A new tax law proposal greatly impacting estate planning may soon be enacted into law. While it is too early to know what will become law, the House Ways & Means Committee tax plan draft indicates that change is coming soon. While new details emerge and changes are made to the proposals over the coming weeks, it is critical to understand how these possible tax changes may affect your estate planning.
What are the Major Proposed Changes that Impact Estate Planning?
One of the most significant changes to affect estate planning is that as of January 1, 2022, the federal estate and gift tax exemption is facing a reduction from $11.7 million to approximately $6 million. Ambitious budget and spending proposals require additional sources of revenue. While technically not yet a law, there is little doubt, per the Congressional Budget Office, that this particular estate and gift exemptions will become law. This near certainty provides a small window for individuals to make full use of their 2021 permissible exemption.
Other major change proposals include grantor trusts which may not have until December 31, 2021, to take full advantage of existing planning opportunities. For decades grantor trusts permitted the grantor to be individually liable for income taxes on earned income, yet the grantor trust remained excluded from the grantor’s taxable estate. If the proposed changes take effect, there will be an elimination of grantor’s trusts in estate gift planning.
Under the current rules, existing grantor trusts are exempt from the law change proposal (grandfathered) with one significant limitation. A gift pre-existing proposed grantor trust law change will be exempt; however, the portion attributable post-act contribution is under the new rules. Therefore that new rule portion is included in the grantor’s taxable estate. Grantor trusts include life insurance trusts. Therefore, pre-funding this trust type with enough cash to pay premiums for several years to ensure its exemption status is required to remain outside the taxable estate. Execution and funding must happen before enacting the proposal to take full advantage of existing grantor trust laws.
Finally, the proposal regulations upend rules regarding the sale of appreciated assets by a grantor to their grantor trust. Today, this action is not an income tax recognition event. The proposal act, however, would deem such a sale as being between unrelated parties. This change means the sale to a grantor trust becomes an income tax recognition event to the grantor. Typically, assets sold to grantor trusts have substantial gains already built-in. Therefore the strategy to sell to a grantor trust largely disappears with the change proposal enactment, and not even losses could have recognition upon such a sale.
Valuation rules such as discounts on ownership interests in passive assets face elimination. Any individual wishing to claim a valuation discount on a gift of interest of an entity must complete the gift before enacting the proposed legislation. Again, the window of opportunity for claiming these types of valuation discounts may close, even long before December 31, 2021.
Understanding Proposed Changes to Tax income Rules
Tax income rules are also under scrutiny and ripe for change. A new surcharge proposal of three percent of a trust’s modified adjusted gross income or an estate above $100,000 is likely to enact into law. Realizing income gains in 2021 rather than 2022 can help to preserve your wealth.
Also, expect individual and capital gains and dividends tax rate increases. Individual tax rates may increase from 37 to 39.6 percent, and the income level threshold for these higher rates will decrease. The current level for higher-income taxpayers’ capital gains will change from 23.8 percent to as high as 31.8 percent. Part of these taxes includes a three percent surtax applying to high-income individuals, estates, and trusts.
The current draft legislation does not propose eliminating the step-up in basis at death or implementing a carryover basis at death, nor transfers of lifetime gifts (other than sales to a grantor trust, see above) or upon the death of an income tax realization event. The legislation does not propose setting a minimum term for grantor retained annuity trusts or eliminating zeroed out grantor retained annuity trusts. Nor does the draft legislation increase the estate tax rate from forty percent or create a progressive estate tax rate structure, limit the annual exclusion to trusts or gifts, and finally will not create new limitations on the use of dynasty trusts.
The recently unveiled Build Back Better Act has the possibility of implementing wide-sweeping changes to the US tax code and has drastic impacts on commonly used estate planning techniques. Whether you have an existing estate plan or need to create one, speak with an attorney today to understand how these proposed changes may affect your existing or future estate plans. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
A trust is a great mechanism for handling estate business and it can be beneficial to anyone with any number of assets. You want to keep your affairs private and stay out of probate court? Maybe you have stepchildren? You want to leave money to your favorite charities? Or you own a small business and you’re concerned about liability. Perhaps you have a child with special needs. You have an elderly parent who might need government benefits. And so on. There are lots of situations where a trust is just the thing.
In an ideal world, a trust runs like a well-oiled machine. The creator of the trust is even-handed and fair in where he wants his money to go. The recipients of trust funds – the beneficiaries – want the best for all, including themselves. The trustee – the person entrusted with managing the money in the trust – is conscientious and responsible. She invests wisely. She provides beneficiaries with regular accountings of how those investments are doing. She pays beneficiaries earned interest right on time. When the trust has served its purpose, she pays out assets and winds up the estate.
