Execute and shelve is not an effective approach to estate planning. McManus & Associates, a top-rated estate planning law firm celebrating 25 years of success, today revealed the “Top 10 Ways to Solidify an Estate Plan Post-Execution,” a recent installment in its Educational Focus Series. During a conference call with clients, the firm’s Founding Principal and AV-rated Attorney John O. McManus shared tips on how to build a solid and complete Estate Plan to protect and nurture your family today and for generations to come.
“To make your estate plan solid, there are numerous issues to consider and actions to be taken that extend far beyond drafting documents,” commented McManus. “Building a foundation through strategic planning and establishing the framework for one’s legacy are important steps, but until all the core elements of the structure are in place, there’s more work to do.
“Today, in the Trump Era, with all the uncertainty about where the estate tax and income tax regimes converge and diverge, it is critical to ensure that core protection work is completed as we batten down the hatches, protecting for the storm of changes most certainly on the horizon. To ignore fully completing this core work as we await changes to more complex tax issues is not the most conservative approach. In fact, some have said that to neglect core planning is tantamount to being reckless with one’s loved ones.
McManus added, “As family dynamics and the legal environment evolve, it’s particularly important after the core work is completed to revisit and revise that portion of one’s estate plan, as needed.”
LISTEN HERE for details: “Top 10 Ways to Solidify an Estate Plan Post-Execution”
Top 10 Ways to Solidify an Estate Plan Post-Execution
1. Dotting Your I’s and Crossing Your T’s – Proper Account Titles
A. Titles need to be in the intended names with type of ownership to guide the direction of your estate plan
I. Examples
1. Joint tenants versus tenants in common
a. Joint tenants
i. All owners have equal interest in property, but it is NOT a divided interest
ii. If one owner passes away, the other owners’ shares increase; the decedent’s estate does not receive any interest
iii. A step-up in basis is available on one-half of the property
b. Tenants in common (recommended in many situations)
i. Each owner has a divided interest
ii. There is a step-up in basis upon death on the deceased tenant’s share
iii. The ownership rights pass through the decedent’s estate
2. With a plan that includes a credit shelter trust with all assets held jointly, no assets will be available to fund the trust upon the decedent’s passing – jointly held assets do not pass through one’s estate according to the terms of the will or trust agreement
2. Bee-lining to Beneficiaries – Asset Beneficiary Designation
A. Any asset that has a beneficiary designation will pass directly to the named beneficiary, not according to the terms of the will or trust
B. Specific language for the designation needs to be utilized if a trust or a trust under the will is the designated beneficiary – in particular, qualified accounts
C. It is important to make sure that the named beneficiaries on the designations are correct and do not conflict with the will to avoid any discrepancies
D. Types of accounts/financial instruments that should be considered for review
I. “Non-qualified” brokerage, investment, and banking
II. Life insurance policies not held in trust
III. “Qualified” IRAs, 401(k)s, annuities, and other tax-deferred investment accounts
E. Other considerations for retirement accounts
I. Only individuals can be named as beneficiaries, not the estate
1. Individuals can be named within a trust
II. Special language is needed to capture “stretch benefits” of an IRA for the beneficiary
1. Stretch benefits allow for a more favorable schedule of required minimum distributions (RMD’s)
3. Gifting Guidelines – Current Thresholds
A. 2017 annual gift tax exclusion: $14,000 per individual (likely to rise in a short period of time)
I. Gift splitting
1. A married couple currently has the ability to jointly give $28,000 per individual
2. A gift tax return needs to be filed when gift splitting
B. 2017 lifetime unified tax exemption: $5.49 million per individual ($10.98 million per couple)
I. Exemption may be used during life or at death
II. Portability
1. Surviving spouse may utilize any unused portion of the deceased spouse’s lifetime unified tax exemption if a Form 706 Estate Tax Return is filed in a timely manner
2. There is no portability on the state level
III. Be sure to calculate gifts made to life insurance trusts as annual exclusion gifts if Crummey notices are utilized
1. Crummey powers give a beneficiary of a trust a limited time (30-60 days) to withdraw any yearly contribution to the trust so that the contribution will be eligible for the annual gift tax exclusion
2. Written notice to the beneficiaries of the trust is required and provides proof that the notice was given
3. When giving notice to beneficiaries of a trust (especially minor children), you must:
a. Send a letter to the beneficiary or guardian of a minor child
b. Allow the beneficiary a limited time (often 30-60 days) to elect to receive the gift
c. After the withdrawal period, the gift remains in the trust and is utilized to pay the insurance premiums
4. Ensuring Insurance & ILITs – Account Funding and Premium Payments Checklist
A. Irrevocable Life Insurance Trusts
I. Opening the trust bank account
1. The trustee must open the account
2. A non-interest bearing account is recommended
II. Funding life insurance trust with cash
1. Funds for the annual premium need to be deposited into the trust bank account and the trustee must send Crummey notices to the beneficiaries
