Estate Planning Options to Consider in Uncertain Times – Annapolis and Towson Estate Planning

Now is a good time to reach out to an estate planning attorney to review and update beneficiaries, named executors, financial and healthcare powers of attorney, wills and trusts, advises the article “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage” from Traders Magazine. There are also some strategic estate planning tools to consider in the current environment.

Intentionally Defective Grantor Trusts (IDGTs): These are irrevocable trusts that are structured to be “intentionally defective.” They are gifts to grantor trusts for non-grantor beneficiaries that allow contributed assets to appreciate outside of the grantor’s estate, while the income produced by the trust is taxed to the grantor, and not the trust. The external appreciation requires the grantor to use non-trust assets to pay the trust’s income taxes, which equals a tax-free gift to the beneficiaries of the trust, while reducing the grantor’s estate. Trust assets can grow tax-free, which creates additional appreciation opportunities for trust beneficiaries. IDGTs are especially useful to owners of real estate, closely held businesses or highly-appreciating assets that are or will likely be exposed to estate tax.

Grantor Retained Annuity Trusts (GRATs): GRATs allow asset owners to put assets irrevocably into trusts to benefit others, while receiving fixed annuity payments for a period of time. GRATs are especially effective in situations where low asset values and/or interest rates are present, because the “hurdle rate” of the annuity payment will be lower, while the price appreciation is potentially greater. GRATs are often used by asset owners with estate tax exposure who want to transfer assets out of their estate and retain access to cash flow from those assets, while they are living.

Debt strategies: Debt repayment represents an absolute and/or risk-adjusted rate of return that is often the same or better than savings rates or bond yields. Some debt strategies that are now useful include:

Mortgage refinancing: Interest rates are likely to be low for the foreseeable future. People with long-term debt may find refinancing right now an advantageous option.

Opportunistic lines of credit: The low interest rates may make tapping available lines of credit or opening new lines of credit attractive for investment opportunities, wealth transfer, or additional liquidity.

Low-rate intra-family loans: When structured properly, loans between family members can be made at below-interest, IRS-sanctioned interest rates. An estate planning attorney will be able to help structure the intra-family loan, so that it will be considered an arms-length transaction that does not impose gift tax consequences for the lender.

High-rate intra-family or -entity loans: This sounds counter-intuitive, but if structured properly, a high-rate intra-family or -entity loan can charge a higher but tax-appropriate rate that increases a fixed income cash flow for the borrower, while avoiding gift and income tax.

All of these techniques should be examined with the help of an experienced estate planning attorney to ensure that they align with the overall estate plan for the individual and the family.

Reference: Traders Magazine (May 6, 2020) “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage”

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How Family Businesses Can Prepare Now for Future Tax Changes – Annapolis and Towson Estate Planning

The upcoming presidential election is giving small to mid-sized business owners concerns regarding changes in their business and the legacy they leave to family members. The recent article “How family businesses can come out on top in presidential election uncertainty,” from the St. Louis Business Journal looks at what is at stake.

Tax breaks. The current estate tax threshold of $11.58 million is scheduled to sunset at the end of 2025, when it will revert to the pre-2018 exemption level of $5 million (as indexed for inflation) for individuals. If that law is changed after the election, it is possible that the exemption could be phased out before the current levels end.

Increased tax liability. These possible changes present a problem for business owners. Making gifts now can use the full exemption, but future gifts may not enjoy such a generous tax exemption. Some transfers, if the exemption changes, could be subject to gift taxes as high as 40%.

Missed opportunity with lower valuations. Properly structured gifts to family members, which benefit from lower valuations (that is, before value appreciation due to capital gains) and current allowable valuation discounts give families an opportunity to pass a great amount of their businesses to heirs tax free.

Here is what this might look like: a family business owner gifts $1 million in the business to one heir, but at the time of the owner’s passing, that share appreciates to $10 million. Because the gift was made early, the business owner only uses up $1 million of the estate tax exemption. That is a $9 million savings at 40%; saving the estate from paying $3.6 million in taxes. If the laws change, that is a costly missed opportunity.

It is better to protect a business from the “Three D’s”—death, divorce, disability or a serious health issue, by preparing in advance. That means the appropriate estate protection, prepared with the help of an estate planning attorney who understands the needs of business owners.

