Who should be the guardian of your minor children?

If you have minor children, arguably the most important estate planning decision you have to make is choosing a guardian for them should the unthinkable occur. It’s critical to put much thought into this decision to ensure your children would be cared for as you wish in such a situation.

Evaluating potential candidates

Here are a few issues to consider when evaluating potential guardians:

  • Do they want to serve as guardians?
  • Does your estate plan provide sufficient resources so that caring for your children won’t cause an economic hardship?
  • Do they share your values and parenting philosophy?
  • If they’re married, is the marriage stable?
  • If they have children, do your children get along with them?
  • How old are they in relation to the children? A grandparent or other older person may not be the best choice to care for an infant or toddler, for example.
  • Are their homes large enough to make room for your children?

It used to the be case in Georgia that the wishes of the parents set forth in a Last Will and Testament were essentially “ironclad” and would be honored by the probate courts.  This all changed significantly in recent years where new laws were passed allowing the selection of the parents to be challenged after their death.  Accordingly, it is vitally important that you are clear on whom you want to serve, but even more important that you consider stating whom you do not want to serve.It’s a good idea to prepare a letter explaining the reasons you believe your appointees are best equipped to care for your children.

Naming others

It’s also important to choose a backup guardian. Why? If your first choice dies or is unable or unwilling to serve for some other reason, a court will appoint a guardian, and you likely wish to provide some guidance on that as well.

Your estate plan should list anyone you wish to prevent from raising your children. Contact us for more information regarding estate planning for parents with minor children.

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Tax reform and estate planning: What’s on the table

As Congress and President Trump pursue their stated goal of passing sweeping new tax legislation before the end of the year, many taxpayers are wondering how such legislation will affect them. One area of particular interest is estate planning; specifically, the future of gift, estate and generation-skipping transfer (GST) taxes.

Potential estate tax law changes are emerging

Under current law, the combined federal gift and estate tax exemption, and the GST tax exemption, is $5.49 million. The top tax rate for all three taxes is 40%. The annual gift tax exclusion is $14,000. That means you can reduce your taxable estate by making tax-free gifts of up to $14,000 per year to an unlimited number of people without tapping your lifetime gift and estate tax exemption.

The U.S. House version of the Tax Cuts and Jobs Act that passed on November 16 increases the exemptions to $10 million (adjusted annually for inflation) and repeals the estate tax after 2024. It also terminates the GST tax at that time. Under the bill, the annual gift tax exclusion stays in place (at $15,000 for 2018 due to inflation indexing), and after 2024 the gift tax is retained but the rate falls to 35%.

The Senate’s version of the bill (as initially approved by the Senate Finance Committee) would also double the exemption for gift and estate taxes. It doesn’t address the GST tax, though, and makes no mention of repealing the estate tax. The full Senate will be addressing the bill after the Thanksgiving recess.

All eyes are on Congress

With the disparity between the House and Senate approaches to the estate tax, some prognosticators doubt a final reconciled bill will include an estate tax repeal. And it’s worth noting that the tax has been repealed in the past, only to be resurrected when party control subsequently changed hands in Washington.

At this point, the question of whether any tax bill will pass is still up in the air. But we can help you chart the best course to accomplish your estate planning goals under current and future tax provisions.

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Update your estate plan to reflect your second marriage

If you’re in a second marriage or planning another trip down the aisle, it’s vital to review and revise your estate plan. You probably want to think through how and if to provide for your current spouse and not inadvertently benefit your former spouse (especially with respect to beneficiary designated accounts). And if you have children from each marriage, juggling their interests can be a challenge. Let’s take a look at a few planning tips.

Take inventory

Have you updated your will, trusts and beneficiary designations to name your current spouse where desired? Bear in mind that the terms of your divorce may require you to retain your former spouse as beneficiary of certain pension plans or retirement accounts.

Next, assess your financial situation and think about how you want to provide for various family members. For example, do you want to provide for all children equally? Will you favor biological children over stepchildren?

Also, are children from your first marriage significantly older than children from your second marriage? If so, their needs likely will be different. For example, if children from the first marriage are college age, in the short term they may need more financial support than children from your current marriage. On the other hand, if your older children are financially independent adults, they may need less help than your younger children.

