigh Laabs 3/7/22

Clarity counts when it comes to estate planning documents

Precise language is critical in wills, trusts and other estate planning documents. A lack of clarity may be an invitation to litigation. An example of this is the dispute that arose after Tom Petty’s death, between his widow and his two daughters from a previous marriage. (The two parties have since resolved their differences and dismissed all litigation matters.)

Interpreting “equal participation”

Details of the musician’s estate plan aren’t entirely clear. But it appears that his trust appointed his widow as a “directing trustee,” while providing that she and his daughters were entitled to “participate equally” in the management of his extensive music catalog and other assets. Unfortunately, the trust failed to spell out the meaning of “equal participation,” resulting in litigation between Petty’s widow and daughters over control of his assets.

There are several plausible interpretations of “equal participation.” One interpretation is that each of the three women has an equal vote, giving the daughters the ability to rule by majority.

Another interpretation is that each has an opportunity to participate in the decision-making process, but Petty’s widow has the final say as the directing trustee. Yet another possibility is that Petty intended for the women to make decisions by unanimous consent.

Determining intent

If the two parties hadn’t settled their differences out of court, it would have been up to the court to provide an answer based on evidence of Petty’s intent. But the time, expense and emotional strain of litigation may have been avoided by including language in the trust that made that intent clear.

If you’re planning your estate, the Petty case illustrates the importance of using unambiguous language to ensure that your wishes are carried out. And if you anticipate that one or more of your beneficiaries will perceive your plan as unfair, sit down with them to explain your reasoning. This discussion can go a long way toward avoiding future disputes.

Review and revise to make your intent crystal clear

If your estate plan has already been drafted and you have concerns regarding the language used, contact your attorney. He or she can review your documents to determine if more precise wording is necessary to make your intentions crystal clear for your family after your death.

_____________________________________________________________________________

Ashleigh Laabs 2/25/22 Ashleigh Laabs 2/25/22

Owning real estate in more than one state may multiply probate costs

One goal of estate planning is to avoid or minimize probate. This is particularly important if you own real estate in more than one state. Why? Because each piece of real estate titled in your name must go through probate in the state where the property is located.

Cost and time can become issues

Probate is a court-supervised administration of your estate. If probate proceedings are required in several states, the process can become expensive.

For example, your representative will need to engage a probate lawyer in each state, file certain documents in each state and comply with other redundant administrative requirements. In addition to the added expense, the process may also delay the settlement of your estate.

Place all real estate into a revocable trust

If you have a revocable trust (sometimes called a “living trust”), the simplest way to avoid multiple probate proceedings is to ensure that the trust holds the title to all of your real estate. Generally, this involves preparing a deed transferring each property to the trust and recording the deed in the county where the property is located. Property held in a revocable trust generally doesn’t have to go through probate.

Before you transfer real estate to a revocable trust, we can help determine if doing so will have negative tax or estate planning implications. For example, will transferring a residence to a trust affect your eligibility for homestead exemptions from property taxes or other tax breaks? Will the transfer affect any mortgages on the property? Will it be subject to any real property transfer taxes?

It’s also important to consider whether transferring title to property will affect the extent to which it’s shielded from the claims of creditors. Please contact us with any questions.

_____________________________________________________________________________

Ashleigh Laabs 2/21/22 Ashleigh Laabs 2/21/22

Use the net gift technique to reduce your gift tax rate

If you’re concerned about the impact of transfer taxes on your gifts, consider making “net gifts” to your loved ones. A net gift is simply a gift for which the recipient agrees to pay the gift tax, thereby reducing the value of the gift for tax purposes. It may also be possible to reduce its value further through the “net, net gift” technique.

The technique in action

The easiest way to demonstrate the benefits of a net gift is through an example. Suppose you’d like to make a $1 million gift to your adult son. For purposes of this example, also assume that you’ve already exhausted your federal gift and estate tax exemption amount, so the gift is fully taxable. At the current 40% marginal rate, the tax on your $1 million gift would be $400,000. However, if your son agrees to pay the gift tax as a condition of receiving the gift, then the value of the gift would be reduced by the amount of tax, which in turn would reduce the amount of gift tax owed.

Rather than get caught up in an endless loop of calculating the tax, reducing the gift’s value, recalculating the tax, and so on, there’s a simple formula for determining your son’s tax liability: Gift tax = tentative tax/(1 + tax rate). In our example, the tentative tax is $400,000 (the tax that would’ve been owed on an outright gift), so the gift tax on the net gift would be $400,000/1.4 = $285,714.

You can confirm that the math works out by assuming that you give your son $1 million and that he agrees to pay $285,714 in gift taxes. That tax liability reduces the gift to $1 million - $285,714 = $714,287, resulting in a tax liability of .40 x $714,287 = $285,714.

By using a net gift technique, you reduce the effective tax rate on the $1 million transfer from 40% to only 28.57%. Note that if the gift is in the form of appreciated assets rather than cash, the recipient’s payment of the tax liability can result in capital gains taxes for the donor.

Taking it up a notch

It may be possible to further reduce the effective gift tax rate by using a net, net gift. Under this technique, in addition to assuming liability for gift taxes, the recipient also agrees to pay any estate tax liability that might arise by virtue of the so-called “three-year rule.”

Under that rule, gifts made within three years of death are pulled back into the donor’s estate and subject to estate taxes. The U.S. Tax Court has effectively given its blessing to the net, net gift technique, allowing the value of a gift to be reduced by the actuarial value of the recipient’s contingent obligation to pay estate taxes that would be owed if the donor were to die within three years of making the gift.

If you’re considering the net gift technique, consult with us before taking any action.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

_____________________________________________________________________________

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.

BLOG

Opening up to SLAT opportunities

Strategic | Experienced | Connected