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Ease the burden of being a member of the Sandwich Generation with these action steps
If you’re currently taking care of your children and elderly parents, count yourself among those in the “Sandwich Generation.” Although it may be personally gratifying to help your parents, it can be a time-consuming and financial burden.
How can you best handle the financial affairs of parents in the later stages of life? Incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they’ve already made. Here are some critical action steps to take to better manage your situation:
Identify key contacts. Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.
List and value their assets. If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. Keep a list of their investment holdings, IRAs and other retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits.
Execute the proper estate planning documents. Develop a plan incorporating several legal documents. If your parents already have one or more of these documents, the paperwork may need to be revised. Some elements commonly included in an estate plan are:
Wills. Your parents’ wills control the disposition of their possessions and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one providing financial assistance, you may be the optimal choice.
Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.
Powers of attorney for health and finances. These documents authorize someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.
Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies so they can act according to their wishes.
Beneficiary designations. Undoubtedly, your parents have completed beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it’s important to keep them up to date.
Spread the wealth. If you decide the best approach for helping your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $17,000 (for 2023) without paying any gift tax. Plus, payments to medical providers aren’t considered gifts, so you may make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amount.
If you’re part of the Sandwich Generation, you already have a lot on your plate. Please contact the FMD team if you have questions regarding your parents’ estate plans or your own. We’d be pleased to help during this challenging time.
© 2023
If you’re married, ensure that you and your spouse coordinate your estate plans
Estate planning can be complicated enough if you don’t have a spouse. But things can get more difficult for married couples. Even if you and your spouse have agreed on most major issues in the past — such as child rearing, where to live and other lifestyle choices — you shouldn’t automatically assume that you’ll both be on the same page when it comes to making estate planning decisions.
A worst-case scenario is when one spouse moves forward with his or her estate plan without the knowledge or approval of the other, to the eventual detriment of the family. Thus, it’s critical for both spouses to clearly communicate their estate planning goals to each other.
Where to begin?
Start with the basic premise that state law generally governs estate matters. Therefore, state law determines if your property is community property, separate property or tenancy by the entirety. For instance, California is a community property state. That means half of what a resident owns is his or her spouse’s property and vice versa. There’s no circumventing this law when planning for a joint estate.
Next, consider your family’s dynamics. Emotions can run high and tensions may result, for example, if a family includes children from a prior marriage. If these issues aren’t addressed beforehand, it could lead to legal squabbles.
Don’t forget about the tax implications. Currently, married couples can take advantage of a record-high federal gift and estate tax exemption that shelters most estates from tax. However, if you and your spouse are high earners (or otherwise have large estates) ensure that you incorporate estate tax minimization techniques into your coordinated plans.
Finally, decide together on distributions of assets to designated beneficiaries. You may intend, for example, for expensive jewelry to go to one child, but your spouse might have other ideas.
Keep lines of communication open
Indeed, clear communication is essential for married couples when developing estate plans. The FMD team can help ensure that you and your spouse both have plans that work in harmony.
© 2023
You’ve received a sizable inheritance: Now what?
If you’ve received, or will soon receive a significant inheritance, it may be tempting to view it as “found money” that can be spent freely. But unless your current financial plan ensures that you’ll comfortably reach all your goals, it’s a good idea to have a plan of action for managing your newfound wealth.
Take time to reflect
Generally, when you receive an inheritance, there’s no need to act quickly. Take some time to reflect on the significance of the inheritance for your financial situation; consult with a team of trusted advisors (including an attorney, accountant, and financial advisor); and carefully review your options.
While you’re planning, park any cash or investments in a bank or brokerage account. If you’re married, consider holding the assets in an account in your name only. An inheritance is usually considered your separate property in the event of a divorce, but it may lose that status if it’s commingled with marital property in a joint account.
Avoid making quick financial commitments
If your loved one’s estate is still being administered, don’t start spending — or make any financial commitments based on your inheritance — until you understand what your net proceeds from the estate will be. Once all fees and taxes are accounted for, the final settlement may be less than you expect.
If you’re receiving your inheritance through a trust, talk with the trustee, familiarize yourself with the trust’s terms, and be sure you understand the timing and amount of distributions and any conditions that must be satisfied to receive them.