Use trusts

Trusts generally avoid probate, so your assets can be distributed efficiently. However, if you leave your wealth to your current spouse outright, there’s nothing to prevent him or her from spending it all or leaving it to a new spouse, effectively disinheriting your children. To avoid this result, you can design a trust that provides income for your current spouse while preserving the principal for your children.

Trusts are particularly valuable if your children from a previous marriage are minors. Generally, if you leave assets to minors outright, they must be held in a conservatorship until the children reach the age of majority. It’s likely that your former spouse will be appointed conservator, gaining control over your wealth. Even though your former spouse will be obligated to act in your children’s best interests and will be supervised by a court, he or she will have considerable discretion over how your assets are invested and used.

To avoid this situation, consider establishing trusts for the benefit of your minor children. That way, a trustee of your choosing will manage the assets and control distributions to or on behalf of your children.

If you’re preparing for a second trip down the aisle or have recently wed for a second time, contact us for help reviewing and, if necessary, revising your estate plan.

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The write stuff: A letter of instructions

When you draft an estate plan, the centerpiece is your will or living trust. Such a document determines who gets what, where, when and how, as well as tying up the loose ends of your estate. A valid will or living trust can be supplemented by other legally binding documents, such as trusts (or additional trusts), powers of attorney and health care directives.

But there’s still a place at the table for a document that has absolutely no legal authority: a “letter of instructions” to your heirs. This informal letter can provide valuable guidance and act as a road map to the rest of your estate.

Taking inventory

Begin your letter of instructions by stating the location of your will or living trust. Then create an inventory of all your assets and include their location, any account numbers and relevant contact information. This may include, but isn’t necessarily limited to, checking and savings accounts, 401(k) plans and IRAs, health insurance policies, business insurance, life and disability income insurance, stocks, bonds, mutual funds and other investments, and any tangible assets your heirs may not readily find.

The contact information should include the names, phone numbers and addresses (including emails) of the professionals handling your financial accounts and paperwork, such as an attorney, CPA, banker, life insurance agent and stockbroker. Also, list the beneficiaries of retirement plans, IRAs and insurance policies and their contact information.

Guidance for personal preferences

A letter of instructions is more than just a listing of assets and their locations. Typically, it will include other items of a personal nature, such as funeral, burial or cremation arrangements, accounting of fees paid for cemetery plots or mausoleums, the names, addresses and telephone numbers of people and organizations to be notified upon death, and specific instructions for handling personal and financial affairs after you’re gone.

The letter can also expand on instructions in a living will or other health care directive. For example, it might provide additional details about the decision for being taken off life support systems. It may also cover charitable contributions you wish to be made after death or the manner in which property should be donated to charity.

Putting pen to paper

As you’re writing your letter, bear in mind that there are no legal requirements backing it. And just like a will or living trust, the letter should be updated periodically to reflect significant changes in your life. Finally, keep the letter in a safe place where the people whom you want to read it can easily find it.

There is no set format to such a “letter;” in fact, we have seen very successful versions of this be in spreadsheets or book form.  One excellent version was compiled/authored by Erik Dewey who makes his “Big Book of Everything” available online in an Excel spreadsheet format.  Mr. Dewey’s spreadsheet is one of the most comprehensive “letters of instruction” that we have come across, and we are pleased to share the link with you here: http://www.erikdewey.com/bigbookmkIIIa.zip.

Contact us if you have questions about a letter of instructions.

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A charitable remainder trust can provide a multitude of benefits

If you’re charitably inclined but concerned about having sufficient income to meet your needs, a charitable remainder trust (CRT) may be the answer. A CRT allows you to support a favorite charity while potentially boosting your cash flow, shrinking the size of your taxable estate, reducing or deferring income taxes, and enjoying investment planning advantages.

How does a CRT work?

You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.

When you fund the trust, you can claim a charitable income tax deduction equal to the present value of the remainder interest (subject to applicable limits on charitable deductions). Your annual payouts from the trust can be based on a fixed percentage of the trust’s initial value — known as a charitable remainder annuity trust (CRAT). Or they can be based on a fixed percentage of the trust’s value recalculated annually — known as a charitable remainder unitrust (CRUT).

Generally, CRUTs are preferable for two reasons. First, the annual revaluation of the trust assets allows payouts to increase if the trust assets grow, which can allow your income stream to keep up with inflation. Second, you can make additional contributions to CRUTs, but not to CRATs.

