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.
Lynnette Khalfani-Cox is known as The Money Coach®; she’s a personal finance expert, television and radio personality, and the author of 12 books, including a New York Times bestseller. She recently reached out to John McManus for guidance on how to avoid a quandary like the one her family faced when three loved ones passed away in short order.
Writing for Get Rich Slowly, a personal finance publication with over 750,000 regular readers, The Money Coach® shares her heartbreaking story, which includes a nightmare custody proceeding after her sister passed away.
New York Times “Wealth Matters” columnist Paul Sullivan recently interviewed John O. McManus, founding principal of NJ-based McManus & Associates and a top AV-rated attorney, about the implications of a recent court case in which he successfully helped a client named Kate contest the will of her late grandmother. John grasped the dynamics at play in Kate’s situation with her family, which was crucial to a successful outcome with the case.
Michele Lerner, a contributing writer to The Motley Fool, this week turned to McManus & Associates Founding Principal John O. McManus to answer the question, “Who Should You Ask to Be Executor of Your Estate?” From the article:
“A common adage in the industry is to name your enemy as your executor as a means of revenge,” says John O. McManus, an estate attorney and founding principal of McManus & Associates in New York City. “It’s a thankless job. If you appoint someone you love as executor, get your house in order. Otherwise, appoint someone you do not.”
Lerner points out that many people choose their closest relatives, but “before you decide, think hard about what you’re asking this person to do.”
She goes on to share that she talked to McManus about “what it means to be an executor and how to go about choosing one.” Below are the questions for which she shares answers from McManus & Associates:
Q: What are the responsibilities of an executor? Q: Do you need to have a financial or legal background? Q: How much time does it take to be an executor? Q: Should you have more than one executor or is it best to have only one? Q: Is it best to ask someone before you name them in your will as executor? Q: Can someone turn down the job of executor? Q:Can you get compensated for the time you put in as an executor? Q: Can you be sued as an executor? Q: Is there anything an executor can do to reduce family fights over personal property?
To find all of our answers to Lerner’s questions, check out the Daily Finance article here.
New Jersey Newsroom Columnist Warren Boroson (“Boroson on Money”) has a new, interesting piece on how to avoid fighting over family heirlooms and personal property after the death of a loved one. The column hinges on McManus & Associates’ recent conference call on the topic, which you can listen to here. Following the call, Boroson spoke with the firm’s Founding Principal and top AV-rated Attorney John O. McManus to gather more details. The result, “Who Inherits Dad’s Subscription to Giants’ Football Games?” is worth checking out.
Here’s a peek:
Who gets dad’s subscription to New York Giants football games – worth a ton of money? Who gets the little silhouettes someone made of all the family members? Who gets grandma’s expensive jewelry? Who gets Fido and the Chairman Meow and other family pets? What about liquor collections, gun collections, rare books, and other “non-titled property”?
A will may not specify who gets such property, with the result that the heirs may wind up fighting over trivial stuff – and expensive stuff. And the resentment may last the rest of their lives. A little planning, says lawyer John O. McManus of McManus & Associates in New Providence, can prevent a lot of hard feelings and family feuds. “Things, personal effects, closely-held assets and land can cause significant fighting among loved ones and oftentimes attorneys give hardly any attention to such items in the creation of legal documents,” McManus warns.
From jewelry to art, cigar collections to fine china, dividing tangible personal property equitably among loved ones after death can be a major challenge for an executor. In order to keep the court from stepping in to divide the pots and pans –a task no judge desires– direction on how to allocate specific items should be given (rarely explicitly mentioned in wills).
In a new conference call led by McManus & Associates Founding Principal and top AV-rated Attorney John O. McManus, learn about unique ways to plan for division of specific personal tangible property and special planning considerations for unique items such as music, art, wine, scotch and even gun collections.
After listening to the discussion, you’ll have answers to the questions below. Don’t hesitate to give McManus & Associates a call at (908) 898-0100 if we can be of further assistance.
1. Is it appropriate to use a personal property memo to capture personal items? Can enforcement of such a memo be guaranteed?
2. How do we catalog our personal property in a memo? Should items be specifically insured?
3. How to plan for art, jewelry and the use of a life estate for personal property, especially in a second marriage.
4. Are you a history buff with collection of Revolutionary and Civil War rifles? Who can you leave them to? Details on fiduciaries who need special licenses or permits.
5. How will pets, especially rare or exotic species be provided for?
6. How do you transfer and value intellectual property, Copyrights, projected sales, music and art?
7. Illegal transportation across state lines? Expensive transportation? Wine or gun collections, a grand piano? How to plan for covering expenses and proper transportation.
8. If you are named a fiduciary, what tasks should you consider taking now to ensure you are protected during probate?
9. Do you have bank accounts worldwide? Considerations to simply the probate process? Are you filing annual disclosures for FBAR?
10. What strategies can you use to ensure an equitable distribution of personal property when considering certain highly valuable assets?
The New York Times today published an article with the headline “Growing Up With A Trust,” written by well-known “Wealth Matters” columnist Paul Sullivan. The story appeared online and in print, as well, on page F9 of the publication’s New York edition.
McManus & Associates worked hand-in-hand with Sullivan on this story, both in facilitating a conversation with one of our clients who shared insight on an anonymous basis and in providing expertise on preparing heirs for inheritance. From the article:
Steve, whose wealth was earned in financial services rather than inherited, is still working out a plan with his wife for telling their three sons about their inheritances. He asked that his name be withheld because he did not want his neighbors in the New York area to know about his money.
In his 40s and retired for more than a decade, he appears to be a model client for any trust and estate planner: he has already put more than $10 million in various trusts. “He’s a thoughtful, meaningful guy, and he has more time than our normal client,” said John O. McManus, his lawyer at McManus & Associates.
He is proud of the provisions written into the trusts for his children, which will keep them from having full access to the money until they are 35. Yet, though he has not done so, talking to his sons about his wealth is also important, even though all three are not yet 10.
Top AV-rated Attorney John O. McManus was happy to weigh in on this important topic, because the firm is committed to helping its clients transfer not only assets, but also family values. As discussed in the piece, conversations with beneficiaries about wealth are part of an ongoing process, not just a one-time event. Through the creation of a Family Mission Statement, McManus & Associates can help you initiate these critical discussions and best prepare your heirs for a productive life filled with success that positively impacts society.
McManus & Associates is ready to talk you through this challenging, yet important process. Give our office a call at (908) 898-0100 to get started.