III. Life insurance trusts can purchase insurance policies on the insured grantor
1. Trust must be the owner and beneficiary of the policy for estate tax minimization when the policy is paid
2. Premiums on the policy are subject to gift taxes
IV. An existing policy can be gifted into a trust (the cash value of the policy is the amount of gift tax exemption you would use)
1. Be careful of the three-year look-back period
V. Special consideration
1. For Crummey withdrawal purposes, it is possible to add an extra beneficiary of an ILIT who has a disproportionate share of interest
2. Despite the share being disproportionate, the extra beneficiary increases the available gift tax exclusion by $14,000
5. Taking the Guesswork Out of GRATs: Scheduled Payments and Terminations
A. Grantor Retained Annuity Trusts
I. A GRAT is established with a set amount of capital in the trust, which can be invested
II. The trust then pays an annuity stream based on the §7520 interest rates (usually 1-3%) compounded annually
III. The hope is that the assets in the trust will grow faster than the annuity payments
IV. The longer the trust term, the smaller the taxable gift, as the remainder beneficiaries must wait longer to receive the property
B. Concerns
I. If the grantor does not outlive the GRAT term, all or part of the value of the GRAT property at the time is included in the grantor’s estate
6. The Rules of Generosity: Gift Tax Returns
A. A Form 709 must be filed with the IRS if more than $14,000 ($28,000 for married couples) is gifted to any one person
B. To start the three-year statute of limitations, the Form 709 must be filed, otherwise the IRS will be able to pursue tax issues indefinitely
C. Keep track of all gifts and remainder of unused exemption
7. Foundation Fundamentals – Maintenance & Distributions
A. A foundation is a charitable entity that can receive various forms of assets including, for example, artwork
B. When making a charitable gift directly to a foundation, an income tax deduction is available (up to 30% of one’s adjusted gross income for cash gifts and 20% for gifts of appreciated stock)
I. The donor gets tax benefits up front
II. The foundation must distribute 5% on an annual basis (5% of average monthly ending balance)
1. Distributions must be to registered charities
2. The 5% figure may be partially offset by advisory fees or administrative fees
C. Compliance concerns with foundations
I. A 990-PF must be filed with the IRS
II. Annual meetings are required
D. Benefits of foundations
I. Tax benefits
II. Impact on charities are compounded long-term
III. If the return on capital exceeds the required distributions, the foundation could conceivably exist in perpetuity (or at least much longer than if the assets were not invested)
IV. Foundations are a great way to get multiple generations involved
1. They can be appointed to the board
2. They see the positive impact that the foundation has on the world
8. Multistate Real Estate Ownership – Estate & Tax Perspectives
A. An estate is subject to taxation by the state in which one is domiciled
B. Immovable property (usually real estate) in other states can be subject to ancillary probate proceedings in that state
I. This will increase the time and cost to settle the estate
II. Many states require full public disclosure of ancillary probate proceedings
III. A lawyer in the state of ancillary probate will likely need to be hired
IV. Be aware of timeshare and vacation club ownership interests that could increase exposure
C. Retitle real property into an RLT (Revocable Living Trust)
I. RLT is domiciled in one’s home state
II. The property is owned by the trust
1. Therefore, immovable property in other states will not end up in the estate and is not subject to ancillary probate in that state
2. Once the grantor passes away, the trust becomes irrevocable and the assets will be distributed as planned
D. Other option: Owning property through an LLC formed in one’s home state
I. Having property in an LLC can avoid ancillary probate
II. Property in an LLC limits liability
9. Leaving Your Mark: Legacy Intentions, Family Meetings & Generational Preparation
A. Family Governance: Most high net worth families are now more concerned with the orderly transfer of assets to loved ones, in a protected manner and without conflict, than they are about estate tax minimization
B. Best Practices
I. Keep good records of financial accounts and other accounts
II. Intentions one would like to share with loved ones should be considered, such as wishes or inheritance they can expect
III. Preparation of family mission and ethical wills – incorporation of philanthropic ideals and legacy intentions
1. Impart values, family stories and histories
2. Include expressions of love, aspirations for future generations, and life lessons
IV. Annual meetings for family entities and the foundation should be scheduled
1. Prepare heirs for use, management, and preservation of inheritance at an appropriate age
2. Identify charitable objectives
10. Weathering the Storm – Maintaining an Estate Plan in a Dynamic World
A. Review plan periodically for relevance
B. Notify your advisors of life changes
C. Encourage a holistic approach to be inclusive of financial, legal, and personal goals
D. Review regulatory or election impact on current estate plan
To view McManus & Associates’ 10-Step Wealth & Family Values Protection Plan™, visit https://mcmanuslegal.com/services/wealth-transfer/10-step-process/. For trusted advice on a lifetime approach to estate planning, call McManus & Associates at 908-898-0100.
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