The fixed percentage — called the unitrust amount — can range from 5% to 50%. A higher rate increases the income stream, but it also reduces the value of the remainder interest and, therefore, the charitable deduction. Also, to pass muster with the IRS, the present value of the remainder interest must be at least 10% of the initial value of the trust assets.

The determination of whether the remainder interest meets the 10% requirement is made at the time the assets are transferred — it’s an actuarial calculation based on the trust’s terms. If the ultimate distribution to charity is less than 10% of the amount transferred, there’s no adverse tax impact related to the contribution.

Handle with care

If the estate tax is repealed as part of tax reform as has been proposed, CRTs would become less beneficial from an estate tax perspective. But they could still help the charitably inclined achieve their goals. CRTs require careful planning and solid investment guidance to ensure that they meet your needs. Before taking action, discuss your options with us.

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A dynasty trust keeps on giving long into the future

With a properly executed estate plan, your wealth can be enjoyed by your children and even their children. But did you know that by using a dynasty trust you can extend the estate tax benefits for several generations, and perhaps indefinitely? A dynasty trust can protect your wealth from gift, estate and generation-skipping transfer (GST) taxes and help you leave a lasting legacy.

Dynasty trust in action

Transfers that skip a generation — such as gifts or bequests to grandchildren or other individuals two or more generations below you, as well as certain trust distributions — are generally considered to be GSTs and subject to the GST tax (on top of any applicable gift or estate tax). However, you can make GSTs up to the $5.49 million (in 2017) GST exemption free of GST tax.

Your contributions to a dynasty trust will be considered taxable gifts, but you can minimize or avoid gift taxes by applying your lifetime gift tax exemption — also $5.49 million in 2017.

After you fund the trust, the assets can grow and compound indefinitely. The trust makes distributions to your children, grandchildren and future descendants according to criteria you establish. So long as your beneficiaries don’t gain control over the trust, the undistributed assets will bypass their taxable estates.

Enhancing the benefits

To increase the benefit to future generations, you can structure the trust as a grantor trust so that you pay any taxes on the trust’s income. The assets will then be free to grow without being eroded by taxes (at least during your lifetime).

Also consider further leveraging your GST tax exemption by funding the dynasty trust with life insurance policies or property that’s expected to appreciate significantly in value. So long as your exemptions cover the value of your contributions, any future growth will be sheltered from GST tax, as well as gift and estate tax.

Is a dynasty trust right for you?

If establishing a lasting legacy is an estate planning goal, a dynasty trust may be the right vehicle for you. Even if an estate and GST tax repeal is passed as part of the GOP’s proposed tax reform legislation, the repeal might be only temporary. So this planning technique could still make sense. Before you take action, consult with us, because a dynasty trust can be complicated to set up. We’ll also keep you apprised of any legislative news regarding an estate and GST tax repeal.

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Who should own your life insurance policy?

If you own life insurance policies at your death, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds. The way around this problem is to not own the policies when you die. However, don’t automatically rule out your ownership either.

And it’s important to keep in mind the current uncertain future of the estate tax. If the estate tax is repealed (or if someone doesn’t have a large enough estate that estate taxes are a concern), then the inclusion of your policy in your estate is a nonissue. However, there may be nontax reasons for not owning the policy yourself.

Plus and minuses of different owners

To choose the best owner, consider why you want the insurance. Do you want to replace income? Provide liquidity? Or transfer wealth to your heirs? And how important are tax implications, flexibility, control, and cost and ease of administration? Let’s take a closer look at four types of owners:

  1. You or your spouse. There are several nontax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback is estate tax risk. Ownership by you or your spouse generally works best when your combined assets, including insurance, won’t place either of your estates into a taxable situation.
  2. Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds aren’t subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax-free. On the minus side, policy proceeds are paid to your children outright. This may not be in accordance with your estate plan objectives and may be especially problematic if a child has creditor problems.
  3. Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the business under a split-dollar arrangement. But if you’re the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the business, the proceeds could be included in your estate for estate tax purposes.
  4. An ILIT. A properly structured irrevocable life insurance trust (ILIT) could save you estate taxes on any insurance proceeds. The trust owns the policy and pays the premiums. When you die, the proceeds pass into the trust and aren’t included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.

Contact us with any questions.