Beware of income and estate tax consequences
An inheritance generally isn’t subject to income tax, but depending on the types of assets you inherit, they may have an impact on your tax situation going forward. For example, certain income-producing assets — such as those from real estate, an investment portfolio or a retirement plan — may substantially increase your taxable income or even push you into a higher tax bracket.
Depending on the size of the inheritance, it may also have an impact on your estate plan. If it increases the value of your estate to a point where estate tax becomes a concern, talk with your advisor about strategies for reducing those taxes and preserving as much wealth as possible for your heirs.
Review and revise your financial plan
Treating an inheritance separately from your other assets may encourage impulsive, unplanned spending. A better approach is to integrate inherited assets into your overall financial plan.
Consider using some of the inheritance to pay down credit card or other high-interest debt (if you have it) or to build an emergency fund. The rest should be available, along with your other assets, for funding your retirement, college expenses for your children, travel or other financial goals.
Have a plan
If you receive a sizable inheritance, there’s nothing wrong with taking a small portion of it and splurging a bit. But for the most part, you should treat inherited assets as you’d treat the assets you’ve earned over the years and incorporate them into a comprehensive financial plan. You’ll also want to address any inherited assets in your estate plan. Contact us for more information.
© 2023
Don’t overlook these two essential estate planning strategies
When it comes to estate planning, there’s no shortage of techniques and strategies available to reduce your taxable estate and ensure your wishes are carried out after your death. Indeed, the two specific strategies discussed below should be used in many estate plans.
1. Take advantage of the annual gift tax exclusion
Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).
For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receive $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).
What if the same amounts were transferred to the recipients upon Jim’s or Joan’s death instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer (GST) tax exemption was available, the tax hit would be at the current 40% rate. So making annual exclusion gifts could potentially save the family a significant amount in taxes.
2. Use an ILIT to hold life insurance
If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.
However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).
An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.
The right strategies for you?
Bear in mind that these two popular strategies might not be right for your specific estate plan. The FMD team can provide you with additional details on each and help you determine if they’re right for you.
© 2023
Addressing guns in an estate plan requires special knowledge
When it comes to estate planning, not all assets are created equal. If you own one or more guns, careful planning is required to avoid running afoul of complex federal and state laws. Without proper planning, there’s a risk that the government will confiscate your guns or that the executor of your estate, your trustees or your beneficiaries will inadvertently commit a felony.
Follow federal, state and local laws
Guns are unique among personal property because federal and state laws prohibit certain persons from possessing firearms. For example, under the federal Gun Control Act, “prohibited persons” include convicted felons, fugitives, unlawful drug users or addicts, mentally incompetent persons, illegal or nonimmigrant aliens, persons dishonorably discharged from the armed forces, persons who have renounced their U.S. citizenship, and persons convicted of certain crimes involving domestic violence or subject to certain domestic violence restraining orders.
Other persons may be prohibited from receiving firearms under state or local laws. These restrictions apply not only to your beneficiaries, but also to executors or trustees who come into possession of firearms.
Under federal law, certain firearms — such as short-barreled rifles, shotguns and fully automatic machine guns — must be registered (with the Bureau of Alcohol, Tobacco, Firearms and Explosives) to a transferee by the transferor. And additional steps must be taken when transporting these firearms across state lines. For other types of firearms, states may require registration and may impose mandatory background checks, permits and other requirements for firearms transported across state lines.
Consider a gun trust
Given the complexity of federal and state gun laws, and the stiff penalties for violating them, it’s critical to consult knowledgeable advisors when providing for guns in your estate plan. You might also consider creating a gun trust — with a trustee who has expertise on gun laws, safety and storage protocols, and transfer requirements — to facilitate the process.
© 2023
Avoiding challenges to your estate plan
A primary goal of estate planning is to ensure that your wishes are carried out after you’re gone. So, it’s important to design your estate plan to withstand potential will contests or other challenges down the road.
The most common grounds for contesting a will are undue influence or lack of testamentary capacity. Other grounds include fraud and invalid execution.
There are no guarantees that your plan will be implemented without challenge, but you can minimize the possibility by taking these actions:
Dot every “i” and cross every “t.” The last thing you want is for someone to contest your will on grounds that it wasn’t executed properly. So be sure to follow applicable state law to the letter. Typically, that means signing your will in front of two witnesses and having your signature notarized. Be aware that the law varies from state to state, and an increasing number of states are permitting electronic wills.
