Tag: legislation

Conference Call: Five Estate Planning Additions to Your New Year’s Resolutions

Regardless of your personal political leanings, the 2020 Election results will likely impact estate planning as we know it today. Certain estate planning strategies will likely evaporate if there is a Democratic sweep in Congress and the presidency. Take advantage of current estate planning opportunities and strategies since there is no certainty that they will be preserved in their present form after the 2020 Election. For example, Bernie Sanders’s proposed For the 99.8 Percent Act (the “99.8 Percent Act”) that was introduced in the Senate in 2019 includes the following changes:  decreasing the gift tax annual and lifetime exclusions; decreasing the estate tax exemption; eliminating valuation discounts; placing restrictions on GRATs; eliminating the use of grantor trusts; and limiting the duration of dynasty trusts to 50 years. This proposed Act could be a template for future legislation proposals.

In a conference call with clients this week, John O. McManus, founding principal of McManus & Associates, offered existing wealth preservation and growth strategies and recommendations to consider for immediate action. Listen and review below:

1. Consider making larger gifts now before the annual gift exclusion is lowered

The 99.8% Act would sharply limit the annual gift exclusion to $10,000 per donee (currently $15,000) and $20,000 per donor; the lifetime gift exclusion would be decreased to $1 million. The annual exclusion was meant to shield from tax and recordkeeping the usual giving done around holidays and birthdays.  This extremely low limit per donor would greatly affect planning at all levels and would particularly affect the funding of irrevocable life insurance trusts and prefunded 529 plans.  Gifts over the $20,000 per donor limit would require you to use the proposed $1 million lifetime gift exclusion.  The lifetime gift exemption, which is currently $11.58 million for 2020, is the amount of assets that can be transferred out of your estate during your lifetime without having to pay any gift tax.  Therefore, in some cases the maximum annual gifting should be done now before there is a possible reduction of the exclusion.  If you make annual gifts to ILITs and other trusts, you may want to consider making a larger gift now utilizing the larger available exclusion to fund the trusts.

2. Utilize the current 2020 $11.58 M estate tax exemption per person, before it is lowered to $3.5M per person

The 99.8 Percent Act seeks to raise the present estate tax rates to the following:

          Estates $3.5 million to $10 million             45%

          Estates $10 million to $50 million              50%

          Estates valued at $55 million or more         55%

          Estates valued at $1 billion or more            77%

Under the 99.8 Percent Act, a married couple would only get a total combined estate tax exemption of $7 million. If this amount is placed in trusts, the $7 million would double every 12 years and the total assets in the trusts will be only $28 million free of tax.  This is a significantly lower number than if the current joint exemption of $23.2 million was placed into trust.  Furthermore, with the elimination of discounting discussed later, the restriction on gifting would be even more significant. Not only is the growth lower, but there remains a significant amount of assets in your estate because of the loss of discounting, as well as less assets being transferred into trust. 

Gifting is most efficient when done as large as possible, since the limits may be lowered and now is the time to do as much as possible before the paradigm shifts to make this a less useful option. The assets gifted and their appreciation over your lifetimes are not subject to federal estate tax at the end of your lifetime.

However, making such large gifts to utilize the large exemption may require that you have access to the transferred assets.  This access can be achieved by setting up a credit shelter trust: one spouse creates the trust and the other spouse is named as a beneficiary so that distributions can be made at any time for their needs. The spouse who is the beneficiary is also appointed as trustee and will retain control over the management of the trust assets.  In order to provide flexibility to access the trust assets, the spouse who created the trust reserves the power to remove and appoint trustees, receive loans from the trust, and reacquire assets from the trust by substituting assets of equal value into the trust.

Therefore, in order to avoid last-minute planning should the exemption drop to $3.5 million, you should do your planning now before any possible changes, especially if you have been waiting to plan because of the current high exemption.

3. Take advantage of valuation discounting before the strategy is eliminated

Valuation discounting has been an area of IRS scrutiny for many years. The proposed 99.8 Percent Act would eliminate valuation discounts applied to intra-family transfers by gift or inheritance, which has driven a lot of estate planning strategy. 