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A Crummey trust can preserve the annual gift tax exclusion

Traditionally, taxpayers have looked for ways to make the most of the $14,000 annual gift tax exclusion, and using a Crummey trust is one way to do that. But with the federal gift and estate tax exemption currently at an inflation-adjusted $5.49 million and the possibility of an estate tax repeal, it may seem that the annual exclusion is less relevant than ever before. Or is it?

Gift and estate tax law uncertainty

Although an estate tax repeal is called for under the “Unified Framework for Fixing Our Broken Tax Code” released by President Trump and congressional Republicans on September 27, there’s no guarantee that legislation including the repeal will be passed. Even if it is, the repeal could be temporary and the estate tax could return in the future. And notably absent from the framework is any mention of a gift tax repeal.

So affluent people whose estates exceed the exemption amount need to continue to seek strategies for minimizing gift and estate taxes. And even those with more modest estates may want to take advantage of the annual exclusion to shelter assets against potential future changes in their wealth and federal estate tax laws. That’s why a Crummey trust may be worth a look.

Convert a future interest into a present interest

The annual exclusion is limited to gifts of a “present interest,” defined by IRS regulations as “an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.”

But what about gifts to a trust designed to distribute assets to your children or other beneficiaries at a future date? Certain types of trusts satisfy the present interest requirement, but only if the trust distributes all of its income currently or, in the case of a trust set up for a minor, distributes all of the principal and income to the beneficiary at age 21.

A Crummey trust satisfies the present interest requirement by giving beneficiaries the right to withdraw trust contributions for a limited period of time (typically 30 days after the contribution is made). To ensure that these withdrawal rights are treated as present interests, they must be real rights with economic substance, rather than a mere paper formality.

In addition, there can be no agreement with the beneficiaries — express or implied — that they won’t exercise their withdrawal rights.

If you want to make annual exclusion gifts to loved ones but retain some control over when they use the gifted assets, a Crummey trust may be right for you. But before you set one up, be sure you understand the gift, estate and income tax implications. We can help you determine if a Crummey trust is right for your estate plan.

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Tax law uncertainty requires an estate plan that can roll with the changes

Events of the last decade have taught us that tax rates and exemption levels are anything but certain. Case in point: Congress is mulling abolishing gift and estate taxes as part of tax reform. So how can people who hope to still have long lifespans ahead of them plan their estates when the tax landscape may look dramatically different 20, 30 or 40 years from now? The answer is by taking a flexible approach that allows you to hedge your bets.

Conflicting strategies

Many traditional estate planning techniques evolved during a time when the gift and estate tax exemption was relatively low and the top estate tax rate was substantially higher than the top income tax rate. Under those circumstances, it usually made sense to remove assets from the estate early to shield future asset appreciation from estate taxes.

Today, the exemption has climbed to $5.49 million and the top gift and estate tax rate (40%) is roughly the same as the top income tax rate (39.6%). If your estate’s worth is within the exemption amount, estate tax isn’t a concern and there’s no gift and estate tax benefit to making lifetime gifts.

But under current law there’s a big income tax advantage to keeping assets in your estate: The basis of assets transferred at your death is stepped up to their current fair market value, so beneficiaries can turn around and sell them without generating capital gains tax liability. Assets you transfer by gift, however, retain your basis, so beneficiaries who sell appreciated assets face a significant tax bill.

Flexibility is key

A carefully designed trust can make it possible to remove assets from your estate now, while giving the trustee the authority to force the assets back into your estate if that turns out to be the better strategy. This allows you to shield decades of appreciation from estate tax while retaining the option to include the assets in your estate should income tax savings become a priority (assuming the step-up in basis remains, which is also uncertain).

For the technique to work, the trust must be irrevocable, the grantor (you) must retain no control over the trust assets (including the ability to remove and replace the trustee) and the trustee should have absolute discretion over distributions. In the event that estate inclusion becomes desirable, the trustee should have the authority to cause such inclusion by, for example, naming you as successor trustee or giving you a general power of appointment over the trust assets.

In determining whether to exercise this option, the trustee should consider several factors, including potential estate tax liability, if any, the beneficiaries’ potential liability for federal and state capital gains taxes, and whether the beneficiaries plan to sell or hold onto the assets.

Consider the risk

This trust type offers welcome flexibility, but it’s not risk-free. Contact us for additional information.

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