NON-TAX REASONS FOR ESTATE PLANNING
by: Begley Law Group
by Thomas D. Begley, Jr., CELA
In calendar year 2000, the exemption from federal estate tax was $675,000. Clients who owned a home, had a retirement plan, and even modest other assets, had to consider this tax. Beginning in 2002, the exemption gradually increased from $1,000,000 to the current level of $5,490,000. Only two-tenths of one percent of decedents dying in 2016 had to file a federal estate tax return. New Jersey decoupled from the Federal Estate Tax at the $675,000 level. Many individuals still had to plan to avoid or minimize this tax. Beginning January 1, 2017, the New Jersey estate tax exemption was increased to $2,000,000, and effective January 1, 2018, the New Jersey estate tax will be repealed. The Estate Planning Bar has seen a significant erosion in clients seeking to do estate tax planning. However, this does not mean there are no other reasons for clients to plan their estates.
Now, the important tax to consider is capital gains tax. The top federal income tax rate is 39.6% for ordinary income. A 3.8% surtax on investment income also applies to individuals with adjusted gross income in excess of $200,000 or $250,000 if married filing jointly. Capital gains tax rates range from 0% to 15% or 20% or as high as 28% for collectibles. Assessing assets at death results in a step-up in basis for low basis or hard to value assets. For example, if an individual purchased stock for $200,000, held the stock for many years and it is now worth $1,000,000 and the individual gives the stock to his child during lifetime, the child would have to pay capital gains tax on the $800,000 profit if the stock is sold. However, if the same client dies and leaves that stock to his child in a Will or Living Trust, the basis on the stock steps up to the fair market value (FMV) on the date of death. Assuming the FMV is still $1,000,000, the child’s basis becomes $1,000,000, and if the stock is sold right away, there would be no capital gains tax.
Grandparents usually have a very special bond with their grandchildren. Many grandparents do not think of leaving their grandchildren something in their Wills. When the Estate Planning lawyer mentions this possibility, the grandparents usually smile and readily assent. The grandparents could leave a flat sum of money, $1,000 to $100,000 or up, or they could divide their estate so that one share goes to each child and a separate share is divided equally among grandchildren. Education trusts can also be established for grandchildren, and a grandparent can also establish a 529 Plan. If a 529 Plan is to be established in the grandparent’s name, then distributions would be considered income to the grandchild student for financial aid purposes. Better practice is to have the grandparent fund a 529 Plan in the name of the parent or even the student, because distributions from such plans are not considered income for Free Application for Federal Student Aid (FAFSA).
Gifts or Loans to Children
Frequently, a parent has helped one child more than others. They may have loaned or gifted money to the child to use as a down payment on a home, to buy a car, or to help a child repay debt, and the loan or gift has never been repaid or equalized. Consideration should be given in the Will or Living Trust to equalization. If the gift or loan is not equalized, it usually results in resentment on the part of those who feel treated unequally.
Parents are often concerned that their children will divorce or be subject to litigation. In some cases, the children or children’s spouses have problems with drug addiction, alcoholism, criminal behavior, spendthrifts, or can’t hold a job. If money is given outright to children and the child is sued, 100% could be recovered by creditors. If money is left outright to children and comingled with funds of the spouse, then the spouse may well wind up with roughly half as equitable distribution. The solution to this problem is to establish a Bloodline Trust with spendthrift provisions.
Retirement Plan Trusts
Many clients are concerned that their children or grandchildren will lose an inherited IRA either by squandering it or by getting sued or divorced. Most clients are very careful to not take more than the Required Minimum Distributions (RMDs) from the IRA each year. However, when children or grandchildren inherit an IRA, they tend to look at it as found money and immediately use it to pay off loans, buy a larger house, a more expensive car, or other non-essential items. The solution is to establish a Retirement Plan Trust for the benefit of the children or grandchildren.
Clients frequently have second, third or even fourth marriages. They want to take care of their current spouse, but eventually they want their assets to go to their own children. A typical arrangement might be for the spouse owning the home to give the surviving spouse a life estate in the home and to establish a trust to provide for the health, education, maintenance and support of the surviving spouse, and upon death of the surviving spouse the assets in the trust to be distributed to the grantor’s children and/or grandchildren.
If the client has a spouse, child or grandchild with a disability who is receiving or may receive means-tested public benefits in the future, such as Supplemental Security Income (SSI), Medicaid, Section 8 Housing, Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), Low Income Home Energy Assistance Program (LIHEAP), or Division of Developmental Disabilities (DDD) benefits, then a Special Needs Trust should be established. A professional trustee should always be selected to administer the Special Needs Trust.
If a client owns a business, she should have a Business Succession Plan. If the business is owned by an entity, the records must be kept up to date, there should be an Agreement among the owners of the entity, and an Employment Agreement should be considered.
Clients should consider life insurance, long-term care insurance, umbrella liability policies and disability policies.
Many clients have modest accounts scattered among a number of financial institutions with no coherent plan. The Estate Planning attorney might suggest that the client work with a financial advisor to prepare a written Investment Policy Statement and assist the client in managing investments.