The current version of the 99.8 Percent Act proposal if adopted would have a major impact on the way assets can be discounted for estate planning purposes. No discounting would be permitted if the transferee and family members have control or majority ownership; this would effectively eliminate the discount strategy. 

Therefore, you should consider creating a family partnership – or making additional transfers of family partnership interests – since the valuation discounting opportunity may soon disappear. Currently, since non-managing interests possess limited authority, the fair market value can be discounted for lack of control and lack of marketability. For example, with the currently available discounting, a 50% noncontrolling interest in your real estate investments could be worth $3.25 million for gift tax purposes instead of their fair market value of $5 million. In addition, the assets grow outside of your estate in a tax-efficient trust.

4. Utilize short-term and mid-term Grantor Retained Annuity Trusts (GRATs)

Restrictions outlined in former President Obama’s annual Greenbook are incorporated into the 99.8 Percent Act and could be pursued by Congress. One of the significant proposals of the 98.8 Percent Act is requiring a minimum GRAT term of 10 years and requiring a minimum remainder interest of not less than an amount equal to the greater of 25% of the trust value or $500,000.  This effectively eliminates the potential for zeroed out GRATs where the remainder interest has a zero value.  Also, rolling two-year GRATs would not be possible.

The 99.8% Act would serve to prevent perceived abuses of GRATs by barring donors from taking assets back from these trusts just a few years after establishing them to avoid gift taxes (while earnings on the assets are left to heirs tax-free). This strategy has cost the Treasury $100 billion since 2000.

•         Effectively, the purpose of the GRAT is to make a loan of investment assets to your children or loved ones. Your loved ones benefit from any growth above the initial contribution. To be valid, the original contribution must be paid back (with modest interest) in installments over a fixed period of years.

•         The key? The grantor must outlive the final repayment. If you die before the final payment, all of the growth that would have been otherwise excluded is now destroyed and reverts back to being included in your estate. The 99.8 Percent Act could dissuade taxpayers from taking advantage of GRATs by setting a 10-year minimum term for the GRAT. This would mean that there would be gift tax consequences for the first time for an historically gift-tax free strategy. 

•         Currently, the ideal GRAT plan chooses investments that will accelerate most rapidly in value during the GRAT’s term. After the final payment is made, the result is that all growth over the original amount is out of your estate and excluded for estate tax purposes and without any gift tax consequences.  Any assets remaining in the GRAT (after all annuities have been paid back) should continue to be held in trust for the benefit of the grantor’s spouse and children.

•         GRATs established now would be protected by law. Before changes go into effect, we recommend the creation of two GRATs:

          Short-term GRAT: Since you must survive the term of the GRAT, a short-term GRAT of two years will minimize the risk of significant wealth failing to pass tax-free because the grantor dies prior to its completion.

          Mid-term GRAT: We also suggest a longer term GRAT, between five and seven years, to avoid the risk that you get caught short if the law changes with only the option to do 10-year GRATs. Mid-term GRATs would be grandfathered and could continue without any consequences during the next four years of a Democratic Congress or presidency.

5. Anticipate the loss of use of Grantor Trusts

The 99.8% Act would prevent wealthy families who currently avoid gift tax by paying income taxes on earnings generated by assets in grantor trusts from doing so.  The Act would include in the taxpayer’s estate any assets in his or her grantor trusts, as well as any distributions from his or her grantor trust during the lifetime of the grantor. Any assets in a grantor trust that is converted to a non-grantor trust would also be included in the grantor’s estate.

If you have been considering establishing or using a grantor trust, there is urgency to start the process and move assets into trust now, as it may no longer be an option starting in 2021.

The sooner one starts, the better the chance of being able to adequately set up a trust that can be grandfathered in. While this legislation and paradigm shift may not necessarily go into effect immediately, this option might only be available for the next year or so. To wait longer is to risk the unknown and to potentially lose the opportunity to utilize this strategy.

Reach out to McManus & Associates should you have questions about these opportunities and strategies.

