So, the ball dropped in Times Square, we all witnessed Anderson Cooper giggling, and now it’s time to make your New Year’s resolutions. Resolved – go to the gym every day, lose weight, and of course make estate planning New Year’s resolutions. Following is a list of various planning points that you may want to consider resolving to address in 2020 concerning your estate plan:
Resolve to plan before the election. Review your entire estate plan with all your advisers (CPA, attorney, wealth adviser, insurance consultant, etc.) before the upcoming 2020 election. While there is uncertainty as to what the election may bring it seems that if the Democrats do gain enough power in Washington a very harsh estate tax bill may be forthcoming. Review your planning, evaluate how to use your exemption before it gets reduced, and get in action. 2020 could be a repeat of 2012. In 2012 there was anticipation that the estate tax exemption could drop from $5 million inflation-adjusted to mere $1 million. As a result, as the end of 2012 approached estate planning became a frenzy of activity as taxpayers tried to get planning done before the end of the year. 2020 could be the same situation as taxpayers try to get planning done before the election. No doubt many of you will wait until past the last minute to see what the election results hold before trying to plan. But that may be a “if you snooze you lose” situation. There just may not be enough time after the election and before the effective date of any tax legislation to get planning in place. If 2012 is a guide, by October 2020 it may become impossible to find a lawyer to draft a trust, an appraiser to appraise a business interest, or an accountant or wealth adviser to do a forecast for your planning. So, resolve to get inaction sooner rather than later.
Resolve not to repeat the biggest 2012 planning mistake. One of the biggest mistakes taxpayers made in planning in the 2012 rush was to make large gifts to use their exemption to trusts that they could not access. That lead to some taxpayers having remorse over having done the planning. There’s a myriad of ways that you can preserve access to assets you gift to an irrevocable trust to use your exemption and get them out of your estate. Resolve not to make the same mistakes in 2020. The first step is to have your wealth adviser or CPA model out the planning so you can see what the numbers look like under different scenarios. Estate planners have a whole toolkit of cool acronyms that can be used to help you accomplish the goal of having access to assets removed from your estate. You could create spousal lifetime access trusts (SLATs). These are trusts that are one spouse creates for the other, and each can be a beneficiary of the others trust. It’s not as simple as it sounds as you must take care to make sure the trusts are sufficiently different (not reciprocal) so that the plan will be respected. But if your SLAT plan succeeds you and your spouse can be a beneficiary of each other’s trust and thus theoretically have access to all the assets you’ve given away. Domestic asset protection trusts (DAPTs) are self–settled trusts that you create and for which you are also a beneficiary. Nineteen states now permit this type of planning. Severe beneficiary you can gain access to trust assets in the discretion of an independent trustee. It’s a bit trickier if you create one of these trusts but live in a state other than the 19 states permitting them. Some naysayers so those won’t work, many disagree. If a DAPT isn’t a neat enough sounding acronym for you, how about a “hybrid–DAPT.” This is a trust that you are not initially a beneficiary of, but for which someone holds a power, in a non-fiduciary capacity (i.e. not like a trustee) to add new beneficiaries which may include you. So initially the trust would not be self–settled but if you need access at a later date you might be added back as a beneficiary. The latest acronym on this access planning bandwagon is a special power of appointment trust (SPAT). This is a trust in which a person holds the power to direct the trustee to make a payment to you. Because you’re never a beneficiary, and because the trustee has no discretion the argument is that a SPAT will not be characterized as a self–settled trust and thus avoid some of the perceived risks associated with that technique. There’s lots of other ways to skin the access cat. If the trust you create is a grantor trust (you pay the income tax and trust earnings) someone can hold the power to make loans to you without adequate security. That mechanism will also reinforce the trusts status as a grantor trust. It also gives you the ability to access funds in the trust should you need to do so. Your trust might also include a tax reimbursement clause so that the trustee would have discretion to reimburse you for the amount of income tax you paid on trust income. Be sure the trust is formed in a state whose laws permit a tax reimbursement without enabling your creditors to reach the assets.