Treat your heirs fairly. One of the most effective ways to avoid a challenge is to ensure that no one has anything to complain about. But satisfying all your family members is easier said than done.
For one thing, treating people equally won’t necessarily be perceived as fair. Suppose, for example, that you have a financially independent 30-year-old child from a previous marriage and a 20-year-old child from your current marriage. If you divide your wealth between them equally, the 20-year-old — who likely needs more financial help — may view your plan as unfair.
Demonstrate your competence if you’re concerned about a challenge. There are many techniques you can use to demonstrate your testamentary capacity and lack of undue influence. Examples include:
Have a medical practitioner conduct a mental examination or attest to your competence at or near the time you execute your will.
Choose witnesses you expect to be available and willing to attest to your testamentary capacity and freedom from undue influence years or even decades down the road.
Videotape the execution of your will. This provides an opportunity to explain the reasoning for any atypical aspects of your estate plan and will help refute claims of undue influence or lack of testamentary capacity.
Consider a no contest clause. Most, but not all, states permit the use of no contest clauses. In a nutshell, it will essentially disinherit any beneficiary who challenges your will or trust.
For this strategy to be effective, you must leave heirs an inheritance that’s large enough that forfeiting it would be a disincentive to bringing a challenge. An heir who receives nothing has nothing to lose by challenging your plan.
Use a living trust. By avoiding probate, a revocable living trust can discourage heirs from challenging your estate plan. That’s because without the court hearing afforded by probate, they’d have to file a lawsuit to challenge your plan.
If your estate plan does anything unusual, it’s critical to communicate the reasons to your family. Indeed, explaining your motives can go a long way toward avoiding misunderstandings or disputes. They may not like it, but it’ll be more difficult for them to contest your will on grounds of undue influence or lack of testamentary capacity if your reasoning is well documented. Contact FMD’s estate planning experts for additional details.
© 2023
Have you planned for long-term health care expenses?
No matter how diligently you prepare, your estate plan can quickly be derailed if you or a loved one requires long-term home health care or an extended stay at an assisted living facility or nursing home. Long-term care (LTC) expenses aren’t covered by traditional health insurance policies or Medicare. So it’s important to have a plan to finance these costs, either by setting aside some of your savings or purchasing insurance. Let’s take a closer look at three options.
1) LTC insurance
An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, transferring (getting in and out of a bed or chair) and maintaining continence.
LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. To qualify, a policy must:
Be guaranteed renewable and noncancelable regardless of health,
Not delay coverage of pre-existing conditions more than six months,
Not condition eligibility on prior hospitalization,
Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.
It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium tax deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.
2) Hybrid insurance
Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have advantages over standalone LTC policies.
For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.
3) Employer-provided plans
Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.
Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.
Think long term
Given the potential magnitude of LTC expenses, the earlier you begin planning, the better. The FMD team can help you review your options and analyze the relative benefits and risks.
© 2023
Breathe new life into a trust by decanting it
Building flexibility into your estate plan using various strategies is generally advised. The reason is that life circumstances change over time, specifically evolving tax laws and family situations. One technique that provides flexibility is to provide your trustee with the ability to decant a trust.
Define “decanting”
One definition of decanting is to pour wine or another liquid from one vessel into another. In the estate planning world, it means “pouring” assets from one trust into another with modified terms. The rationale underlying decanting is that, if a trustee has discretionary power to distribute trust assets among the beneficiaries, it follows that he or she has the power to distribute those assets to another trust.
Depending on the trust’s language and the provisions of applicable state law, decanting may allow the trustee to:
Correct errors or clarify trust language,
Move the trust to a state with more favorable tax or asset protection laws,
Take advantage of new tax laws,
Remove beneficiaries,
Change the number of trustees or alter their powers,
Add or enhance spendthrift language to protect the trust assets from creditors’ claims, or
Move funds to a special needs trust for a disabled beneficiary.
Unlike assets transferred at death, assets that are transferred to a trust don’t receive a stepped-up basis, so they can subject the beneficiaries to capital gains tax on any appreciation in value. One potential solution is to use decanting.
