Wednesday, August 16, 2017  



Estate Planning in a Down Economy


Estates, Trusts, Wills…still with me? The words conjure up images of an attorney reading from a lengthy, dusty document with the family gathered around to learn what happens to a dear or not-so-dear departed relative’s assets.

This type of scene actually took place years ago but is the exception today. Current laws and economic conditions provide us with new and limited opportunities in estate planning and make the “reading of the will” a thing of the past.

By James A. Butts IV, “Alfie”

Estate planning is the process of analyzing, anticipating and arranging for the disposition of your assets in the event of your incapacity and death. This process ranges from simple tasks such as the preparation a beneficiary designation form for a life insurance policy or IRA to the more complex preparation of documents that will control the timing and conditions of distribution of your assets. Items to be considered in your planning include retirement income, business succession, charitable giving, medical issues and expenses, disability, long term care, special needs beneficiaries, taxes and gifts, among others.

Before the use of trusts became popular, estate planning was generally achieved by the preparation of a will. The disposition of your assets at the time of your death was controlled by the directions in your will. Those assets would be subject to probate; a court supervised process of estate administration that can be costly both in time and money.

The majority of estate plans today include revocable living trusts (also called “inter vivos” trusts). A living trust is an agreement or contract between the creator or “grantor” of the trust and his or her trustee for the trustee to control assets under the terms of the trust agreement. A trust is revocable when the grantor has retained the ability to revoke the trust and return the assets to his individual control. The trustee (who is usually the grantor) then owns, manages and disposes of trust assets at the direction of the grantor. At first glance this seems a bit self-serving, a trust that you create, you control and you can change or revoke, however it has distinct advantages.

Assets held in a living trust are not subject to the probate process. Simply put, people die making their individual assets subject to probate, trusts do not die, they just get a new trustee. This new trustee or “successor” trustee then controls the trust assets and is directed to follow the trust instructions applicable at the grantor’s death. These instructions generally include paying outstanding debts, funeral expenses and distribution of the trust assets. The trust may include instructions for the trustee to retain assets for other individuals and conditions for their distribution in the future.

The successor trustee will act not only upon the grantor’s death but during the grantor’s lifetime if the grantor desires assistance or becomes incapacitated. This makes a living trust a very valuable tool where assets must be managed for a grantor who cannot manage them himself. The court process of appointment of a guardian may be avoided as the transition from the grantor trustee’s control of trust assets to the successor trustee generally requires no court interaction.

People often do not make estate planning a priority and today may use the downturn in the economy as further excuse to procrastinate. Dying or becoming incapacitated without proper preparation can produce unintended and even catastrophic results. Good advice is to periodically review your estate plan. The best advice is to do it now.
Several situations exist in today’s economy that may necessitate changes to your estate plan. More often than not parents choose to leave assets to their children in equal shares, however, in the last few years those parents may have had to financially assist one child more than the others. This assistance can skew the “equal” distribution scheme; a result that can be addressed through careful estate planning.

Consideration must also be given to how a beneficiary who is having financial difficulty will receive an inheritance. Distributing assets to such a beneficiary will immediately subject the assets to the claims of creditors. A trust to hold assets for that beneficiary may provide protection for the assets while also providing for the beneficiary.
Distributions to beneficiaries are often described in specific amounts. This may be problematic if the amount defined in your estate plan has remained the same but your overall asset value may have dropped. Careful consideration must be given to those amounts and their appropriateness due to the change in value of all the estate or trust assets.
Where a child needs assistance now there are a few options. The annual gift tax exclusion is $13,000. This is the amount any person may give to any other person or as many other people as they wish without any estate or gift tax consequences. A couple could make a series of gifts and transfer up to $52,000 to a child and his spouse during 2012 with no tax consequences.

Other opportunities for assisting a child are to directly pay medical and tuition expenses as these payments are exempt from the gift tax without regard to the $13,000 annual exclusion. Medical expenses in this context include the payment of health insurance premiums which may be too high for a struggling or possibly unemployed child to continue paying.
Interest rates are at all time lows and a parent may wish to make a low interest loan to a child. Federal law generally requires a loan from one related party to another to include a minimum interest rate. The rate for May of 2012 ranges from 0.28% to 2.85% depending on the term of the loan and is a rate far below those commercially available. In certain situations loans of up to $100,000 may not be subject to the interest rate requirement at all allowing the parties to avoid payment of interest and income to the parent.

A unique opportunity exists till the end of 2012 for large gifts. The applicable exclusion amount is the total value of assets that you can transfer (not including those transfers covered by your annual gift tax exclusion) during your life and at death without paying estate and gift taxes. That exclusion amount for 2012 is $5 million. This is the highest amount that has ever been allowed for gift and estate transfers. The exclusion amount is scheduled to drop to $1 million on January 1, 2013 unless Congress takes action. That means that for people with large estates there has never been a better time to give it away!

Transferring stock, real estate or other assets that have depressed values would allow the donor to use less of his or her annual exclusion or applicable exclusion amount and any future appreciation, dividends, rents or other income from the asset will then belong to the donee.

The $5 million applicable exclusion has not always been so generous. As recently as 1997 the exclusion was only $600,000, meaning that all assets of a decedent passed to the next generation over $600,000 would be subject to federal estate tax. The applicable exclusion has changed nearly every year since then and is scheduled to revert back to the 2002 amount of $1 million for 2013 unless the law is changed.

Many couples have trusts which contain formula clauses that make reference to the applicable exclusion (previously called the unified credit). The formulas were designed to take into account changes in the tax laws. Because the applicable exclusion amount is now nearly 10 times what it was in 1997, these plans need to be reviewed with current asset values to determine if the plan still achieves the intended result. The effect of the scheduled change for 2013 and possible action by Congress should also be considered.

The advantages of planning in a down economy are not limited to those listed in this article. There are many complex tools available to estate planners which take advantage of the current low interest rates to leverage transfers of assets such as a personal residence, business and investment assets, and charitable gifts. The down economy should be a reason to plan or review planning now and not an excuse to procrastinate.

The House and Home Magazine would like to thank James A. Butts IV, “Alfie”, for his contribution of this informative article. Alfie concentrates his practice in Estate Planning and Estate and Trust Administration. Alfie has lectured for Virginia Continuing Legal Education on estate and trust subjects and has been with Rumsey and Bugg, PC in Irvington, Virginia since 2000. You can find more about the author and his firm at www.rumseyandbugg.com