Resolve to evaluate all existing life insurance trusts. The Dems have proposed capping annual exclusion gift amounts at $20, 000 per donor per year. Under current law you can gift $15,000 per donee. Many if not most life insurance trusts are built around the construct of your making gifts to the trust, the trustee issuing annual demand or so–called Crummey power notices to the beneficiaries, then paying the premium. So, for example, if your life insurance trust’s insurance premiums were $150,000 you might gift $150,000 to the trust and the trust has 10 beneficiaries the trustee would issue 10 Crummey power notices for $15,000 to each beneficiary, and there would be no use of your lifetime gift exemption. The annual gift exclusion amounts would suffice to cover the entire transfer. If the Dems sweep in 2020 and the $20,000 cap be enacted, you might have difficulty funding your life insurance premiums by gifts to the trust. Unless you take action now you may be forced into using a split–dollar loan arrangement, or other complex mechanisms, to fund your insurance trust. Consider making transfers to those trust today using some of the current large temporary exemption to fund the trust with sufficient cash to cover future year’s premiums. While on the topic of life insurance trusts, many old trust pay out all insurance proceeds to beneficiaries at some specified age, for example 35. That payout destroys the protection the trust affords, puts assets into their estates and makes those proceeds reachable by creditors and possibly in a divorce. Consider decanting (merging) those old trusts into new more modernized trusts that provide better safeguards, such as lifetime protection for the beneficiaries. Also, while you’re at it too many trustees never have trust life insurance policies reviewed. It’s important to have an insurance expert periodically review the performance of the policy. Life insurance should not be viewed as a “set it and forget it” asset. Insurance must be monitored and managed no different than your securities portfolio.
Resolve to review appreciated assets inside every grantor revocable trust. Many of the trust created for estate planning purposes are grantor trusts. As noted above this means you can pay the income tax on the income earned by the trust. Many grantor trusts have an express provision permitting you to swap or substitute assets of equal value for trust assets. You can also sell an asset or by an asset from the trust with no income tax consequence. Given the run-up in the stock market over the past decade if you haven’t recently reviewed appreciated assets inside your trust, you should. It may be important to swap those assets for cash back into your estate so that should you die your estate would obtain a step-up in the income tax basis of those assets.
Resolve to review tax reimbursement clauses (or not) in your revocable grantor trusts. Many grantor trusts include a clause permitting the trustee to reimburse you is the settlor creating the trust for income taxes you pay on trust income. That’s not a great result for many because one of the reasons the trust was set up as a grantor trust in the first place was so that you could have ‘tax – burn” thereby reducing your estate by the income tax you pay on trust income. Nonetheless cash flow issues might make it desirable from your perspective to be able to be reimbursed for taxes you paid. Just like with the substitution power discussed above the wild ride the mark stock markets have taken over the past decade might have substantial appreciation inside your trust. Realization of some of those huge gains (did I hear Apple or Netflix?) might be more costly of the tax bite than you’re comfortable bearing. If you have that issue speak to your estate planning attorney to determine what might be done, perhaps through a decanting, to address that concern. Adding a tax reimbursement provision if it’s not in the trust, however, is not assuredly an “easy-peasy” step.
Resolve to talk to your entire planning team about the secure act. The secure act signed into law just before Christmas, generally eliminates the stretch–IRA and requires that most beneficiaries have to receive IRA and other plan proceeds within 10 years of the plan holder’s death. This could require you to change beneficiary designations, trust instruments, insurance planning a much more. Resolve to review what you might want to update in light of this new law.
Resolve to fund your trusts. Many folks are hot to trot to get their trust planning done, but then never follow through. If you have the world’s greatest life insurance trust but never transferred your life insurance to the trust that trust won’t accomplish much towards achieving your goals. If you have a revocable trust in you intended to have it facilitate planning during your later years, and perhaps avoid probate, not transferring assets to that trust might derail those wishes. If you have a revocable trust set up to use your exemption but haven’t gone through all the formalities of a proper transfer of assets that planning too will be of little benefit. Talk to your planning team and get appropriate assets properly transferred.