Decanting can authorize the trustee to confer a general power of appointment over the assets to the trust’s grantor. This would cause the assets to be included in the grantor’s estate and, therefore, to be eligible for a stepped-up basis.
Follow your state’s laws
Many states have decanting statutes, and in some states, decanting is authorized by common law. Either way, it’s critical to understand your state’s requirements. For example, in some states, the trustee must notify the beneficiaries or even obtain their consent to decanting.
Even if decanting is permitted, there may be limitations on its uses. Some states, for example, prohibit the use of decanting to eliminate beneficiaries or add a power of appointment, and most states won’t allow the addition of a new beneficiary. If your state doesn’t authorize decanting, or if its decanting laws don’t allow you to accomplish your objectives, it may be possible to move the trust to a state whose laws meet your needs.
Beware of tax implications
One of the risks associated with decanting is uncertainty over its tax implications. Let’s say a beneficiary’s interest is reduced. Has he or she made a taxable gift? Does it depend on whether the beneficiary has consented to the decanting? If the trust language authorizes decanting, must the trust be treated as a grantor trust? Does such language jeopardize the trust’s eligibility for the marital deduction? Does distribution of assets from one trust to another trigger capital gains or other income tax consequences to the trust or its beneficiaries?
Decanting can breathe new life into an irrevocable trust. The FMD Team is pleased to help you better understand the pros and cons of decanting a trust.
© 2023
Should you move your trust to another state?
There are several reasons why you may want to move a trust to a more favorable jurisdiction. For instance, to avoid or reduce state income tax on the trust’s accumulated ordinary income or capital gains. However, before doing so, it’s critical to understand the risks.
Revocable trust vs. irrevocable trust
Many people retire to states with more favorable tax laws. But just because you move to a state with no income or estate taxes doesn’t mean your trusts move with you. Indeed, for individual income tax purposes, you’re generally taxed by your state of domicile. The state to which a trust pays taxes, however, depends on its situs.
Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for a revocable trust. In fact, it’s possible to change situs for a revocable trust by simply modifying it. Or, if that’s not an option, you can revoke the trust and establish a new one in the desired jurisdiction.
If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved. Some trusts expressly authorize the trustee or beneficiaries to move the trust from one jurisdiction to another.
If the trust document doesn’t designate a situs or establish procedures for changing it, then the trust’s situs depends on several factors. These include applicable state law, where the trust is administered, the trustee’s state of residence, the domicile of the person who created the trust, the location of the beneficiaries and the location of real property held by the trust.
Identifying the risks
Moving a trust presents potential risks for the unwary. For example:
If you move a trust from a state that permits perpetual trusts to one that doesn’t, you may inadvertently limit the trust’s duration.
Some states tax all income derived from a source within the state. If your trust holds real estate or interests in a business located in such a state, that state may tax the income regardless of the trust’s situs.
In some cases, conflicting state laws may cause the same income to be taxed in more than one state.
Also consider other taxes that may have an impact, such as intangibles tax, property tax, and tax on dividends and interest.
Making the right move
Depending on your circumstances, moving a trust may offer tax savings and other benefits. Keep in mind, however, that the laws governing trusts are complex and vary considerably from state to state. FMD’s Estate Planning and Wealth Preservation Team can help you determine whether moving a trust is the right move for you.
© 2023
Plan carefully to avoid GST tax surprises
If you want to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the generation-skipping transfer (GST) tax. Designed to ensure that wealth is taxed at each generational level, the GST tax is among the harshest and most complex in the tax code. It’s also among the most misunderstood.
ABCs of the GST tax
To ensure that wealth is taxed at each generational level, the GST tax applies at a flat, 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. The tax applies to transfers to “skip persons,” including your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you.
There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.
Allocation rules
Even though the GST tax enjoys an inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption ($12.92 million for 2023), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.
The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely solely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST taxes. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.
3 types of GST tax triggers
Three types of transfers may trigger GST taxes:
“Direct skips” — transfers directly to a skip person that are subject to federal gift and estate tax,
Taxable distributions — distributions from a trust to a skip person, or
Taxable terminations — for example, if you establish a trust for your children, a taxable termination occurs when the last child beneficiary dies and the trust assets pass to your grandchildren.