Consider reorganizing the business. If you own an S-corporation, you know how complicated estate planning can be. One strategy is to reorganize your business, so you have both voting and non-voting shares. Gifting non-voting shares might provide some relief to business owners, who are not yet ready to give up complete control of their business.

Preparing for future ownership alternatives. What kind of planning will offer the most flexibility for future cash flow and, if necessary, being able to use principal? Grantor Retained Annuity Trusts (GRATs), entity freezes, and sales are three ways the owner might retain access to cash flow, while transferring future appreciation of assets out of the estate.

Know your gifting options. Your estate planning attorney will help determine what gifting scenario may work best. Some business owners establish irrevocable trusts, providing asset protection for the family and allowing the trust to have control of distributions.

Reference: St. Louis Business Journal (April 3, 2020) “How family businesses can come out on top in presidential election uncertainty”

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How Low-Interest Rates Create Estate Planning Opportunities – Annapolis and Towson Estate Planning

One result of the global health crisis is that interest rates are lower now than they have been in many, many years. The April 2020 AFRs (Applicable Federal Rates), which are used to determine the least amount of interest that has to be charged for below-market loans and are often used for intrafamily lending, have decreased to 0.91 percent for loans less than 36 months, 0.99 percent for loans of 36 months or more and less than nine years, and 1.44 percent for loans of nine years or longer.

The article, titled “Estate Planning in a Low Interest Rate Environment,” from The National Law Review Journal, explains that for families where intrafamily lending has already occurred, these low rates provide a chance to amend the terms of current promissory notes to obtain these rates.

There are two opportunities presented:

  • The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
  • If a parent has already lent money to a child who will eventually inherit assets from the parent, this lower interest rate will help to facilitate wealth transfer. The parent will receive lower payments under the note, minimizing the assets that are added back to the lender’s taxable estate.

Here are a few situations where these loans are typically used:

  • Parents extend a loan to adult child, who is going through a challenging financial period.
  • Parent lends money to a child with the understanding that the child will invest the money at a higher rate of return than the interest charged under the note, thus allowing growth to occur in the child’s estate rather than in the parent’s estate.
  • Complex estate planning, where a sale is made to an intentionally defective trust, where the seller’s goal is to freeze the value of the estate for a price at which the asset was sold on an installment basis. This allows future growth to take place outside of the seller’s taxable estate.

These intrafamily loans are usually part of sophisticated estate planning. Other methods include Grantor Retained Annuity Trusts (GRATs), or Charitable Lead Trusts (CLTs), which also become more attractive in a low interest rate environment.

With a GRAT, there is a transfer of assets to a trust, in which the settlor retains an annuity payment for a certain number of years. At the end of the term, the remaining assets pass to the trust beneficiaries with no estate tax implication. The CLT operates in a similar way, except that the payment for a specified number of years is made to a charity.

Speak with an experienced estate planning attorney about how your estate could benefit from the current low interest rate environment.

Reference: The National Law Review (April 13, 2020) “Estate Planning in a Low Interest Rate Environment”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Should I Know About Being an Executor? – Annapolis and Towson Estate Planning

You’re named executor because someone thinks you’d be good at collecting assets, settling debts, filing estate tax returns where necessary, distributing assets and closing the estate.

However, Investopedia’s article from last summer, “5 Surprising Hazards of Being an Executor,” explains that the person named as an executor isn’t required to accept the appointment. Prior to agreeing to act as an executor, you should know some of the hazards that can result, as well as how you can address some of these potential issues, so that being an executor can run smoothly.

