Trusts

Your Estate Plan, Your Trusts, and Your Retirement Accounts

October 11, 2020 By Doug Welty

You should read this excellent short column by financial writer Arden Dale of The Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” on integrating IRAs, 401(k) plans, federal employee Thrift Savings Plan (TSP) accounts, and similar retirement savings accounts into estate and trust plans. The article deals primarily with choosing primary beneficiaries in a way that will minimize estate and income taxes. For most married retirement plan beneficiaries, that will mean choosing their spouses to receive the plan proceeds outright and free of trust, via a rollover after the first spouse’s death. Safeguard Your Retirement Plan For Children

However, trusts continue to be important contingent, or secondary, beneficiaries, especially for larger plans. The ability of your children or grandchildren (and in some cases, your spouse) to compound retirement plan investments over a long period of time makes IRAs and similar plans one of the most valuable tools for wealth succession planning for your family. Well-drafted retirement plan trusts help ensure that such plan “stretch-outs” will be administered property. I will normally recommend a separate IRA Inheritance Trust if you wish to

preserve and guard retirement plan assets from your beneficiaries’ “predators and creditors” – including remarriage spouses, your children’s and grandchildren’s creditors, and their improvidently-chosen spouses;
control distributions after your death (discourage or prevent a beneficiary from withdrawing all of the assets he inherits from you at once, absent a very good reason);
direct otherwise-reluctant retirement plan administrators to divide an account into separate accounts for your children;
limit payouts to any special-needs beneficiaries (including those who become disabled after your death) to protect ongoing government benefits; and
ensure that your retirement plan money stays in your family.

Generally speaking, if you and your spouse’s combined retirement plan assets exceed $250,000, it will be cost-effective for us to create stand-alone IRA Inheritance Trusts for each spouse in addition to your Revocable Living Trust. If you’d like to arrange an appointment or a phone call, or receive more information via email, please call or email me, or use the contact tool in the sidebar.

(Updated: December 2020)

7 Major Errors in Estate Planning – A Financial Advisor’s View

May 18, 2016 By Doug Welty

These days, access to estate planning counsel and financial advisors is no longer restricted to the very rich.

(Well, there was never actually an exclusive club of rich folks who kept the secret rituals secret, but it used to cost a lot more than it does today. And in the good old days, only the very rich had to concern themselves with income taxes and death taxes.)

These can burn you. But even with the increasing democratization of trust and estate planning, there continues to be a large group who, somehow, just don’t get the word. Forbes Online contributor Rob Clarfeld posted an article ten years ago (but still relevant today) entitled “7 Major Errors In Estate Planning.” His top seven aren’t necessarily the same seven I’d pick (I’ll put up my own short list one of these days) but they’re awfully common nevertheless. Here are the bullet points in Rob’s list – his comments are at the link.

Not having a plan at all (aside from the “plan” that legislators have written for you).
Trying to do everything yourself.
Failing to consider how IRA and life insurance beneficiary designations and improper titling of assets can affect your planning.
Failure to understand the interplay between gift taxes, death taxes, and life insurance.
Allowing your annual gift tax exclusions ($16,000 per recipient per donor) to go to waste.
Failing to take advantage of the $12.06 million lifetime gift tax exemption amount scheduled to sunset on December 31, 2025.
Leaving assets outright to adult children, rather than in well-designed “spendthrift” trusts that protect them from predators, creditors, and improvidently-chosen spouses.

Are you guilty of any of these planning sins? If you know you are (or even think you are), contact me for more information. You can use the form in the sidebar.

Consider “Front-Loading” Your Life Insurance Trust Contributions

December 7, 2012 By Doug Welty

A proposal that first appeared in the Obama administration’s failed 2012 budget proposal sought to override existing state laws and limit the terms of cascading or “dynasty” trusts to 90 years. This proposal didn’t make it into law, but might resurface again in a future Democratic administration or congress.

Frontload your irrecovable life insurance trust Although there can be no guarantees, any new federal law along those lines probably would treat existing dynasty trusts as grandfathered, and so exempt from this term limitation. However, if gifts were made to such trusts after the effective date of a trust term limitation law, a result might be that the trust would lose its grandfathered status. This already happens with certain grandfathered trusts (those settled before September 25, 1985) with respect to the generation-skipping transfer (GST) tax.

Or, a contribution after the effective date might cause the trust to be divided into a “dynasty share” and a “limited-term share.”

Many of my clients (and many, many people who aren’t my clients yet) with potentially taxable estates have already-existing irrevocable life insurance trusts (ILITs) to which they contribute annually. Many of these trusts are 100% exempt from the generation-skipping transfer tax. Those folks, to the extent possible and practicable, should consider using some of their lifetime exemption to “front-loading” their gifts to such GST exempt ILITs. Just in case.

Why Copyrights and Trusts Don’t Always Mix Well

January 20, 2012 By Doug Welty

Here’s a recent article of mine about the estate planning aspects of transferring copyrights to literary and artistic works. I wrote it for a readership of trusts & estates lawyers, CPAs, and financial planners who get questions about copyrights, making gifts of them during life and at death, and how the heirs of authors and artists can often terminate and reclaim a grant of rights that was made during an author’s lifetime.

You can read the whole thing, but the nugget of wisdom is this: if you intend to make a gift of literary rights when you die, do it in your will (which can be a pour-over will), and not by transferring them to your living trust while you’re alive.

How Low Interest Rates Can Cut Your Tax Bill

October 14, 2011 By Doug Welty

Alexander Hamilton I often point out tax-saving opportunities created by our current low interest rates, and an October 1, 2011 Wall Street Journal article does a nice job of making the point again. In How Low Rates Can Cut Your Tax Bill, Tax Report columnist Laura Saunders points out that our current low interest rates (a Section 7520 rate of only 1.6% in December 2011) add to the attractiveness of several mainstream planning opportunities:

Loans to family members – the applicable federal rate for long-term loans (more than 9 years) is only 2.80% in December 2011. The author gives an example of a $100,000 loan from parents to a child and his spouse to buy a home: the parents could either collect annual interest of $2,950 or they could forgive the loan (up to $52,000 of debt forgiveness per year with no gift tax liability) in whole or in part.

Installment Sales — with interest rates low, more of a sale counts as capital gain than as ordinary interest income.

Grantor-Retained Annuity Trusts — noting that we have seen proposals from money-hungry Congressmen to eliminate short-term GRATs, the author urges consideration of a strategy “sanctioned by the tax code” while rates remain low;

Charitable Lead Trusts — Charitable lead trusts (in which a charity uses trust assets for a term of years to create income, and then returns them to your children or grandchildren) are likely to pass more tax-free assets to beneficiaries when interest rates and asset values are low. Given historically low interest rates and low asset values, lifetime CLTs, which can create income tax deductions now and save estate taxes later, are worth considering if you are charitably inclined.

Check out the article, and then contact me if you’d like to talk about any of these strategies in more detail. Remember, nobody knows how long interest rates will stay this low. They could rise tomorrow, so if you’ve been thinking along these lines, it’s time to get moving.