Conference Call: Top 10 Estate and Tax Planning Issues in the News

There are several tax and estate planning strategies that high-net-worth individuals (HNWIs) should consider seizing upon before year-end. In a conference call with clients today, John O. McManus, founding principal of McManus & Associates, weighed in on timely topics for the benefit of clients, from legislative initiatives that may impact estate planning to why an estate plan needs to include provisions governing digital assets. Below, listen to the call recording and find an outline of the issues covered during the discussion:  

  1. What legislative initiatives and political current events may impact estate planning? If enacted, the SECURE Act will drastically limit the ability to “stretch” an IRA for your children and the estate and wealth tax proposals of the Democratic candidates for President may suggest urgency in need to complete wealth transfers.
  2. How does being diagnosed with a significant health problem impact the estate plan? It is best to re-focus on the estate plan and have difficult conversations with family members and advisors as soon as reasonably possible because of the elevated concern about incapacity or demise.
  3. Why should major life events cause one to re-visit the estate plan? Marriages or divorces in the family, the acquisition of new assets or investments, starting a business can all serve to undermine the intended estate plan or create a new blind spot or vulnerability. 
  4. What are the important principles in planning for the modern family? Blended families, same-sex marriages, single-parent families, and domestic partnerships each raise their own nuanced considerations, which places a greater emphasis on a specialized and flexible approach. 
  5. Why and how should you discuss your estate plan with your children? Discussing death, taxes, and asset protection may be uncomfortable, but they are essential to best prepare your heirs for their inheritance. 
  6. What is a family mission and how can it be integrated into the estate plan? It is important to consider imparting sentiments in support of the family legacy, such as preserving family traditions and values. 
  7. What are the risks of failing to properly plan for the disposition of a specific asset, such as a home, personal effects, a business, or even frequent flyer miles? Items that may have a sentimental value or disproportionately favor one child over another may cause divisiveness and other complexities. 
  8. What estate planning lessons can be drawn from the Financial Independence, Retire Early (FIRE) movement? Prudently structuring discretionary trusts can avoid an outcome in which children are deprived of their motivation for self-sufficiency and can also provide opportunities for them to amplify their personal wealth. 
  9. Once an estate plan is completed for the time being, what are the practical steps that should be taken to protect the documents and other important information? Current best practices include various options for physical and electronic storage to ensure these materials are readily available during an emergency or tragedy. 
  10. Why must an estate plan include provisions governing digital assets, including web-based accounts and cryptocurrencies? Wills, Trusts, and Powers of Attorney should specifically authorize a fiduciary to have access to all information, including online and digital passwords to ensure efficient access to accounts.

Conference Call: “Top 10 Estate Planning Considerations to Complete Before Year-End”

Yesterday, McManus & Associates held a client conference call reviewing several immediate strategies that clients should consider employing before year-end. With the proposed tax reforms listed in President Obama’s budget, certain planning strategies are in the crosshairs and may not be around for long. Although legislation next year could be made retroactive to January 1, 2014, if you act before the end of 2013 such changes will not affect your planning. Get inside the castle walls now.

During the half-hour call, the firm shares effective strategies and highlights maintenance items required to ensure one’s family wealth remains protected. Below are the 10 questions that will be answered by listening to the recording.

LISTEN HERE: “Top 10 Considerations for Estate Planning with Life Insurance”

  1. Laws could change with new revenue debates. Have you made lifetime gifts in trust? Created a grantor trust?
  2. Have you made sure to operate your family LLC/Limited partnership as a legitimate business? What should you do before year-end?
  3. What should you give away? Are you planning to make annual exclusion gifts, gift appreciated securities etc? Have you prepared Crummey notices?
  4. Should you create lifetime trusts for your children? Have you given your trustees a limited power of appointment?
  5. What can you prepay? What should you prepay? Home, deductibles, medical expenses, major year-end purchases?
  6. Have you crossed any major milestones this year? Do you have children who turned 18 this year? Do the fiduciaries and guardians named in your documents still reflect your current wishes? Are your powers of attorney up to date?
  7. Have you made contributions to your family foundation and/or donated to charity?
  8. Are you over 70 ½? How to use Required Minimum Distribution to your advantage.
  9. Create GRATs or QPRTs. Given the current interest rates what should you consider?
  10. How should you consider harvesting capital gains, timing long-term losses?

Give us a call at 908-898-0100. We can help you identify which strategies you should implement now before the calendar rolls over to 2014.