Before They’re Gone—Estate Planning Strategies

As Congress continues to hammer out the details on impending legislation, there are certain laws still in effect concerning estate planning. The article “Last Call for SLATs, GTRATs, and the Use of the Enhanced Gift Tax Exemption?” from Mondaq says now is the time to review and update your estate plan, just in case any beneficial strategies may disappear by year’s end.

Here are the top five estate planning items to consider:

Expect Exemptions to Take a Dive. Estate, gift, and generation-skipping transfer tax exemptions are $11.7 million per person and are now scheduled to increase by an inflationary indexed amount through 2025. Even if there are no legislative changes, on January 1, 2026, this number drops to $5 million, indexed for inflation. Under proposed legislation, it will revert to $6,020,000 and will continue to be indexed for inflation. This is a “use it or lose it” exemption.

Married Couples Have Options Different Than Solos. Married persons who don’t want to gift large amounts to descendants have the option to gift the exemption amount to their spouse using a SLAT—Spousal Lifetime Access Trust. The spouses can both create these trusts for each other, but the IRS is watching, so certain precautions must be taken. The trusts should not be identical in nature and should not be created at the same time to avoid application of the “reciprocal trust” doctrine, which would render both trusts moot. Under proposed legislation, SLATs will be includable in your estate at death, but SLATs created and funded before the legislation is enacted will be grandfathered in. If this is something of interest, don’t delay.

GRATs and other Grantor Trusts May be Gone. They simply won’t be of any use, since proposed legislation has them includable in your estate at death. Existing GRATs and other grantor trusts will be grandfathered in from the new rules. Again, if this is of interest, the time to act is now.

IRA Rules May Change. People who own Individual Retirement Accounts with values above $10 million, combined with income of more than $450,000, may not be able to make contributions to traditional IRAs, Roth IRAs, and defined contribution plans under the proposed legislation. Individuals with large IRA balances may be required to withdraw funds from retirement plans, regardless of age. A minimum distribution may be an amount equal to 50% of the amount by which the combined IRA value is higher than the $10 million threshold.

Rules Change for Singles Too. A single person who doesn’t want to make a large gift and lose control and access may create and gift an exemption amount to a trust in a jurisdiction with “domestic asset protection trust” legislation and still be a beneficiary of such a trust. This trust must be fully funded before the new legislation is enacted, since once the law passes, such a trust will be includable in the person’s estate. Check with your estate planning attorney to see if your state allows this strategy.

Reference: Mondaq (Sep. 24. 2021) “Last Call for SLATs, GTRATs, and the Use of the Enhanced Gift Tax Exemption?”

What Should Be Included in Estate Planning?

How should you plan for the future, given all that we’ve been through since March 2020? One important step is to get your estate plan in order. While many people became more aware of their mortality since the pandemic began, just as many have kept putting off having an estate plan done. The time to do it, according to the recent article “A Simple Guide to Estate Planning Best Practices” from Accounting Web, is now. Here’s how.

Start with a will. The size of your estate doesn’t matter. Having a will means that you are able to grant whatever you own to someone else on your death. If you don’t have a will, your state’s law will distribute your worldly goods. This method makes certain assumptions that might not be true. You might not want your children to inherit everything you own at age 25. You may also have a distant cousin who thinks they are entitled to an inheritance and is willing to litigate just to get some of your assets. Having a will is the start of having an estate plan. It’s also how you name the executor, the person who will be in charge of administering your assets after death. Your will is used to name a guardian to care for minor children.

Consider your estate planning goals. If you have an estate plan that’s older than four years, it’s time for a review. If you don’t remember when your estate was last done, you definitely should have it reviewed. Your assets may have increased or decreased. The person you named to be your executor may have moved away or died. The past five years have seen a large number of new tax laws, which may have a major impact on your estate plan. You may need to establish trusts and make gifts to keep your wealth in the family.

Could low-cost wealth transfers be right for you? Making gifts to your next of kin may allow them to have access to capital, while decreasing your taxable estate. One common method to do this is through an intra-family loan. By providing a younger member of the family with a loan at a minimal federal interest rate, the younger generation can invest in assets that are likely to appreciate outside the older generation’s taxable estate. Talk with your estate planning attorney about how to do this properly. It’s not a do-it-yourself transaction.

Grantor Retained Annuity Trusts (GRATs) A GRAT allows you to retain an annuity interest in a separate trust, while leaving the remainder beneficiaries. The value of the annuity is removed from the value of the GRAT-constrained property, so beneficiaries only need to pay taxes on the remainder of the value. Low interest rates made a GRAT very attractive, and low entry requirements provide an opportunity to appreciate assets within the GRAT, which might have otherwise been levied on the investments if they were passed through a will. GRATs may need management—one strategy is to combine assets with a series of long and short-term trusts to prepare for market volatility.

