Checklist 2020 Planning Follow Through: You Have More Work To Do

2020 estate planning was a wild ride! Throngs of wealthy Americans had their advisers assist them with all types of planning. Much of the planning was based on the fear that the Democrats would control Congress and pass harsh tax legislation. Regardless of the outcome of the political changes for those of you who completed estate planning in 2020 you have to remember the lyrics of The Carpenters tune “We’ve only just begun.” Your planning obligations have only just begun. If you created a trust (or several) in 2020, gave gifts of real estate, business interests, or other steps, you need to address the inevitable planning loose ends and follow up that such planning always entails. In golf, follow-through is crucial in driving the ball to the green. In estate planning, follow-through is essential to assuring that your planning goals have a likelihood of being met.

Early in 2021 you should communicate with your advisers and review several items about your 2020 planning if that planning is to have any likelihood of succeeding. It is rarely sufficient to just sign a trust or make a transfer, that plan has to be administered. Below are just a few points to consider:

Ancillary Work: Consider any ancillary or follow up work that may not have been addressed in 2020 because of the focus on estate tax minimization transfers. In the rush to finish certain planning before year-end you may not have realized the vital steps to take once the planning was implemented to increase the likelihood of it working. You really need to do so now.

Loans: If you loaned money to heirs, or had other loan transactions (e.g. selling assets such as a family business to a trust for a note) you need to calendar the interest payment dates and amounts and be certain that interest is paid regularly following the terms of the written promissory note. Correct payment of interests is a fundamental criterion for the IRS or creditors to respect a transaction as a real loan (rather than it is recharacterized as some other type of transaction or perhaps even being disregarded).

Crummey Powers: If you created an irrevocable trust you might need to be certain that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (so-called “Crummey” powers) to permit gifts to perhaps qualify for the gift tax annual exclusion then written notices for 2020 gifts (and gifts in future years) will have to be issued. This can be far more complex them many realize in that if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may have to be prioritized based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not. Further complications may arise if you made gifts to a trust that is exempt from the generation-skipping transfer (GST) tax in that you may have to file a gift tax return to allocate GST exemption to assure that your trust remains GST exempt. Finally, and deeper into the tax Twilight Zone, if your trust has so-called hanging powers you might have your CPA track how much of those exist in each year.

Life Insurance: If you own life insurance (you really should not in most cases, but rather a trust you create should) do not make the classic mistake most insureds make and ignore your coverage after the purchase. Every few years have your insurance consultant review policy performance, the appropriateness of coverage for your plan, and more. If you did not have your insurance consultant review all of your coverage in light of your 2020 planning you should do so in 2021. As but one example, many people create spousal lifetime access trusts (“SLATs”). These are trusts one spouse creates that typically benefit the other spouse and heirs. With SLATs there is some latitude for you to indirectly benefit (but see below) from the trust as a result of distributions to your spouse. But if your spouse dies prematurely that possibility is eliminated. A simple solution to that mortality risk is life insurance for your spouse. If that was not explored when your planning was addressed in 2020 (perhaps it was mentioned but you had no time to investigate coverage) do so now.

Trustee Fees: If you have named institutional trustees their fees will have to be paid each year. Many trust companies send bills to the settlor (and others) for their fees. But if you pay those fees directly that will be an additional gift to the trust requiring the filing of a gift tax return for that year. In contrast, if the trust pays the fee directly there may be no tax implications or reporting requirements.

Disclaimer: If you made transfers to a trust that have a disclaimer mechanism (or perhaps even if they do not) and you wish to reconsider the planning, it may be possible for a trustee or beneficiaries to disclaim the gifts made to the trust within nine months of the transfer and unwind the planning. If you are having reservations or concerns evaluate the pros/cons and possibilities of a second look.

GRATs: If you created one or more grantor retained annuity trusts (GRATs) in 2020, you have to be certain that the trustee calendars the required annuity payments and assures that they are made on a timely basis. Some speculate that missing payments could jeopardize the GRAT itself. Also, be certain to confirm in the GRAT document precisely how the payment is calculated. Some payments are structured to increase so that each year’s payment is more than the prior year’s. Is the payment, however, structured, to be prorated for the first year or paid on the anniversary date of the trust funding? Confirm what the trust document says as to when the payment is due. It might be due based on the date of the trust or the date of the assets being transferred to the trust.

Trust Formalities: Trusts must be operated properly with full respect to the terms of the trust document and all trust formalities. If your spouse is a beneficiary of a SLAT you created (see above) be certain that your indirect benefit is exactly that. All of this is quite gray and your benefit from the trust in a manner that is excessive or obvious may undermine the intended estate tax benefits of the SLAT and expose trust assets to the reach of your creditors. Trusts must have their own bank accounts, not commingle funds with yours, and pay their own bills (and not pay your personal bills if you are not a permissible beneficiary), and so forth.

Entity Formalities: If you transferred interests in an entity to the trust (e.g. membership interests in a limited liability company or LLC) in the rush of 2020 planning only a simple assignment of LLC interests may have been signed. Contact your corporate attorney and inquire about an amended and restated operating agreement. If the stock in a closely held corporation was given or sold to the trust be certain that a share certificate is issued, an amended and restated shareholders’ agreement signed, etc.

Gift Tax Return: Review with your CPA well in advance of the tax filing deadline the requirements and benefits of filing a gift tax return and what and how 2020 transactions should be reported. Gift tax returns are complex and planning what to report and how is often not a simple or obvious matter.