  1. Conflicts with Co-Executors. Parents will frequently name more than one adult child as co-executor, so they don’t show favoritism. However, for those who are named, this may not work well because some children may live far way, making it difficult to coordinate the hands-on activities, like securing assets and selling a home. Some adult children may also not have the financial ability to deal with creditors, understand estate tax matters and perform effective accounting to satisfy beneficiaries that things have been properly handled. In addition, multiple executors mean additional paperwork. Instead, see if co-executors can agree to allow only one to serve, and the others will waive their appointment. Another option is for all of the children to decline and allow a bank’s trust department to handle the task. Employing a bank to serve instead of an individual as executor can alleviate conflicts among the children and relieves them from what could be a very difficult job.
  2. Conflicts with Heirs. It’s an executor’s job to gather the estate assets and distribute them according to the deceased person’s wishes. In some cases, heirs will land on a decedent’s home even before the funeral, taking mementos, heirlooms and other valuables. It’s best to secure the home and other assets as quickly as possible. Tell the heirs that this is the law and share information about the decedent’s wishes, which may be described in a will or listed in a separate document. This Letter of Last Instruction isn’t binding on the executor but can be a good guide for asset disbursements.
  3. Time-Consuming Responsibilities. One of the major drawbacks to be an executor is the amount of time it takes to handle responsibilities. For example, imagine the time involved in contacting various government agencies. This can include the Social Security Administration to stop Social Security benefits and, in the case of a surviving spouse, claim the $255 death benefit. However, an executor can permit an estate attorney to handle many of these matters.
  4. Personal Liability Exposure. The executor must pay taxes owed, before disbursing inheritances to heirs. However, if you pay heirs first and don’t have enough funds in the estate’s checking account to pay taxes, you’re personally liable for the taxes. Explain to heirs who are chomping at the bit to receive their inheritances that you’re not allowed to give them their share, until you’ve settled with creditors, the IRS and others with a claim against the estate. You should also be sure that you understand the extent of the funds needed to pay what’s owed.
  5. Out-of-Pocket Expenses. An executor can receive a commission for handling his duties. The amount of the commission is typically determined by the size of the estate (e.g., a percentage of assets). However, with many cases, particularly smaller estates and among families, an executor may waive any commission. You should pay the expenses of the estate from an estate checking account and record all out-of-pocket expenses, because some of these expenses may be reimbursable by the estate.

Being an executor can be a challenge, but somebody must do it. If that person’s you, be sure to know what you’re getting into before you agree to act as an executor.

Reference: Investopedia (June 25, 2019) “5 Surprising Hazards of Being an Executor”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Does an Estate Planning Attorney Really Do? – Annapolis and Towson Estate Planning

Vents Magazine’s recent article, “Understanding What an Estate Planning Attorney Does,” explains that estate planning is a legal set of instructions for your family about how to distribute your wealth and property after you die. Estate planning attorneys make sure the distribution of property happens according to the decedent’s will.

An estate planning attorney can provide legal advice on how to prepare your will after you pass away or in the event that you experience mental incapacity. She will have all the information and education on all the legal processes, beginning with your will and moving on to other important estate planning documents. She will also help you to understand estate taxes.

An estate planning attorney will also help to make certain that all of your savings and property are safe and distributed through the proper legal processes.

Estate planning attorneys can also assist with the power of attorney and health care directives. These documents allow you to designate an individual to decide issues on your behalf, in the event that you become mentally incapable of making decisions for yourself. They can also help you with a guardian who will look after your estate.

It’s important that you select the right estate planning attorney to execute the legal process, as you’ve instructed in your estate plan. You should only retain an attorney with experience in this field of law because other legal counsel won’t be able to help you with these issues—or at least, they may say they can, only to find out later that they’re not experienced in this area.

You also want to feel comfortable with your estate planning attorney because you must disclose all your life details, plans and estate issues, so she can create an estate plan that’s customized to your circumstances.

If you choose the right attorney, it will save you money in the long run. She will help you save from all the estate taxes and make all the processes smooth and easy for you and your loved ones.

Reference: Vents Magazine (December 12, 2019) “Understanding What an Estate Planning Attorney Does”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Why Even “Regular Folks” Can Benefit from Trust Funds – Annapolis and Towson Estate Planning

A trust is a useful tool, even if you’re not a wealthy person. There are many different types of trusts, but the most basic types are revocable and irrevocable. A recent article from Business Insider “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich” clarifies when and how to use a trust fund.

Trust funds are often used to avoid having assets pass through the probate process. They allow for a tax-efficient means of transferring wealth, avoid or defer estate taxes and help with charitable giving. An experienced estate planning attorney can help clarify what type of trust is needed, and how it can work with an overall estate plan.

Trust funds have a bad reputation for creating badly-behaved young adults, but they are a good planning tool for anyone. Some trusts are more expensive to maintain than others, which is why they are often associated with wealthy people. However, they have the same purpose: to ensure that a person’s money goes where they want it to go. The directions can be as specific as you wish.

