Posts tagged Estate Planning
Estate Planning

Are you a business owner and considering creating an Estate Plan?

If you want to prevent your business or businesses from being wrapped up in litigation, handicapped with tax liabilities or even run by people who have little understanding of what your goals are for the business then you should consider this when creating an estate plan.

You should plan for incapacity and avoid guardianship. Who would you want to run your business if you become unable to manage the day to day affairs? He or She should be designated through a power of attorney or revocable trust. If you do not designate someone in advance upon your incapacity you leave the decision-making power of your business to who the guardianship court appoints. Some very important business decisions may also require advance court approval. Planning to avoid guardianship can help ensure that the business will continue to be effectively managed if you are unable to do so.

One key component to creating an estate plan and considering your closely held business is to avoid probate. Any property in your name is generally subject to probate following your death. Assets which may be included in probate including their fair market values become public record. Being stuck in probate is long drawn out process which may take longer than a year or more before your business can be transferred to your loved ones.

What about your estate tax liability? Currently the law states that anyone with over 11.18 million will be subject to estate tax within nine months of death.  Several closely held businesses exceed that value, often triggering a substantial tax liability. Without advance planning your estate may need to borrow or sell assets to raise the funds.

Planning to minimize estate tax can involve many complex measures, including life insurance, buy-sell agreements, and sales or gifts to trusts. An attorney with experience should be involved when making these decisions.

What about my personal income tax? Death is difficult to go through, however, it also can bring income tax benefits. Planning may eliminate income tax benefits. Many high net worth individuals make gifts of business interests to the next generation in order to remove appreciating assets from the donor’s estate. The estate tax savings is generally expected to outweigh the loss of income tax savings.

To avoid the painstaking process of probate you should have an attorney create a revocable trust and transfer the title of your business to that trust. Therefore, your assets are now in a trust and are not public record and do not require the probate court to become involved.

Balancing the Future

The future for our young people today is more important than ever.  When I think of the state of Social Security, the high expense of student loans, the limitations of employment and the lack of retirement our children might unfortunately see.  I ask the question, how are my children going to have any golden years? The only golden years they may see will be as children.  Our loved ones should be able to be on their own and establish their own way in life.  As parents we want for them to be self sufficient, not to pave their way, but to show them what we learned along the way as well as the ethics many of our parents taught us.  Essentially, we should teach, but to not coddle.

Thoughts of this keep me up at night for my own children.  As an Estate Planning attorney I listen to these same concerns with my clients.  This unforeseen future for our children, is it going to be harder for them than it was for me?  What if I was given more opportunity because my parents setup a trust for me. How would it have changed my life?  Would I have struggled the way I needed to struggle to find my way, or would it have changed who I became in a more  positive way and allowed me to better provide for my children.

These are the thoughts that come to mind when we as parents try to create some balance for our children's future. When we are thinking in these terms it maybe a good time to start planning ahead. We may not be in a position at this time, but realize the need for a plan.  We maybe at a point in our lives that this maybe at the top of a long list of goals we need to accomplish.  No matter what the situation entails estate planning needs to be contemplated. 

For many of us our loved ones may not have the ability to fend for themselves, they maybe compromised in some form.  Who will look out for them when I am gone?  How will my partner be financially?  What if my child already feels some form of entitlement and he or she needs to learn more in this life than to just expect or take.  How do I setup a plan for my kids educational needs?  What about my grandchildren who I love so dearly?  Where do I start in creating a plan for the future that bares these different needs and goals in mind?  

Many of my clients are genuinely surprised of the cost of creating an estate plan many believed the cost would be much greater.  When balancing the cost of creating a comprehensive estate plan there are many questions one needs to ask. How do I avoid the mess of creditors and protecting my beneficiaries?  I have read Probate is a nightmare and how do I avoid it?  How do I reduce my estate taxes?

 When considering these questions and the cost of hiring an attorney to create an estate plan, you will find it is much smaller of an expense than even just the estate tax liability if one is not created. 

There is a lot of valuable information available on the internet, one should always start with researching the elements of Estate Planning, Where do I start?  Do I need just a will, or do I also need a trust, or a combination of both?  What type of trusts do I set up to better protect my hard earned assets.

With many of these questions in mind, talking with an attorney, for many as a free consultation, can help with your questions or concerns.  An attorney can navigate you through your options, and you will have a better idea of what to expect, allowing you the piece of mind of what you need to do for the future of your family and loved ones.  

The clients or prospective clients I visit with always leave with a better sense of their situation and we develop the plan that best fits their needs, not just today, but for the future.

Balancing your finances today, your beneficiaries needs and an improving economy, It might be a good decision to create an Estate Plan to better protect your assets and have a more influential future for your loved ones.

Wrong advise about trusts

Many advisors recommend clients set up trusts for their children or grandchildren to take advantage of new large estate-tax exemptions.

But that advice is often overly simplistic, and sometimes it’s based on outdated strategies. Other than the uber wealthy, why would any client set up a trust for grandchildren? In most cases, that makes no sense because the same goals can be achieved through other strategies.

Worse yet, it seems that too many advisors have forgotten the unhappy clients who similarly pursued inappropriate strategies in the mad rush to do estate planning in 2012 before the exemption was supposed to decline from $5 million to $1 million in 2013 (which it didn’t). Clients that made large gifts to children or grandchildren, or trusts for them, later regretted those gifts because they could no longer access those assets.

So how can your clients have their cake and eat it too?

To plan better, advisors first need to identify how a client’s goals might be different today because of the 2017 tax changes. They may want to consider the following strategies:

  • The current estate, gift and GST tax exemption is a whopping $11.8 million, but that amount is halved in 2026, so clients should try to use as much as feasible before it is reduced. Using the exemption requires the client to make a gift that removes funds from the client’s estate (in tax parlance a “completed gift”).

  • Does the client need access to the assets given away? Without access, many clients will be uncomfortable making the large gifts necessary to use some of the expiring exemption.

  • Consult with the client’s estate planner and CPA to determine if the client would benefit from using traditional grantor trusts (the client setting up the trust and making gifts pays the income tax) or non-grantor trusts (the trust, not the client, pays income tax on trust income). Some plans, like those involving life insurance, are best held in grantor trusts. Other plans may seek to circumvent the income tax restrictions in the new law, for example to maximize charitable contribution deductions, salvage state and local tax deductions on real property or increase the 20% deduction under new Code Section 199A on pass-through business entities. Those strategies require the use of non-grantor trusts. This distinction between grantor and non-grantor trusts is critical as it requires different trust provisions. Advisors need to understand the nature of the trust’s structure, as it affects not only income tax planning but asset location decisions, as well.

Achieving any of those goals can be complicated, and doing so requires fine-tuning in the preparation of the plan and trust document. Too many articles about planning after the 2017 tax law have glossed over all of this. While financial advisors don’t need to be experts in all the nuances (after all, they can also rely on the client’s attorney), many advisors are active participants in the tax planning process and need some understanding of the nuances to do that.

All advisors, whatever role they take in tax planning, need to understand the big picture so that they can confirm their clients are getting the best planning.

If making a completed gift sounds inconsistent with preserving the client’s access to those funds, it isn’t. It just requires careful planning and drafting. Don’t advise the client to gift outright to an heir as that provides no protection or access. Instead, have the client gift to a trust to both protect the heir, and assure the client access.

Addressing the subject of mortality can be tough — but advisors can help make the conversation less painful.

A common non-grantor trust plan used for years is the intentionally non-grantor trust or “ING” trust. These trusts have been used by high-income taxpayers to shift certain income out of a high-tax state. ING trusts may remain a great plan for ultrahigh-net-worth taxpayers who have already used all of their estate tax exemptions. But for most wealthy taxpayers, securing exemptions before those exemptions decline by half in 2026 (or sooner by a new administration) may be best.

These taxpayers need a different type of ING trust than the uber-wealthy use. If an ING approach is used it must be fundamentally different from all traditional ING trusts, which were incomplete gifts (and thus, did not use the exemption), so that transfers constitute completed gifts which use the exemption before it declines. Otherwise, a fundamental goal of the planning will be lost. This is why, when a client’s attorney recommends a type of trust, planners need to understand the nature of that trust. They also need to be cautious recommended ING trusts for all clients because this technique, unless modified, is not optimal for everyone.

Location matters: When clients set up a new trust, remember to ask the question: What state is being recommended for the trust? The client’s home state? In many cases, the type of planning the client will need will require that the trust be formed in what are called “trust friendly” jurisdictions.

There are about 17 states, of which Alaska, Delaware, Nevada and South Dakota are the most popular, that permit clients to set up a trust and be a beneficiary of that trust, yet have the trust assets be removed from their estate. This type of trust might be warranted for a single client that wants to assure access to assets transferred by using a self-settled domestic asset protection trust or DAPT. ING trusts discussed above also need to be formed in these states to work. If a client wants to save state income tax forming a trust (or moving an existing trust) to a no-tax state may be essential to the plan.

Forming a trust in a state other than the client’s home state will often require naming an institutional trustee in that better state. Planners should not deter such planning for fear of undermining their client relationship. Rather, financial advisors should establish relationships with purely administrative trust companies based in the better trust states, so that their clients can get the best planning without creating unnecessary complications or competition for the advisor.

Trusts should also often include a trust protector to provide flexibility. This might include the power to change institutional trustees and states where the trust is governed and administered. Other persons might be given the power to add a beneficiary or loan the client money from the trust. But be careful as the latter two powers may characterize the trust as a grantor trust for income tax purposes (which in some cases now is not desired).

There are also different views as to whether the trust protector should act in a fiduciary capacity (with the level of responsibility of a trustee) or not. If a person is acting in a fiduciary capacity, they may not be able to add a new beneficiary, for example, as that might dilute the interests of the beneficiaries they have a duty of loyalty to. While financial advisors do not need to be experts in all these matters, they should at least ask questions to be sure the attorney has considered these issues.

Given the current high estate tax exemptions, for many clients the trusts should be created to last forever or a very long time (dynastic) and the client’s generation skipping transfer (GST) exemption should be allocated to protect gifts to the trust. This can keep the trust assets outside the estate tax system for many generations or forever. Rarely should trusts be planned for wealthy clients that pay out large sums at specified ages (e.g. 30).

Overall, there are more variations of trusts than ever before, which means clients and their families have more strategies they can benefit from. That said, the expansion of these options has also increased the complexity of trusts as planning tools, and identifying the best option for clients is not always an easy task.

Planners should remain proactively involved in the estate and trust planning process to make sure that in the end, a client’s plan does not merely recycle older trust strategies, but rather it uses the latest options to build a tailored plan suited to modern times.

Martin M. Shenkman

Martin M. Shenkman, CPA, PFS, JD, is a Financial Planning contributing writer and an estate planner in Fort Lee, New Jersey. He is founder of Shenkman Law. Follow him on Twitter at @martinshenkman