Wealth Preservation

Your New Estate Planning Checklist

December 10, 2021 By Doug Welty

Fortunately (or unfortunately, if you’re not all that happy with our current estate and gift tax laws), the start of 2022 brings no significant changes to the federal or Virginia tax laws or to Virginia laws affecting estate and trust planning and administration.

So instead of an update on new laws and tax rates, here’s a practical checklist you can use to evaluate your estate plan and, perhaps, make some financial and planning resolutions for the upcoming year. Because an out-of-date estate plan might be missing useful features that I’ve added in recent years in response to those years’ changes in tax and nontax estate planning laws and court decisions.

Action This Day Do you have an estate plan in place? (That question is for you, non-clients.) Whether you do or not, please go through the rest of this checklist. If you answer “no” or “I don’t know” to any of the following questions, please contact me so that we can get things set right.

Do you have a revocable living trust and pour-over Will in place? If so, have you and I sat down and reviewed them within the last five years?

Does your Health Care Power of Attorney permit a person (such as your spouse or a family member) or committee of your choosing (such as a family member in concert with your doctor) to make emergency health care decisions for you in the event you are ever unable to do so?

Are you pretty sure that your estate plan will minimize death taxes and income taxes for your beneficiaries (including taxes on your real estate, investments, life insurance proceeds, and IRA or TSP assets)?

Do you need to take any steps to avoid to avoid possible will contests or similar disputes among the beneficiaries (and non-beneficiaries) of your estate?

Are the people you have named in your Wills as Guardians of your minor children’s persons, and named in your trusts as Trustees of the assets you might leave them, still the best people (or financial institutions) for the job? I often counsel my clients to pick co-Trustees – banks or trust companies to do the heavy lifting, and trusted individuals (who might be the beneficiaries themselves) to keep an eye on them.

Does your estate plan provide protection from creditors and lawsuits for assets you leave to your surviving spouse, children, and grandchildren? (If your plan is more than ten years old, it almost certainly doesn’t protect them to the maximum extent now possible. If it doesn’t include a revocable living trust, it absolutely doesn’t protect them.)

If you have a revocable living trust in place as part of your estate plan (and you should), have you transferred all of your assets to yourself as Trustee so that your family can avoid the expenses, annoyances, and stress of probate? If not, we should get started this day.

Does your estate plan protect your children’s inheritances in the event your surviving spouse chooses to remarry? (And your surviving spouse’s inheritance, in case he or she chooses unwisely?)

Does your estate plan include provisions to allow the assets you leave to your surviving spouse and your children to get a step-up in basis at their deaths, to minimize future capital-gains taxes?

If this checklist leads you to believe there might be ways your current estate plan could be improved, I invite you to contact me so that we can make it better.

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.

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.