As noted above, the GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — currently allows you to transfer up to $17,000 per year to any number of skip persons without triggering GST tax or using up any of your GST tax exemption. Note, however, that transfers in trust qualify for the exclusion only if certain requirements are met.
Plan carefully
If your estate plan calls for making substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to allocate your GST tax exemption carefully. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.
© 2023
Enacting a spendthrift trust can be beneficial to your loved ones
Are you concerned that some of your beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money? You don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. Instead, consider using a spendthrift trust that can provide protection, regardless of how long you live.
As with other trusts, a spendthrift trust may incorporate various tax benefits, but that’s not its primary focus. Indeed, this trust type can help you provide for an heir while protecting assets from his or her potentially imprudent actions.
Spendthrift trust in action
Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.
The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a foolhardy business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.
Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or “as needed” based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.
Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, he or she has full control over that amount. The money can be spent without restriction.
Role of the trustee
Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, and how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.
Although it’s not illegal to name yourself as trustee, this is generally not recommended. More often than not, the trustee will be an attorney, financial planner, investment advisor or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.
Other key considerations
There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You must also establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).
Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to assist you when considering a spendthrift trust.
© 2023
Have you recently reviewed your life insurance needs?
Once upon a time, life insurance played a much larger part in an estate plan than it does now. Why? Families would use life insurance payouts to pay estate taxes. But with the federal gift and estate tax exemption at $12.92 million for 2023, far fewer families currently are affected by estate tax.
However, life insurance remains a powerful tool for providing for your loved ones in the event of your untimely death. The amount of life insurance that’s right for you depends on your personal circumstances, so it’s critical to review your life insurance needs regularly in light of changing circumstances.
Reasons to reevaluate
Consider reevaluating your insurance coverage if you’re:
Getting married,
Getting divorced,
Having children,
Approaching retirement, or
Facing health issues.
The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you pass away.
The events listed above can change the equation, so it’s a good idea to revisit your life insurance needs as you reach these milestones. For example, if you get married and have kids, your current and future obligations are likely to increase significantly for expenses related to childcare, mortgage, car payments and college tuition.
As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.
On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.
Periodic reassessment a must
There are many factors that affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically and especially when your life circumstances change. We can help you determine whether you have an adequate amount of life insurance coverage.
© 2023
To file or not to file a gift tax return, that is the question
If you made gifts last year you may be wondering if you need to file a gift tax return. The short answer: There are many situations when it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift tax. Let’s take a closer look at the reasons why.
What gifts are considered nontaxable?
The federal gift tax regime begins with the assumption that all transfers of property by gifts (including below-market sales or loans) are taxable. It then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:
Gifts of present interests within the annual exclusion amount ($17,000 per donee in 2023, up from $16,000 in 2022),
Direct payments of qualifying medical or educational expenses on behalf of an individual,
Gifts to political organizations and certain tax-exempt organizations,
Deductible charitable gifts,
Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements, and
Gifts to one’s noncitizen spouse within a special annual exclusion amount ($175,000 in 2023, up from $164,000 in 2022).
If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the federal gift and estate tax exemption ($12.92 million in 2023, up from $12.06 million in 2022).
Are there tax traps to be aware of?
If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:
Future interests. The $17,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $17,000 in 2023 ($16,000 in 2022).
Spousal gifts. As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported.
Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $34,000 for 2023 (up from $32,000 for 2022) to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.
The deadline to file Form 709 for 2022 is April 18. Please contact us if you’re unsure of whether you need to file a gift tax return this year.
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Provide your heirs the option of creating an inheritor’s trust
Even though it may not be top of mind when you’re developing or revising your estate plan, it’s important to consider how bequeathing assets to your family might affect them. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. Giving a loved one permission to create an inheritor’s trust can help avoid this outcome.
The trust in action
In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of his or her own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate, but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce.
Because the trust, rather than your family member, legally owns the inheritance, and because the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement, but it can provide a significant level of asset protection in the event of divorce.
With an inheritor’s trust, your heir can also realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust can also own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.
Talk to your heirs first
As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Turn to us to help determine whether an inheritor’s trust is right for your situation.
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Is your revocable trust fully funded?
A revocable trust — sometimes known as a “living trust” — can provide significant benefits. They include the ability to avoid probate of the assets the trust holds and facilitating management of your assets in the event you become incapacitated. To obtain these benefits, however, you must fund the trust — that is, transfer title of assets to the trust or designate the trust as the beneficiary of retirement accounts or insurance policies.