There are three people involved in any trust: the grantor, who puts their assets in the trust fund; the beneficiary or beneficiaries, who receive those assets according to the terms of the trust; and the trustee, the person or group of advisors or the organization that is responsible for managing the trust when the trust is created and after the grantor has died. A grantor can put almost any kind of asset into a trust, but most people use them for real estate, bank accounts, investment accounts, business interests and life insurance policies.

If a trust is revocable, it means the grantor may make changes at any time and can generate income through the assets in the trust. The assets are included in the grantor’s estate and the grantor may pay taxes on the assets now and upon their death. Creditors can access the assets for any unpaid debts. Once the grantor of a revocable trust dies, the trust becomes irrevocable.

An irrevocable trust cannot be changed, once it is created. It can only be accessed after the death of the grantor. The assets are not included in the grantor’s estate and they do not have to pay taxes during their lifetime or at death. The taxes are the responsibility of the trust and beneficiaries. Depending on how the trust is designed, creditors may not access the trust.

If you are considering setting up a trust, meet with an estate planning lawyer to discuss your unique situation and determine which type of trust works best for you and your family.

Reference: Business Insider (December 2, 2019) “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Use A Dynasty Trust to Protect Your Wealth – Annapolis and Towson Estate Planning

Using an irrevocable trust ensures a far smoother transition of assets than a will and also offers significant tax savings and far more privacy, control and asset protection, begins the article “Dynasty Trusts: Best Way to Protect Family Wealth” from NewsMax.

Just as their name implies, a dynasty trust is king of all trust types. It gives the family the most benefits in all of these areas. Still not convinced? Here are a few reasons why the dynasty trust is the best estate planning strategy for families who want to preserve an estate across many generations.

Most trusts provide for the transfer of assets from one benefactor to the next generation, at most two or three generations. A dynasty trust can last for hundreds of years. This offers tax advantages that are far superior than others.

Under the new tax laws, an individual can gift or bequeath up to $11.4 million during their lifetime, tax free. After that limit, any further transfer of assets are subject to gift and estate taxes. That same transfer limit applies whether assets are left directly via a will or indirectly through a trust. However, in a direct transfer or trust, these assets may be subject to estate taxes multiple times.

If a grantor transfers assets into a dynasty trust, those assets become the property of the trust, not of the grantor or the grantor’s heirs. Because the trust is designed to last many generations, the estate tax is only assessed once, even if the trust grows to be worth many times more than the lifetime exclusion.

Not all states permit the use of dynasty trusts. However, five states do allow them, while six others allow trusts with lifespans of 360 years or more. An experienced estate planning attorney will know if your state permits dynasty trusts and will help you set one up in a state that does allow them if yours does not. Nevada, Ohio and South Dakota provide especially strong asset protection for dynasty trusts.

Because dynasty trusts are passed down from generation to generation, trust assets are not subject to the generation-skipping transfer tax. This tax is notorious for complicating bequeathals to grandchildren and others who are not immediate heirs.

When the dynasty trust is created, the grantor designates a trustee who will manage trust funds. Usually the trustee is a banker or wealth manager, not a trust beneficiary. The grantor can exert as much control as desired over the future of the trust by giving specific instructions for distributions. The trustee may only give distributions for major life events, or each heir may have a lifetime limit on distributions.

With these kinds of safeguards in place, a benefactor can ensure that the family’s wealth extends to many generations. Speak with an estate planning attorney to learn about the laws concerning dynasty trusts in your state and see if your family can obtain the benefits it offers.

Reference: NewsMax (September 16, 2019) “Dynasty Trusts: Best Way to Protect Family Wealth”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What You Need to Know about Trusts for Estate Planning – Annapolis and Towson Estate Planning

There are many different kinds of trusts used to accomplish a wide variety of purposes in creating an estate plan. Some are created by the operation of a will, and they are known as testamentary trusts—meaning that they came to be via the last will and testament. That’s just the start of a thorough look at trusts offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.

Another way to view trusts is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, and the irrevocable trust usually cannot be changed.

A testamentary trust is a revocable trust, since it may be changed during the life of the grantor. However, upon the death of the grantor, it becomes irrevocable.

In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.

If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.

Note that distributions from a living trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.

When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).

Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.

The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.

Trusts are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. There is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets, and when the grantor dies, the remaining assets of the trust pass to the charity.

Speak with your estate planning attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.

Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys