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Legislative Update: Estate Planning Action To Take Now

by Westray Veasey, J.D.

Last week, the House Ways and Means Committee released its first draft of the “Build Back Better” legislation.  The revenue component of the bill includes several tax law changes which, if enacted, could have significant estate planning implications.  Below is a summary of the most significant estate planning-related components in the proposed legislation.

Reduction in the Estate and Gift Tax Exemption

Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), the exemption against estate, gift and generation-skipping transfer (“GST”) tax was increased from $5 million per person to $10 million per person, indexed for inflation ($11.7 million for 2021). Under TCJA, this increase in the exemption amount sunsets after December 31, 2025.  The current draft of the bill eliminates the increase beginning on January 1, 2022, meaning that for gifts or estates on or after that date, the exemption amount is back to $5 million, indexed for inflation (approximately $6 million for 2022). Clients who want to take advantage of the current $11.7 million exemption should consider making lifetime gifts using as much of the increased exemption amount as possible before the end of 2021.  Be aware that any such gifts must exceed the “base” exemption amount of $6 million in order to use any of the increased exemption amount.  Exemption is used from the bottom up, so while a gift of $6 million or less will at least get any future appreciation on that gifted amount out of the transferor’s taxable estate, it will not be taking advantage of any of the additional $5.7 million of exemption currently available through the end of the year.

Elimination of Intentionally Defective Grantor Trusts

Under current law, a person can establish and fund a trust, known as an intentionally defective grantor trust (“IDGT”), where the trust assets are excluded from his or her taxable estate but are treated as owned by grantor for income tax purposes.  As a result, with an IDGT, the grantor can enter into transactions with the trust, such as sales, loans or asset swaps, with no income tax consequences.  In addition, the grantor pays the tax on the trust’s income, effectively making additional “tax free” gifts to the trust and allowing the trust assets to grow income tax-free outside of the grantor’s estate.  Under the current draft of the bill, new rules will apply with respect to grantor trusts that are signed after enactment of the legislation as well as for post-enactment contributions to and transactions with existing grantor trusts.  These new rules provide that the grantor trust assets will be included in the grantor’s taxable estate, distributions from them will be treated as taxable gifts, and transactions between the grantor and the trust will trigger income tax.  Many common estate planning techniques are IDGTs, including grantor retained annuity trusts (“GRATs”), spousal lifetime access trusts (“SLATs”) and irrevocable life insurance trusts (“ILITs”).  Clients could have a very small window to establish IDGTs or to add additional funds to existing ones in order to lock in the existing favorable tax treatment.

Elimination of Valuation Discounts for Family Entity Interests

Under current law, the gift tax value of a minority interest in a family entity (LLC, corporation or partnership) can be discounted off of its proportionate share of the value of the entity’s underlying assets due to the interest being unmarketable and lacking in control.  As proposed under the draft bill, for interests in family entities transferred on or after the date of enactment, no such valuation discount will be allowed to the extent the entity’s assets include publicly-traded securities, non-operating cash or other passive, non-business assets.  Clients may have a limited window to establish and transfer family entities holding passive investments at a discounted value.

There will likely be changes to these estate planning related components as the bill makes its way through Congress.  However, you should consider them with your estate and tax advisory team as soon as possible in case there are tax savings strategies you should implement before they may be eliminated, possibly as soon as date of enactment.

How Will the SECURE Act Impact Your Retirement Planning?

by Westray Veasey, J.D.

The Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), enacted on December 20, 2019, is landmark legislation containing a number of provisions that will affect most clients’ retirement planning. Here is a look at some of the more important elements of the Act that impact individuals.

With Congress concerned that we are not saving enough for retirement and recognizing that people are working later in life, the SECURE Act lifts the prohibition on contributing to a traditional IRA after the year an individual reaches age 70 ½. (There are no age limits on contributions to 401(k) plans or ROTH IRAs.) Beginning in 2020, individuals of any age can contribute earned income to a traditional IRA. This change allows people working past age 70 ½ an additional way to save for retirement and to potentially further reduce their taxable income, Medicare premiums, and taxation of their social security.

In addition, the Act pushed back the starting age for required minimum distributions (“RMDs”) from age 70 ½ to age 72. For individuals who turn age 70 ½ in or after 2020, their required beginning date for RMDs is April 1 of the year following the year they turn age 72. (If you turned age 70 ½ in 2019, you are under the old rules and must take an RMD by April 1, 2020.) Be aware, as under the prior law, if you push your first RMD to April 1 of the following year, you will have two RMDs for that year, as the following year’s RMD will also be due by year end. Clients who are not relying on their IRAs for living expenses can take advantage of the tax deferral offered by IRAs for another 18 months, but should they? Waiting longer to begin taking RMDs could push you into a higher tax bracket during retirement, and potentially increase the amount of taxable social security or generate additional income-related Medicare premium surcharges.

