Top 10 Estate Planning Considerations to Complete Before Year-End

FROM DIGITALJOURNAL.COM-


With the proposed tax reforms listed in President Obama's budget, certain planning strategies are in the crosshairs and may not be around for long. McManus & Associates, an estate planning law firm based in the Tri-State Area, today released the latest chapter, "Top 10 Estate Planning Considerations to Complete before Year-End," in its free Educational Focus Series. During a client conference call, the firm's Founding Principal and top AV-rated Attorney John O. McManus highlighted effective financial tactics to use now, as well as maintenance items required to ensure one's family wealth remains protected. To review the top estate planning tips that should be applied before 2014, go to the firm's website at http://mcmanuslegal.com/2013/11/conference-call-top-10-estate-planning-considerations-to-complete-before-year-end/.

"Although legislation next year could be made retroactive to January 1st, acting before the end of this year will ensure that any changes in 2014 won't affect your planning," explained McManus. "Get inside the castle walls before year-end; in instances when Congress has passed rules retroactively, the laws are made retroactive to the beginning of the calendar year, but not to the prior year."

1. Laws will change, but not before year-end.

a. President Obama continues to publically call for a reduction in the lifetime gift and Federal estate tax exemption amounts. With deficit negotiations upcoming next year, there could be potential for a reduction in the exemption amount, precluding clients from taking advantage of the current unprecedented exemption amount.

b. Grantor trusts are intentionally defective for income tax purposes, meaning that the grantor pays any income tax on income earned by the trust assets. In this way the grantor can preserve the assets and accelerate the growth of the trust. The powers that the grantor retains cause it to be a "grantor trust."

c. Even if you have an estate plan in place, it may not reflect the current legislation to best employ the exemption amounts and tax rates.

2. Your partnership is validly created, but is it validly maintained?

a. Family Limited Partnerships and LLCs provide tremendous opportunities for estate planning, taking advantage of discounted values for assets gifted to trust, and provide a further level of asset protection for your family.

b. Such entities must be run, however, as legitimate businesses, which means shareholders' meetings, etc. No personal use assets owned by the LLC/FLPs should own multiple assets (investment properties, business interests, liquid and illiquid financial instruments).

c. Have annual review meetings to review your partnership and asset performance.

3. You are making gifts to your loved ones -- be careful not to exceed your exemption amount.

a. First, keep close track of all your gifts. Timely filing of a gift tax return allows the donor to elect how he or she wants to deploy the Generation Skipping Tax Exemption and start the clock running on the statute of limitations.

b. Gifts made to life insurance trusts to cover premium payments, for example, may not apply to gifts that a grantor would want to have use up his exemption amount.

c. Such gifts to life insurance trusts require Crummey notices be sent to each beneficiary of the gift to notify them that such gift has been made to this trust.

d. Consider naming people other than your children when making gifts to a life insurance trust -- this way the client can still make annual exclusion gifts to his children through other means (such as in trust).

e. Are your trustees monitoring the performance of insurance policies in the ILIT?

4. You have done great estate planning -- do you know the current two hottest strategies?

a. As opposed to trusts with language that reads, "one fractional portion at 30, the next at 35, the final piece at 40" consider creating a trust for children for their lifetime.

b. Lifetime trusts provide a practical vehicle to preserve assets, yet allow children the power to appoint and remove trustees and even the ability to serve as trustee of the trust at a certain age. If the child works to build her own life and never needs to touch the assets in trust, they can continue to grow and pass on free of tax. Standards for distributions are described in four terms: health, education, maintenance and support.

c. A limited power of appointment allows a person the ability to decide who will receive the assets in the trust within a class of individuals as defined in the trust document, decided upon by the grantor. Such limited power does not grant the holder of such a limited power to transfer the property to his/her creditors.

5. Income tax deductions can be powerful -- here are three useful deductions to take:

a. For clients who itemize deductions, it may be most tax-efficient to accelerate certain payments if it will result in higher write-offs for 2013.

b. Accelerating a January house payment due in January adds a 13th month of deductible interest. Prepayment of state, local and property taxes due early in 2014 can reduce a client's federal tax bill. Miscellaneous and medical deductions can only be taken if they exceed 10% or 2% of a client's AGI, respectively. Consider prepaying college tuition, or if you live in a state with no personal income tax, you might consider making a major year-end purchase to write off sales tax.

c. WARNING: Prepayment is not always the right answer. This strategy will not work if you will pay the alternative minimum tax (AMT). Ask your accountants about how to best proceed.

6. Your adult children continue to love and respect you, but the law prohibits you from making decisions on their behalf. Do the fiduciaries and guardians named in your documents still reflect your current wishes?

a. In today's litigious society, it is critical to immediately move forward to create health care documents, name powers of attorney, and execute a living will.

b. Marriage, divorce, new children, or any major life change -- either personally or in assets owned -- should lead you to revisit your planning to ensure that your family is protected as you intend and that all fiduciaries named are still reflective of your current wishes.

c. If it has been more than 5 years since the execution of a power of attorney, it may be wise to re-execute. Certain states and institutions will want to see a more current power of attorney.

7. You love to make year-end gifts to charity. Here are two critical strategies:

a. As we enter the holiday season and are reminded of all the people in our lives for whom we are grateful, we also can pause to reflect on how richly blessed we have been over the past year. In this moment of thanksgiving, have you considered donations to charitable causes that are close to the mission of your family?

b. Make charitable gifts with appreciated stock so that you get the full deduction for the value of the donation without liquidating the stock and the realizing capital gains.

c. Establishing your own foundation can be a wonderfully unique way to bring the family to talk about values, assets, and how to best match personal passions and resources to help find solutions to problems in the world.

8. Surprise! You now have to make withdrawals from your IRA. Here's a strategy to avoid tax payment and fully benefit your charity.

a. The IRS allows up to $100,000 in cash donations from an IRA to charities for clients who have reached age 70 1/2. Such donation does count for the required minimum distribution from the IRA and can help prevent possible loss of itemized tax deductions, phase-out of personal exemptions or credits, etc.

9. Given the current interest rates, should you consider a GRAT or QPRT?

a. With current interest rates low, as set by IRC 7520, the interest hurdle to make the creation of a GRAT profitable is rather low. This device allows the grantor to gift assets to children in an irrevocable trust for a term of years. Over that term the grantor is entitled to receive back an annuity stream equal to the value of the gift plus the federal interest rate. For assets that a client expects to appreciate significantly over the next few years, this can be a valuable vehicle for removal of growth from the estate.

b. Conversely, if interest rates rise, consider creation of a QPRT. The higher the interest rate, the greater the discount that you enjoy from the actual fair market value of the gifted residence.

10. How should you consider harvesting capital gains, timing long-term losses?

a. If you own investments that have dropped in value since you acquired them, now might be a good time to sell off part or all of them to cut your tax bill. Direct your advisor to sell only those positions within the portfolio that have realized losses, namely the highest basis shares. You can deduct capital losses up to the amount of any capital gains that you'll have for the year.

b. The preferential long-term capital gains rates are only applicable to securities owned for over one year. Therefore, holding appreciated securities for over a year before selling makes great tax sense. There is of course market risk that stock prices could plummet during that year. That said, now may be a great time to cash in some long-term winners to benefit from the 20% tax rate.

"Before a year comes to a close, there are some very important tax planning strategies that you can take advantage of that just end and each year they are non-accretive," commented McManus. "If you don't do them by year-end, you may or may not get to do them in the New Year -- even if you do, you lost the opportunity to do them in the previous year."