Inventory your assets
To the extent that a revocable trust isn’t funded — for example, if you acquire new assets but fail to transfer title to the trust or name it as the beneficiary — those assets may be subject to probate and will be beyond the trust’s control in the event you become incapacitated.
To avoid this result, periodically take inventory of your assets. This can better ensure that your trust is fully funded.
Max out FDIC insurance coverage
Another important reason to fund your trust is the ability to maximize FDIC insurance coverage. Generally, individuals enjoy FDIC insurance protection on bank deposits up to $250,000.
But with a properly structured revocable trust account, it’s possible to increase that protection to as much as $250,000 per beneficiary. So, for example, if your revocable trust names five beneficiaries, a bank account in the trust’s name is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million ($2.5 million for jointly owned accounts).
Note that FDIC insurance is provided on a per-institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks. FDIC rules regarding revocable trust accounts are complex, especially when a trust has more than five beneficiaries, so talk to us to maximize insurance coverage of your bank deposits.
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Joint ownership isn’t right for all estate plans
Generally speaking, owning property jointly benefits an estate plan. Indeed, joint ownership offers several advantages for surviving family members. However, there are exceptions and it’s not the solution for all estate planning problems.
2 types of joint ownership for spouses
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 may be 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 in some states 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.
Joint ownership plusses and minuses
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.
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 starters, 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 actually makes a withdrawal.
Lessons to be learned
Joint ownership can be a valuable estate planning tool, especially because it avoids probate. However, this technique shouldn’t be considered a replacement for a will. We can help you coordinate joint ownership with other aspects of your estate plan.
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Deciding whether to make lifetime gifts or bequests at death can be a deceptively complex question
One of your primary estate planning goals may be to pass as much of your wealth to your family as possible. That means sheltering your estate from gift and estate taxes. One way to do so is to make gifts during your lifetime.
Current tax law may make that an enticing proposition, given the inflation-adjusted $12.92 million gift and estate tax exemption. However, making lifetime gifts isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate and making bequests at death.
Tax consequences of gifts vs. bequests
The primary advantage of making lifetime gifts is that by removing assets from your estate, you shield future appreciation from estate tax. But there’s a tradeoff: The recipient receives a “carryover” tax basis — that is, he or she assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.
An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)? The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon — that is, how long you expect the recipient to hold the asset after receiving it.
Estate tax law changes ahead
Determining the right time to transfer wealth can be difficult because so much depends on what happens to the gift and estate tax regime in the future. (Indeed, without further legislation from Congress, the base gift and estate tax exemption amount will return to an inflation-adjusted $5 million in 2026.) The good news is that it may be possible to reduce the impact of this uncertainty with carefully designed trusts.
Let’s say you believe the gift and estate tax exemption will be reduced dramatically in the near future. To take advantage of the current exemption, you transfer appreciated assets to an irrevocable trust, avoiding gift tax and shielding future appreciation from estate tax. Your beneficiaries receive a carryover basis in the assets, and they’ll be subject to capital gains taxes when they sell them.
Now suppose that, when you die, the exemption amount hasn’t dropped, but instead has stayed the same or increased. To hedge against this possibility, the trust gives the trustee certain powers that, if exercised, cause the assets to be included in your estate. Your beneficiaries will then enjoy a stepped-up basis and the higher exemption shields all or most of the assets’ appreciation from estate taxes.
Work with us to monitor legislative developments and adjust your estate plan accordingly. We can suggest strategies for building flexibility into your plan to soften the blow of future tax changes.
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A single parent’s estate plan should address specific circumstances
According to the Pew Research Center, nearly a quarter (23%) of U.S. children under the age of 18 live with one parent. This is more than three times the share (7%) of children from around the world who do so. If your household falls into this category, ensure your estate plan properly accounts for your children.
Choosing a guardian
In many respects, estate planning for single parents is similar to estate planning for families with two parents. Single parents want to provide for their children’s care and financial needs after they’re gone. But when only one parent is involved, certain aspects of an estate plan demand special attention.
One example is selecting an appropriate guardian. If the other parent is unavailable to take custody of your children if you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? Depending on the situation, you might want to preserve your wealth in a trust until your children are grown.
