We often advise clients to consider any changes in their life every two to three years and determine if any adjustments need to be made to their overall estate plan to ensure that their personal and financial goals are met. However, during these uncertain times, when clients are facing potential risks to their health and financial stability, it is even more prudent for clients to evaluate their estate planning needs.
Although much of the world may be “shut down,” we are working around the clock to assist clients in establishing comprehensive estate plans and retitling assets. Through virtual meetings, telephone conferences and electronic communication, we are available to analyze assets, evaluate old documents, draft new documents, supervise document execution, and coordinate with financial institutions and advisors to transfer assets and change beneficiary designations.
For individuals with higher net worth, there are numerous advanced planning techniques that should be considered. With low interest rates and depressed asset values, conditions are favorable for lifetime gifting, sales to grantor trusts, the funding of grantor retained annuity trusts (GRATs) and/or the renegotiation of older promissory notes. If formed in an appropriate jurisdiction, these techniques could allow substantial assets to escape the tax system and pass to multiple generations free of federal and state estate taxes, as well as generation-skipping transfer taxes.
Every individual regardless of net worth should have a Will. Under a Will, an individual provides for the distribution of assets at death, names the person(s) to oversee the distribution of their estate, designates guardian(s) for minor children if necessary and is able to protect assets for future generations.
With proper drafting, the Will would be able to minimize or eliminate potential state and federal estate, inheritance and generation-skipping transfer taxes. The Will could also provide valuable asset protection by forming trusts for children to (1) establish guidelines for how the assets should be used and distributed to the children, and (2) provide a degree of creditor protection, including protection from a divorcing spouse in most states.
In addition to Wills, in many states (such as Florida, New York and Connecticut) using a Revocable Trust (a/k/a Living Trust) together with a Will (a/k/a Pour Over Will) could be advantageous. The use of Wills which pour over to Revocable Trusts can (1) avoid the somewhat time-consuming and expensive probate process, (2) provide potential future administrative and income tax savings for the lifetime trusts created for children, and (3) provide some privacy concerning the ultimate disposition of assets.
Coordinating Beneficiary Designations and Funding Revocable Trusts
While executing new or updated Wills and Revocable Trusts may be the first step, it is also imperative that clients carefully review the titling of their assets. Are life insurance policy designations coordinated with the estate plan? Are retirement accounts designated correctly to ensure that the beneficiaries will receive maximum tax deferral? Have all individually held assets been transferred to a Revocable Trust if one was created? What about jointly held assets and other beneficiary designated accounts? Analyzing these questions is often as important as making sure appropriate documents are in place.
Health Care Directives
It is important for individuals to make sure their health care directive is up to date. A health care directive serves two purposes. First, these documents assert one’s desire to be free from the use of life-sustaining or prolonging procedures and medications if he or she becomes irreversibly or terminally ill. Second, these documents allows an individual to appoint a health care agent to make a wide range of medical and health care decisions for him or her if he or she is unable to articulate his or her own preferences.
Powers of Attorney
A power of attorney, on the other hand, allows an individual to name an agent (a/k/a attorney-in-fact) to manage his or her assets and make investment decisions on his or her behalf if he or she is unable to make such decisions for himself or herself. It is important to have this document in place to avoid the necessity of having to go to court for the appointment of a guardian if such individual cannot manage his or her own affairs.
The COVID-19 outbreak has caused extreme financial volatility, depressing the fair market value of many assets. This volatility, combined with the increase to the federal estate and gift tax exemption under the Tax Cuts and Jobs Act of 2017, has presented a unique gifting opportunity for individuals to remove assets from their taxable estates at lower values. Through proper estate planning, individuals may even be able to access these gifted assets, if needed, while allowing all future appreciation to escape the estate tax system.
Sales to Grantor Trusts
In this extremely low interest rate environment, even individuals that have limited estate and gift tax exemption remaining have an opportunity to remove assets from their taxable estates by selling assets to “grantor trusts.” In a grantor trust, the grantor is treated as the owner of the trust for income tax purposes. This means that during the grantor’s lifetime, items of income, deduction, gain, loss or credit attributable to the grantor trust would be reported on the grantor’s individual income tax return.
By selling assets to a grantor trust, an individual can transfer assets out of his or her estate in exchange for a secured promissory note bearing interest at the lowest interest rate permitted by the Internal Revenue Service to avoid imputed interest (e.g., the interest rate on a 9-year promissory note created in April, 2020 would be 0.99% per year). The promissory note would require annual interest payments, specify the length of the repayment term and require a balloon payment of principal at the term’s end. Because the sale is from an individual to a grantor trust that he or she created, neither the sale nor the interest payments received from the trust on the promissory notes would trigger income tax.
Through this technique, the future appreciation of the assets sold to the trust escapes the estate tax system, while the grantor retains an income stream from the underlying promissory notes.
Grantor Retained Annuity Trusts
A grantor retained annuity trust or GRAT is a trust into which an individual would transfer assets while at the same time retaining the right to receive an annual payment for a term of years. The GRAT could be “zeroed out,” which means that the present value of the annuity payments that the individual would receive equals the gift tax value of the assets being transferred to the GRAT. The annuity value payments are determined by a rate published by the Internal Revenue Service. If the GRAT assets outperform this rate, all remaining assets in the GRAT would escape the estate tax system without using any estate and gift tax exemption. Similar to the strategies discussed above, depressed asset values and low interest rates provide an ideal environment for GRATs.