To counterbalance the tax deferral from the extension of contribution and RMD ages past 70 ½, the SECURE Act largely eliminated the “stretch IRA” strategy. Under the prior law, designated beneficiaries (humans and certain qualifying trusts) of inherited IRAs could take RMDs over their life expectancy. The younger the beneficiary, the greater the remaining life expectancy and the smaller percentage of the account withdrawn and taxed each year. Now, for IRA owners who die after December 31, 2019, beneficiaries other than “eligible designated beneficiaries” must empty the account by the end of the 10th year after the death of the IRA owner. Eligible designated beneficiaries are spouses, disabled or chronically ill persons, and individuals who are not more than 10 years younger than the deceased IRA owner. Those beneficiaries may generally still take their distributions over their life expectancy as under the pre-SECURE Act rules. Minor children of the account owner are also eligible designated beneficiaries, but they can only take age-based RMDs under the old rules until the age of majority, and then the 10 year rule kicks in.

Clients should reevaluate their IRA beneficiary choices and revisit how their IRA dollars fit into their overall estate planning strategy. For some, this could be as simple as making sure your beneficiary is an eligible designated beneficiary, or if that is not possible, increasing the number of beneficiaries to spread out the tax hit. Some clients might want to consider more complex strategies. Certain trust strategies could allow them to pass their accumulated retirement funds to their heirs on a tax-preferred basis, such as contributing their RMDs to a trust that can purchase tax-free wealth replacement life insurance or using a charitable remainder trust as the beneficiary of their account. In situations where the client has designated as their IRA beneficiary a trust that was designed to use the beneficiary’s life expectancy to stretch out RMDs under the prior law, the application of the SECURE Act rules could produce unintended adverse effects.

There were also a few notable non-retirement provisions in the SECURE Act. Tax-free distributions up to $10,000 (lifetime) from a 529 plan are allowed to pay principal or interest on a qualified education loan of a designated beneficiary and each of their siblings. Under the 2017 Tax Cuts and Jobs Act, for tax years 2018 and after, tax on the unearned income of children (the “kiddie tax”) was based on rates applicable to trusts, which are very compressed. The SECURE Act repealed these new rules so that starting in 2020, and with the option to start retroactively in 2018 and 2019, the kiddie tax rate returns to the marginal tax rate of the child’s parents. Potential tax savings could be achieved by filing amended returns to apply the new-old rates to unearned income in 2018 and/or 2019. Lastly, certain tax breaks were extended through 2020, including the exclusion from gross income for the discharge of certain qualified principal residence indebtedness, the mortgage insurance premium deduction and the deduction for qualified tuition and related expenses.

Like most tax laws, the SECURE Act presents both opportunities and challenges. Because most of its provisions go into effect in 2020, clients should talk with their advisor about whether and how the SECURE Act impacts them.

As Fiduciary Counsel, Westray oversees the firm’s legal matters, including its trust activities. Westray also serves as a resource to the firm’s individual clients with regard to their estate planning matters and to our nonprofit clients with regard to compliance issues.

How Your Advisor Can Enhance Your Estate Plan

by Westray B. Veasey, J.D.

Developing an estate plan – one that actually operates like you intend – is a daunting task, and it does not end with an executed will.  That is just the beginning.  If you are like most people, when you got married or had your first child, you found an attorney through a friend and engaged him or her to draft a will that left your assets to your spouse and named a guardian for your minor children.  Then you put your will in a folder and did not look at it again until your wealth advisor asked if you had an estate plan, to which you responded “Yes, but it probably needs updating.”  Understatement.

An experienced and trusted estate planning attorney is essential to developing an estate plan.  Involving your wealth advisory team in your estate planning process ensures that your plan functions as it should.  When I was in private practice, my clients would ask me “How often do I need to update my estate plan?”  Typically, my answer was that they should review their plan every three to five years, or upon a significant life event or tax law change.  While some of my clients were diligent with their estate plan and contacted me for a review at appropriate times, many were not.  In most cases, clients meet with their wealth advisory team with relative frequency, and certainly more often than every three to five years.  Our service platform ensures we are involved in all aspects of our clients’ financial lives.  This includes ensuring their estate planning goals are accomplished.  Here are some ways that our advisory team can enhance your estate plan:

We know your assets, your concerns and your family.  

We are familiar with your goals and can help you define your estate planning objectives prior to meeting with an attorney.  For example, you may have a desire to pass on a business or vacation home, a charitable objective, or a desired level of support for your beneficiaries. You may seek to address the financial immaturity of a beneficiary, or make education funding a priority in your plan.  We also have the ability to gather and share pertinent information that your attorney will require to develop your plan, such as a balance sheet, beneficiary designations, and a family tree.  Additionally, we know when relevant laws, your assets or your life circumstances change, and we can prompt you to update your plan accordingly.

We have expertise. 

If you currently have an estate plan, it likely fits in a one to two inch binder.  We can boil your plan down to several summary pages, explain how your current plan works and provide you with a list of likely updates and potential strategies for you and your attorney to consider.  If you are reworking your plan and have been given 100+ pages of draft documents to review, we can review them with you and make sure the plan is drafted according to your intentions.

