Top 9 Estate Planning Tasks to Complete before Year-End

The holiday season represents a window of opportunity for growing and preserving wealth. McManus & Associates today outlined the “Top 9 Estate Planning Tasks to Complete before Year-End”. As part of the firm’s educational focus series, Founding Principal and top AV-rated Attorney John O. McManus recently discussed time-sensitive recommendations for building your nest egg and reducing your check to Uncle Sam for Tax Year 2014.

LISTEN HERE: “Top 9 Estate Planning Tasks to Complete before Year-End”

“Amid the holiday rush, find time to review strategies and maintenance items that will give your family the gift of a stronger financial future,” advised McManus. “There are several estate planning to-do’s that should take priority before the clock strikes midnight on December 31, 2014.”

 Top 9 Estate Planning Tasks to Complete before Year-End

  1. Make gifts to “top off” lifetime gift exemption amount ($5.34 MM).
    1. The lifetime exclusion, even if fully used at the end of 2013 ($5.25 MM), now allows for an additional $180,000 gift (per married couple) because of the 2014 inflation adjustment ($5.34 MM).
    2. This action enables more asset growth outside of your estate.
  2. Make gifts to charities and family foundations with appreciated assets.
    1. Consider gifting low-basis stock (instead of selling to raise cash for gifting) that could lead to gains. This may help to minimize the 1% – 2% excise tax on net investment income. Consider offsetting gains with losses as private foundations cannot carry forward capital losses.
    2. Determine liquidity needs in the foundation to meet the requirement to pay 5% of the value of a foundation’s net investment assets. Consider gifting appreciated property to charity as opposed to selling the property, recognizing the gain, and contributing cash to charity. This may help avoid capital gains taxes and the 3.8% surtax on net investment income.
    3. Consider making a “conduit election,” so contributions to the foundation can be treated as though made to a public charity for income tax purposes, which can be helpful if all donations will be made early in the following year, and the income tax deduction would be limited by more restrictive private foundation rules.
    4. Fund a Charitable Remainder Trust (CRT) with concentrated positions in appreciated securities in order to diversify without adverse tax consequences associated with selling appreciated securities. The income stream received by the grantor is taxable (5% of the trust assets), however, the trust can defer the associated capital gains (possibly indefinitely, depending on the trust’s other income). When establishing a CRT, take an income tax charitable deduction for the present value of the charities’ remainder interest.
  3. Harvest losses to offset capital gains and to reset the income tax basis for future gains.
    1. Sell securities to recognize losses that can be used to offset capital gains. Employ the same strategy for unrecoverable debts.
    2. Conversely, consider selling securities to realize long term capital gains to lock into a more favorable rate this year. The same securities can be purchased in 2015 to effectively gain a step up in basis. Since the sales are at a gain, the wash sale rules do not apply.
  4. Establish and fund qualified plans – take distributions if in pay status.
    1. Set up retirement plans by year-end with contributions deferred until tax filing due date.
    2. Consider making a gift of up to $5,500 to either a traditional or Roth IRA for your children or grandchildren who are not funding their own IRAs, but have enough earned income to report.
    3. If you are over age 59 ½ and your rate is low, consider taking a taxable distribution from your retirement plan even if it is not required, or consider a Roth IRA conversion.
    4. If you convert to a Roth IRA in 2014, you can recharacterize it back to a traditional IRA until October 15, 2015. You can undo the Roth conversion if the account value decreases significantly from the time of conversion and avoid the recognition of income tax based on the higher value of the account on the date the conversion was made.
  5. Identify assets and amounts to make proper Grantor Retained Annuity Trust (GRAT) distributions before April 15, 2015.
    1. Plan to ensure that the distribution amount is liquid.
    2. If the distribution is illiquid, carefully determine the distribution date value of the assets. If the valuation is deemed incorrect (particularly if the distributed asset is overvalued), the GRAT may be disqualified.
  6. Host annual meetings for partnerships, foundations, and family missions.
    1. Discuss and plan for the family mission, family business interests and family donation pattern.
    2. Document the meeting.
  7. Make annual exclusion gifts of $28,000 (per married couple) to chosen loved ones.
    1. Make gifts into trusts for children and grandchildren.
    2. Make contributions to children and grandchildren’s 529 plans.
    3. Conversely, make gifts directly to educational institutions and medical facilities (not limited to the annual gift exclusion amount).
  8. Make distributions of income from trust accounts and estate accounts to lower the income tax liability.
  9. Estates and trusts are taxed at the highest income tax rate. It, therefore, may make sense to distribute income to the beneficiaries to be taxed at the beneficiary’s lower income tax rate.
  10. This can be particularly beneficial in light of the compressed income tax brackets applicable to trusts, and the lower threshold at which the 3.8% Medicare surtax applies to trusts. Depending on the terms of the trust agreement and applicable state law, it may also be beneficial to distribute capital gain income to beneficiaries in lower income tax brackets.
  11. Review all life insurance policies and life insurance trusts to confirm compliance.
  12. Determine whether or not your current life, long-term care, and liability insurance continues to efficiently meet your coverage needs.
  13. Ensure that your beneficiary designations pass the assets according to your wishes.
    1. Update Crummey withdrawal notices with 2014 gifts into life insurance trusts.
    2. Consider using RMDs that you do not need or want to take to fund a life insurance policy in trust to replace assets lost to income and estate taxes on IRAs and other assets.

“Take action now to protect the assets you’ve worked hard to build and reduce your check to Uncle Sam for tax year 2014,” said McManus. “Talk to a professional wealth advisor immediately to capitalize on this window of opportunity that will close by month’s end and to recalibrate your estate plan based on changes in family dynamics, net worth and estate taxes.”

For trusted advice on year-end giving and estate, tax and retirement planning, call McManus & Associates at 908-898-0100 – the firm works with domestic and international clients across the globe.