There are important estate planning techniques that aren’t directly affected by legislation and changes in tax law, but that can still make a big impact on wealth preservation. From regularly updating a will to consistently moving assets off a balance sheet, here are five estate planning items that should be added to your client’s to-do list.
Schedule Routine (Estate Planning) Checkups
Make sure clients regularly update their health care documents and wills.
Ask clients to consider whether the individuals named in their documents are still appropriate. Think about positions including power of attorney (POA), health care agent, guardian for minor children, trustees of an irrevocable or testamentary trust, trust protectors and trustee appointers (if any). Ask the client questions, such as:
Has the client’s relationship with any of the people named changed?
Has the client’s life situation of any of those named changed?
Has the health of any of those named changed? If a client’s parents were initially named as guardians for minor children, but the parents are now older and in poor health, for example, alternative guardians who can keep up with kids may need to be named instead.
Are all of the people who have been named still geographically appropriate? For example, if a client’s trusted POA moved across the country and can’t now serve in an emergency, a new POA should be named.
Next, clients should also consider whether the beneficiaries named are still proper. Ask the client questions, such as:
Are the amounts left to each beneficiary still appropriate?
Again, how’s the client’s relationship with each beneficiary? For instance, has there been a falling out with any of them?
Are there new beneficiaries (nieces, nephews, charities, etc.) the client now wishes to include? Or have the client’s documents been drafted cover new children and grandchildren automatically?
Are any of the beneficiaries at risk with inheriting assets? Are they the target of a divorce, legal action or the victim of financial strife or addiction, for example?
Finally, think through whether the current trust provisions make best use of the law for asset protection purposes.
"Do it for the Kids"
Set up trusts for your clients’ children and grandchildren.
While the lifetime exemption amount has changed several times in the last decade, the annual gifting exemption has remained fairly constant. Setting up a trust for a client’s children and grandchildren allows him to tap into this reliable wealth transfer mechanism without the damage of gifting assets to them outright. With this strategy:
Assets will be held in a protected vehicle, meaning they can be passed on to the next generation outside of the children’s estates, as well.
A trustee can manage and control the assets while the children are minors.
The client’s spouse should be added as a beneficiary, and the grantor should retain the power to take loans from the trust.
Move Assets off Your Clients’ Balance Sheets
Have the client sell the family business, real estate, life insurance, investment accounts and more into a trust.
A family business is typically a long-term investment, so have the client sell it into a trust. This provides an income stream to older individuals who may wish to surrender the day-to-day operations of the business without losing access to the economic security of the asset. It also puts the asset in a protected vehicle that’s exempt from estate tax.
Have the client sell business interests when the value is modest so that growth takes place outside of his estate. Selling a business interest also allows for valuation discounts, with greater equity going into trust.
Real estate can be sold into trust for a similar purpose as family businesses.
Life insurance can be sold into a trust to avoid the 3-year look-back. If a client gifts life insurance into his irrevocable trust and passes away within three years, the Internal Revenue Service will claw that asset back into his estate. The sale prevents this.
Make the Switch
Swap low basis assets out of your client’s trust.
Assess the income tax benefits of holding assets inside a client’s estate versus the estate tax benefits of pushing them outside of his estate.
With a critical eye, consider swapping estate assets for the trust’s assets, and vice-versa, to maximize the income tax basis step-up.
A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of transfer, not the value at which the original party purchased the asset.
When an asset is gifted to an individual or trust, there’s a carryover of the original basis – meaning there’s no step-up. Although the asset is now outside the grantor’s estate for estate tax purposes, on the sale of the asset, capital gains tax will be due.
When an asset is included in a descendant’s estate, the asset receives a step-up in basis to the date of death value at that time. The asset can be sold to avoid any capital gains tax.
The opportunity to achieve the step-up is available now and should be seized. It’s highly likely that the strategy will be advantageous to undertake at any time in the near future, with minimal downside risk.
Give Precedence to Giving Back
Use foundations and charitable trusts to make philanthropy a focus for your client’s family and to help him achieve income tax benefits.
Family unity can be created through a consistent emphasis on giving back.
Foundations and charitable trusts also both have income tax benefits. The tax rates may change, but income tax is unlikely to go away, so this will always be an important piece of a good planning strategy.
Donations should be reviewed annually to assess portfolio performance, confirm that the foundation is meeting minimum distributions for charity and verify that the donative patterns are still desirable.