Resolve to revise your documents. If the pages of the will done 30 years ago are yellow and curled that’s a pretty good sign that it’s long past time to revise them. In case you hadn’t noticed, the 2017 tax act radically changed many aspects of estate planning. If you haven’t had your will, revocable trust, and overall plan updated since the 2017 tax act, and most recently for the Secure Act, resolve to call your estate planner this year and get working.
Resolve to revise your power of attorney. Crusty old powers of attorney are unlikely to have provisions dealing with digital assets as well as other clauses addressing an array of modern issues. While your reconsidering your power of attorney review what prerequisites there are for it to be activated. Many powers are structured as so – called springing powers. This means that until you are disabled, and someone proves you are disabled, your agent cannot act. While that’s seductive from the perspective that you might feel it’s protective because your agent can’t spend money unless you’re incapacitated. But that hurdle can make it difficult time consuming and costly to implement the power when it’s really needed. The delays attendant to getting physician sign offs, and other criteria that your document may require, could be problematic. This is not to say that a springing power is wrong (in the states the permit it) but resolve to revisit this and other decisions with your estate planner.
Resolve to administer your estate plan properly. Most folks think that once they’ve signed their will they’re done and can go home and forget about their planning. They stick their documents in a desk drawer in their home office and hope to never think about it for years if not decades to come. That’s a big mistake. Resolve to dust off your plan and review the administration of your plan each year with your advisers. The best plans are of little use if not administered properly. If you have irrevocable trusts and don’t adhere to the formalities, have documents signed by inappropriate people, make inappropriate distributions, don’t file income tax returns, fail to file a proper gift tax return, and so on that plan could be torpedoed before it’s out of the starting blocks. If you have entities that are part of your plan and you don’t administer them with the appropriate formalities and respect them as independent entities, don’t think that the IRS or creditors will respect them if you haven’t. While administering a plan can be as exciting as watching paint dry, it’s essential if you’re going to have any likelihood of achieving your planning goals.
Resolve to simplify when simplification really works. Some folks think that simple is a goal unto itself. That’s often a tragic mistake because the real goal should be accomplishing your real goal. Once you’ve established a goal finding the simplest way to achieve that goal may well be worthwhile. Too often taxpayers end up with trusts and financial accounts that have proliferated like Tribbles (Google Star Trek and “The Trouble with Tribbles” if you’re not familiar with Tribbles). In some cases, you might be able to merge various trust simplifying your planning. When that’s feasible it can be a useful step. A simpler plan is easier and less costly to administer, and most important, more likely to be administered properly. Some people have dozens of different financial accounts. Why? Unless there’s a legal or tax reason to have a particular account, consider consolidating accounts to simplify administration. But if you have a complicated family, business, or tax situation, don’t make simplification a primary goal. That might may detract from your real goals of endeavoring to preserve family harmony, saving estate taxes, and so forth.
Resolve to review all fiduciary and non-fiduciary positions. Modern trust and estate planning have resulted in the proliferation of fiduciary and other positions in various documents. In the simple days you would name a trustee for trust. Now you may have a general trustee, distributions trustee, investment director, trust protector, a person holding a special power of appointment (see SPAT above), a person holding powers to add additional beneficiaries (see hybrid-DAPT above), someone holding the power to loan, and so forth. You need to periodically review each position in the person and successors you’ve named to hold those positions. Are they still suitable? Do they have the business acumen or financial acumen to address the complexities that may be involved in fulfilling their role? Do you still talk to them? If you haven’t updated your revocable trust to remove your ex-brother-in-law from the position of trust protector, perhaps it’s time to discuss that with your lawyer.
New Year’s is always been a time of making resolutions. Likely there been few of us who have made estate planning New Year’s resolutions, but we all really should. There’s much benefit that can be had from proper planning, the security, peace of mind, tax benefits, and family harmony that current well-maintained planning can provide. Resolve to address these issues even if you find them unpleasant, costly, technical and frankly just would rather avoid them.