Grantor Trust Acquisition of Assets. Here’s a slightly complicated but effective way to reduce taxes on assets: selling them to a grantor trust. The sale may still be taxable, but for a reduced rate. An individual may create and fund a trust using a portion of their gift tax shelter allowance. This ensures that the assets in the trust will be sheltered from transfer tax in the future. The trust structure works as a “grantor” trust for income tax purposes with the individual as the taxpayer, who is liable to report all income generated from the trust. Here’s the neat twist: the individual may sell these appreciated assets to the grantor trust without expressing capital gains. The assets in the trust may grow over time, so the trust estate develops with less fear of tax liability. This is a complex transaction that an estate planning attorney can discuss with you.

One thing is certain: the financial demands of the pandemic have created a need for government agencies to find revenue. The time to prepare for increased taxes on wealth is now.

Reference: Accounting Web (June 23, 2021) “A Simple Guide to Estate Planning Best Practices”

 

Estate Planning Actions to Consider before 2020 Ends

When it comes to estate planning, there’s no such thing as a “one-size-fits-all” solution. That is especially true before a presidential election. However, there are several factors that should be considered and discussed with your estate planning attorney, as recommended in this recent article from The National Law Review “Top Ten Estate Planning Recommendations before the End of 2020.”

The estate, gift and generational-skipping transfer tax exemption is now $11.58 million per person. It’s scheduled to increase every year by an inflationary indexed amount through 2025 and in 2026 will revert to $5 million. If Biden wins the election, don’t be surprised if changes are made earlier. The IRS has already said that if the exemption is used this year, there will be no claw back. This is a “use it or lose it” scenario. If you are planning on using it, now is the time to do so.

It is possible that Discounts, GRATS, Grantor Trusts and other estate planning techniques may go away depending upon who wins the election and control of Congress. Consider taking advantage of commonly used estate planning tools before it is too late.

Married couples who are not ready to gift significant amounts to their children or to put assets into trusts for their children should consider the SLAT–Spousal Lifetime Access Trust. They can create and gift the exemption amount to a SLAT and still maintain access to the assets.

Single individuals who similarly are not ready to make large gifts and give up access to assets may also create and gift an exemption amount to a trust in a jurisdiction based on “domestic asset protection trust” legislation. They can be a beneficiary of such a trust.  Interest rates are at an all-time low, and that is when tools like intra family loans, GRATs and GLATs are at their best.

Moving to Florida, Nevada, Texas and other low- or no-income tax states has become very popular, especially for people who can work remotely. Be aware that high tax states like New York and California are not going to let your tax revenue leave easily. Check with your estate planning attorney to make sure you’re following the rules in giving up your domicile in a high-income tax state.

Reference: The National Law Review (Oct. 6, 2020) “Top Ten Estate Planning Recommendations before the End of 2020”

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Estate Planning Options to Consider in Uncertain Times

Now is a good time to reach out to an estate planning attorney to review and update beneficiaries, named executors, financial and healthcare powers of attorney, wills and trusts, advises the article “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage” from Traders Magazine. There are also some strategic estate planning options to consider in the current environment.

Intentionally Defective Grantor Trusts (IDGTs): These are irrevocable trusts that are structured to be “intentionally defective.” They are gifts to grantor trusts for non-grantor beneficiaries that allow contributed assets to appreciate outside of the grantor’s estate, while the income produced by the trust is taxed to the grantor, and not the trust. The external appreciation requires the grantor to use non-trust assets to pay the trust’s income taxes, which equals a tax-free gift to the beneficiaries of the trust, while reducing the grantor’s estate. Trust assets can grow tax-free, which creates additional appreciation opportunities for trust beneficiaries. IDGTs are especially useful to owners of real estate, closely held businesses or highly-appreciating assets that are or will likely be exposed to estate tax.

Grantor Retained Annuity Trusts (GRATs): GRATs allow asset owners to put assets irrevocably into trusts to benefit others while receiving fixed annuity payments for a period of time. GRATs are especially effective in situations where low asset values and/or interest rates are present, because the “hurdle rate” of the annuity payment will be lower, while the price appreciation is potentially greater. GRATs are often used by asset owners with estate tax exposure who want to transfer assets out of their estate and retain access to cash flow from those assets, while they are living.

Debt strategies: Debt repayment represents an absolute and/or risk-adjusted rate of return that is often the same or better than savings rates or bond yields. Some debt strategies that are now useful include:

Mortgage refinancing: Interest rates are likely to be low for the foreseeable future. People with long-term debt may find refinancing right now an advantageous option.

Opportunistic lines of credit: The low interest rates may make tapping available lines of credit or opening new lines of credit attractive for investment opportunities, wealth transfer, or additional liquidity.

Low-rate intra-family loans: When structured properly, loans between family members can be made at below-interest, IRS-sanctioned interest rates. An estate planning attorney will be able to help structure the intra-family loan, so that it will be considered an arms-length transaction that does not impose gift tax consequences for the lender.

High-rate intra-family or -entity loans: This sounds counter-intuitive, but if structured properly, a high-rate intra-family or -entity loan can charge a higher but tax-appropriate rate that increases a fixed income cash flow for the borrower, while avoiding gift and income tax.

All of these techniques should be examined with the help of an experienced estate planning attorney to ensure that they align with the overall estate plan for the individual and the family.

Reference: Traders Magazine (May 6, 2020) “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage”