Are you prepared for Estate Tax Increase? By Syed Nishat

Are you prepared for Estate Tax Increase? By Syed Nishat

In 2018, the Tax Cuts and Jobs Act doubled the Estate Tax exemption, which is currently at $11.58 million for 2020 (and twice that for married couples), however this limit policy has a sunset provision in year 2025, when it will revert to 2017 amounts. Current policy can change quickly, and historically, Democratic administrations have lower estate tax exemptions. To prepare for a possible change in tax regime, it may be advisable to look at how not to include assets in the value of the estate and avoid the estate tax, with strategies such as transferring assets to irrevocable trusts. As the estate tax limit may change with a changing political structure, it may be a good strategy to speak with an estate planning attorney and a fiduciary financial advisor if you think moving assets out of your estate will benefit your long-term plan before year end.

While planning for your family’s future security, the first step is establishing the best estate planning tools for your unique circumstances. Not all estate planning is alike, and without some guidance, you might end up making some mistakes through decisions that may seem unimportant or small at first, but could have lasting detrimental effects on your family’s financial future. Here are some common mistakes that are best to avoid, particularly with the aid of an experienced professional’s guidance.

Only Having a Testamentary Trust: A testamentary trust is one established by your will after your death, meaning that for the assets to move into the trust they must still go through the probate process. While this may not have as large of an effect on a smaller estate, a larger estate will gain much more protection by establishing a living trust, or one that is funded during the grantor’s lifetime.

Always using a Joint Trust: While it might seem to make sense to establish a joint trust, this is not always the best solution. If one spouse belongs to a profession at higher risk of litigation, such as in the medical field, it is better to establish separate trusts to ensure the assets in the trust of the other spouse cannot be touched in legal decisions.

Leaving Assets in Your Children’s Names: This may seem strange, but to provide more protection for your beneficiaries’ inheritance, it is better not to gift the assets directly into your children’s names through a will. To avoid probate time and costs, it is better to put your assets into a trust and distribute them that way.

Not Having a Spendthrift Clause: To protect beneficiaries from themselves, a spendthrift clause in a trust gives specific directions to a trustee on how distributions can be made for a beneficiary, including paying only for the beneficiary’s basic needs or making limited payment. To protect assets from your beneficiaries’ creditors, make sure that the trust you establish has a spendthrift provision. This clause will also prevent the beneficiary’s creditors from touching the assets as long as they remain in the trust.

Not Naming a Back-Up Trustee: Not only should you make sure that the trustees you have are those you know to be extremely reliable, you should also ensure that you have named a back-up trustee in case the initial person is unable or unwilling to perform their duties.

Not Naming an Outside Beneficiary: It can happen that every heir of a bloodline passes before the end of a trust. If there is no one to inherit, funds will pass to the state. To maintain control over your funds, make sure to name someone, either outside the family or even a charity to benefit in the event that this occurs.

No Special Needs Provision: While the grantor may not have any current children or grandchild with special needs, it is important to include a clause to protect any future disabled beneficiaries by allowing the executor to establish a Supplemental Needs Trust to ensure the beneficiary receives their share of the estate while not disqualifying them from government assistance programs.

Not Naming a Professional Trustee: To make sure that everything is properly taken care of, particularly if you don’t feel you have a close relative or someone with enough experience to administer a complicated trust, it may be best to enlist the assistance of a professional trustee, usually a trust company. They can fulfil a number of duties, including managing and administering the trust, and can be set up as the successor trustee to step in
should the others be unable to serve in that capacity.

Not Establishing Trusts for Each Child: When a trust dissolves, the beneficiaries will receive the gifts listed for each in the documentation. Rather than just moving the funds into their own names, it is advantageous to establish an individual trust for each child and have the distributions flow through these new trusts to better maintain the assets.

Not Having an AB Trust Provision: Otherwise known as a Credit Shelter Trust, this is created on the death of a married person and funded with that person’s estate as outlined in the trust provision. The assets move to the surviving spouse through this trust. Within the trust, these assets remain protected from the surviving spouse’s creditors, including proceedings resulting from a remarriage and divorce.

Not Having a Trust Protector Clause: A trust protector is a third-party, unaffiliated with the trust, who can step in to help avoid litigation when difficulties arise with the administration of a trust. This clause allows the trust protector to step in and act, if necessary, in the best interest of the beneficiaries. Powers can vary by unique trust clause, but may include the ability to change trustees, approve distributions, and resolve issues between trustees and beneficiaries.

Not Having an Operating Agreement: If you own an LLC, this will also be part of your estate plan. An operating agreement sets forth the operational and financial rules for the LLC, including what happens if a member dies, allowing the surviving members to continue to run the business and provide for a surviving spouse. To further protect one’s share in an LLC, it is often best to have it owned by a trust.

No Buy/ Sell Agreement: Also related to jointly owned businesses, rather than having an informal agreement with partners or relatives, there should be a formal agreement in place about how their shares can be sold or transferred, including after death to provide for surviving spouses. This should be done under a Transfer on Death for business as a designation.

Not Funding the Trust: After creating the trust, it is important to make sure that it is actually funded as stated in the documentation. This means that your house, bank accounts, brokerage accounts, and other assets should be in the name of the trust, and the trust should also be the life insurance beneficiary. In the case of an Irrevocable Life Insurance Trust, then the life insurance owner should be the trust. For retirement accounts, the primary beneficiary should be your spouse with the trust named as the secondary beneficiary.

Final thought and Deadline.

One of the themes throughout is protecting your assets by reducing the amount of Estate Tax, which is the financial levy on an estate based on the current value of its assets at the time of the owner’s death over a certain amount. High net worth couples can transfer almost 22 million through Irrevocable Trust before the law changes. Once the assets are in the Irrev Trust, it is not part of the Estate and it grows estate tax free. It also provides asset protection from creditors. Everyone’s situation is unique, but it is important to speak to fiduciary financial advisor who can help you with your financial planning needs.

“Securities America and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation.”