The political ping-pong commonly seen in the U.S. leads to legislative changes that make it necessary to reevaluate one’s tax strategies every few years. However, there are also important estate planning techniques that are not directly affected by legislation and changes in tax law, but that can still make a big impact on wealth preservation. From regularly updating your will to consistently moving assets off your balance sheet, several estate planning items should be added to your to-do list.
McManus & Associates Founding Principal John O. McManus recently discussed with clients, “5 Estate Planning Action Items that Remain Relevant Regardless of Shifting Political Winds.” Listen to a recording of the call and find details below.
1. Schedule Routine (Estate Planning) Checkups: Regularly update your health care documents and wills
Consider whether the individuals named in one’s documents are still appropriate. Think about positions including power of attorney, health care agent, guardian for minor children, trustees of an irrevocable or testamentary trust, trust protectors and trustee appointers (if any). Ask questions, such as:
- Has the relationship with any of the people named changed?
- Has the life situation of any of those named changed?
- Has the health of any of those named changed? If one’s parents were initially named as guardian for minor children, but the parents are now older and in poor health, for example, alternative guardians who can keep up with kids may need to be named instead.
- Are all of the people who have been named still geographically appropriate? For example, if one’s trusted power of attorney moved across the country and cannot now serve in an emergency, a new power of attorney should be named.
Next, one should also consider whether the beneficiaries named are still proper. Ask questions, such as:
- Are the amounts left to each beneficiary still appropriate?
- Again, how is one’s relationship with each beneficiary? For instance, has there been a falling out with any of them?
- Are there new beneficiaries (nieces, nephews, charities, etc) one now wishes to include? Normally, documents drafted by McManus & Associates cover new children and grandchildren automatically.
- Are any of the beneficiaries at risk with inheriting assets? Are they the target of a divorce, legal action, or the victim of financial strife or addiction, for example?
Finally, think through whether the current trust provisions make best use of the law for asset protection purposes.
2. “Do it for the Kids”: Set up trusts for your children and grandchildren
While the lifetime exemption amount has changed several times in the last decade, the annual gifting exemption has remained fairly constant. Setting up a trust for your children and grandchildren allows one to tap into this reliable wealth transfer mechanism without the damage of gifting assets to them outright. With this strategy:
- Assets will be in a protected vehicle, meaning they can be passed on to the next generation outside of the children’s estates, as well.
- A trustee can manage and control the assets while the children are minors.
- The spouse should be added as a beneficiary, and the grantor should retain the power to take loans from the trust.
3. Move Assets off Your Balance Sheet: Sell the family business, real estate, life insurance, investment accounts and more into a trust
- A family business is typically a long-term investment, so sell it into a trust. This provides an income stream to older individuals who may wish to surrender the day-to-day operations of the business without losing access to the economic security of the asset. It also puts the asset in a protected vehicle that is exempt from estate tax.
- Sell business interests when the value is modest so that growth takes place outside of one’s estate. Selling a business interest also allows for valuation discounts, with greater equity going into trust.
- Real estate can be sold into trust for a similar purpose as family businesses.
- Life insurance can be sold into a trust to avoid the three year look-back. If you gift life insurance into your irrevocable trust and pass away within three years, the IRS will claw that asset back into your estate. The sale prevents this.
4. Make the Switch: Swap low basis assets out of your trust
- Assess the income tax benefits of holding assets inside one’s estate versus the estate tax benefits of pushing them outside of one’s estate.
- With a critical eye, consider swapping estate assets for the trust’s assets, and vice-versa, to maximize the income tax basis step-up.
- A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of transfer, not the value at which the original party purchased the asset.
- When an asset is gifted to an individual or trust, there is a carryover of the original basis – meaning there is no step-up. Although the asset is now outside the grantor’s estate for estate tax purposes, upon the sale of the asset, capital gains tax will be due.
- When an asset is included in a descendant’s estate, the asset receives a step-up in basis to the date of death value at that time. The asset can be sold to avoid any capital gains tax.
5. Give Precedence to Giving Back: Use foundations and charitable trusts to make philanthropy a focus for your family and to achieve income tax benefits
- Family unity can be created through a consistent emphasis on giving back.
- Foundations and charitable trusts also both have income tax benefits. The tax rates may change, but income tax is unlikely to go away, so this will always be an important piece of a good planning strategy.
- Donations should be reviewed annually to assess portfolio performance, confirm that the foundation is meeting minimum distributions for charity, and verify that the donative patterns are still desirable.