Trust planning is one of the most effective ways to provide for your children. Trust assets are managed by one or more qualified, trusted individual or corporate trustees, and you specify when and under what circumstances the funds should be distributed to your kids. A trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.
Addressing incapacitation
As a single parent, it’s particularly important for your estate plan to include a living will, advance directive or health care power of attorney. These documents allow you to specify your health care preferences in the event you become incapacitated and to designate someone to make medical decisions on your behalf.
You should also have a revocable living trust or durable power of attorney that provides for the management of your finances in the event you’re unable to do so.
If you’ve recently become a single parent, contact us because it’s critical to review and, if necessary, revise your estate plan. We’d be pleased to help.
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Run the numbers before donating appreciated assets to charity
Are you charitably inclined? If so, you probably know that donations of long-term appreciated assets, such as stocks, have an advantage over cash donations. But in some cases, selling appreciated assets and donating the proceeds may be a better strategy.
That’s because adjusted gross income (AGI) limitations on charitable deductions are higher for cash donations. Plus, if the assets don’t qualify for long-term capital gain treatment, the deduction rules are different.
Tax treatments by type of gift
All things being equal, donating long-term appreciated assets directly to charity is preferable. Not only do you enjoy a charitable deduction equal to the assets’ fair market value on the date of the gift (assuming you itemize deductions on your return), you also avoid capital gains tax on their appreciation in value. If you were to sell the assets and donate the proceeds to charity, the resulting capital gains tax could reduce the tax benefits of your gift.
But all things aren’t equal. Donations of appreciated assets to public charities are generally limited to 30% of AGI, while cash donations are deductible up to 60% of AGI. In either case, excess deductions may be carried forward for up to five years.
Work the math
If you’re contemplating a donation of appreciated assets that’s greater than 30% of your AGI, crunch the numbers first. Then determine whether selling the assets, paying the capital gains tax and donating cash up to 60% of AGI will produce greater tax benefits in the year of the gift and over the following five tax years. The answer will depend on several factors, including the size of your gift, your AGI in the year of the gift, your projected AGI in the following five years and your ability to itemize deductions in each of those years.
Before making charitable donations, discuss your options with us. We can help you make charitable gifts at the lowest tax cost.
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Addressing IP in an estate plan can be tricky
Over your lifetime, you may have accumulated a wide variety of tangible assets, including automobiles, works of art and property, that you’ve accounted for in your estate plan. But intangible assets can easily be overlooked.
Consider intellectual property (IP), such as patents and copyrights. These assets can have great value, so, if you have them, it’s important to properly address them in your estate plan.
Common forms of IP
IP generally falls into one of these categories: patents, copyrights, trademarks or trade secrets. Here we’ll focus on patents and copyrights, which are protected by federal law to promote scientific and creative endeavors by providing inventors and artists with exclusive rights to exploit the economic benefits of their work for a predetermined time.
Patents protect inventions, and the two most common are utility and design patents. A utility patent may be granted to someone who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” A design patent is available for a “new, original and ornamental design for an article of manufacture.” To obtain patent protection, inventions must be novel, “nonobvious” and useful.
Utility patents protect an invention for 20 years from the patent application filing date. Design patents filed on or after May 13, 2015, last 15 years from the patent issue date. There’s a difference between the filing date and issue date. For utility patents, it takes at least a year and a half from date of filing to date of issue.
Copyrights protect the original expression of ideas that are fixed in a “tangible medium of expression.” These tangible mediums of expression typically take the form of written works, music, paintings and photographs.
Unlike patents, which must be approved by the U.S. Patent and Trademark Office, copyright protection kicks in as soon as a work is fixed in a tangible medium. For works created in 1978 and later, an author-owned copyright generally lasts for the author’s lifetime plus 70 years.
Estate planning for IP
For estate planning purposes, a key question is: What’s it worth? Valuing IP is a complex process. It’s best to obtain an appraisal from a professional with experience valuing IP. After you know the IP’s value, decide whether to transfer it to family members or charity through lifetime gifts or bequests after your death.
It’s important to plan the transaction carefully to ensure that your objectives are achieved. There’s a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator — even if the work is sold or given away.
Contact us to learn more on addressing IP in your estate plan.
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