We attend to details and hold you accountable.    

Your attorney will give you a list of follow up actions required to ensure your plan is properly implemented after your documents are signed.  Often, because of complexity, costs, and time constraints, clients don’t do what their attorneys have recommended.  If your assets are not titled to coordinate with your perfectly drafted estate planning documents, your goals may not be met.  For example, if your sole asset is a joint investment account titled with survivorship with your spouse, it will pass to your spouse upon your death and not fund that trust you and your attorney labored over.  We can help update your asset titling and beneficiary designations to align with your plan and to avoid unnecessary costs and inefficiencies of administration.

We know attorneys. 

Estate planning strategies often require the input of the client’s wealth advisory team to ensure cash flow, tax implications, charitable objectives and family dynamics are considered.  As such, we frequently partner with the estate planning attorney to ensure the client’s unique circumstances are reflected in their plan.   And through years of experience working with estate planning attorneys in your community, we can help you find a qualified estate planning attorney if you need one.

We are a fiduciary.

We certainly can serve as executor or trustee under your estate plan, but even if you don’t need a corporate fiduciary, we understand the responsibilities of a fiduciary and can explain them to you.  This will help you select the right fiduciaries under your plan and ensure that the provisions governing their role are consistent with your desires.  For example, if you want your trustee to favor the needs of your spouse over those of your adult children, you will need to spell that out in your trust document.

While developing (and monitoring) an estate plan that meets your goals can be daunting, it does not have to be.  Our team can help explain your estate plan, aid in its implementation and keep it current.

The Need for an Estate Plan

by Westray Veasey, J.D.

Years ago, the exemption against estate tax was only $600,000, and that forced many people to address their estate plans for tax reasons. With the exemption currently at $11,180,000, very few people have taxable estates, but really all of us have estate planning needs. Just because the IRS may have little to no claim to your estate, there are still many issues to address as part of an estate plan.
For example, do you know what happens to your assets if you die without a will? Assets that are titled jointly or have a beneficiary designation such as life insurance pass by operation of law to the joint owner or beneficiary. But the laws of the state in which you reside decide who inherits your individually-owned assets and personal belongings. For example, without a will, not all of your assets pass to your spouse, but, instead, some portion of your estate could pass to children. Here are ten things to consider when creating or updating an estate plan:

  • A comprehensive estate plan not only includes your will and/or trusts but health and financial powers of attorney to designate agents who can make financial and health care decisions for you if you become incapacitated.
  • Who should serve as your fiduciaries? The executor of your estate and your trustee will manage and distribute assets to your surviving spouse and/or children.
  • You can decide who should inherit your assets by having an estate plan. Without a will, the state statutes decide for you, and it is possible that without a will you could disinherit someone you believed would receive your estate.
  • Are there specific bequests you would like to make? Who would you like to have Grandmother’s china, Dad’s watch, or your wedding ring? You can outline such bequests in an estate plan.
  • North Carolina law allows you to appoint a guardian for your minor children in a will. Otherwise, the courts will make that determination.
  • Assets directly inherited by minors must be held in a court-supervised guardianship. Application must be made to the court for distributions, and when your child turns age 18, he or she will receive the remaining assets outright. An estate plan can include a trust for your minor children, where you can spell out who can control and distribute assets for them until they reach an age determined to be appropriate by you.
  • Do you need to consider special circumstances? Comprehensive estate planning will include contingencies for a child with special needs, a blended family with children from prior marriages, or liabilities to a former spouse.
  • You can protect your heirs from spendthrift behavior, spouses, and creditors through trusts.
  • You can consider the proper disposition of your life insurance and retirement accounts by revisiting the ownership and/or beneficiary designations of those accounts.
  • You can protect your business interests. Do the co-owners have an agreement that provides buyouts upon certain events and do you understand those provisions? Will the buyout be unfunded or backed up with disability or life insurance, and what are the income and estate tax implications of the buyout?

These are a few of the initial considerations you should discuss with your estate planning attorney. Of course, when you have a taxable estate, there are even more reasons to develop a thorough estate plan, not only to address the issues above, but also to mitigate your estate tax burden. Estate planning is not simply for the very wealthy; everyone should have an estate plan.

Westray serves as Fiduciary Counsel for Trust Company of the South, overseeing the firm’s legal matters, including its trust activities.  Westray also serves as a resource to the firm’s individual clients with regard to their estate planning matters and to our nonprofit clients with regard to compliance issues.  Prior to joining Trust Company of the South, Westray practiced law with Poyner Spruill LLP in their trusts and estates group. She has over fifteen years of experience advising clients in the areas of estate, generation-skipping transfer and gift tax planning, business succession planning, asset protection and estate and trust administration. Westray has been recognized in Business North Carolina Magazine’s “Legal Elite” for Tax and Estate Planning.