That’s the ideal world. Not everybody lives there, unfortunately. Individual trustees can be inexperienced, overworked, overwhelmed, intentionally uncooperative, or even abusive or dishonest. Beneficiaries can become anxious and suspicious, with or without reason. And grit gets in the gears.
If you are a beneficiary who’s concerned that the trustee is not living up to her duties, we suggest a stepped approach. Start by being nice and assuming the best intentions. Specifically, identify what’s troubling you. Try to sit down with the trustee to discuss your concerns. Disagreements may turn out to be misunderstandings that can be worked out amicably.
If you don’t have a copy of the trust document, ask for it. Don’t believe what you’re told about what the trust says. You as beneficiary have the right to read the document and to make sure that what you think you’re entitled to is in fact what you are entitled to.
Beneficiaries have the right to know where trust funds have been placed, how much income the funds have earned, and how much the trustee has spent on expenses and commissions. If your trustee has not provided you with an accounting, ask politely in writing. Request that the trustee responds within a specified reasonable time. If your request is simple – for example, you’re only asking for a copy of the trust document – that time could be short. If you want an accounting, allow the trustee more time to calculate expenses and reconcile accounts.
If all goes well, the situation may be resolved at that point.
If not, though, act immediately. Don’t merely hope things will take care of themselves. Your time to go to court is limited and you may be penalized for not acting promptly. Call an experienced trust-and-estate lawyer. General practitioners may be good negotiators, but they are probably unfamiliar with current trust-and-estate law. You need an attorney who has extensive experience with trustees or executors who have mishandled an estate or otherwise breached their duties. And remember – you need your own attorney, not the attorney who drafted the trust.
You and your attorney can then choose the optimal way to reach your goals. Maybe simply a letter from the attorney to the trustee will do the job. If it doesn’t, though, it may be time to go to court. Your attorney will advise you.
But what if you think the trustee is actually stealing? Misappropriating your inheritance? Isn’t that a crime? A police matter?
Yes, but. The police won’t pursue a case unless the trustee has actually embezzled or absconded. Otherwise, if your trustee has invested funds recklessly, or lost money, or won’t communicate with you, those are civil disputes that are resolved in probate court, not criminal court. The probate judge can force uncooperative trustees to act, or, if necessary, may remove the trustee altogether if she is unfit or the situation otherwise warrants.
In sum, an individual serving as trustee is responsible to communicate honestly and openly with beneficiaries, gather and invest property of the estate, and to account for the property that passes through. That can be a big job, so allow your trustee some latitude if possible. But life being what it is, drama and chaos can break out, especially if familial relationships aren’t what they could be wished for.
If you find yourself in that situation, we would be happy to talk with you about how we could help provide support and expertise, to move toward a happier solution. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
When a family member has passed, the family occasionally ends up arguing over personal property. Arguments can take place over things like a coffee mug, a piece of jewelry, or a painting. These types of arguments can be eliminated by filling out a personal property memorandum and keeping it with your will or trust.
A personal property memorandum is designed to cover who should receive items owned that don’t have an official title record. Personal property includes furniture, jewelry, art, and other collections, as well as household items like china and silverware. Personal property memoranda may not include real estate or business interests, money and bank accounts, stocks or bonds, copyrights, and IOUs.
When writing your memorandum, it is best to keep things simple. Personal property memoranda generally resemble a list of items with the attached names of the inheritors. It can be handwritten or typed but should always be signed and dated.
All items should contain sufficient detail so that argument and confusion can be avoided. Complete contact information including address, phone, email, and a backup contact if possible should be included. Do not include items that you have already explicitly left in your will or trust.
The beauty of a separate list of personal items and their planned distribution is that if you later decide to change who receives what, you simply update your current list, or replace the list altogether. You can destroy an old record or maintain signature and dates on each of your personal property memoranda so that it is easy to identify your most current set of wishes.
A personal property memorandum for your tangible personal effects is a simple way to address how you want your personal property to be distributed. We would be happy to help you create a legal personal property memorandum along with any other estate planning documents you may need. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
Cryptocurrency is a digital asset and as such needs to be addressed differently than traditional estate planning assets. Crypto-assets may comprise significant individual wealth in the forms of cryptocurrencies like Bitcoin and noncurrency blockchain tokens. If you own any of these asset classes, addressing complex challenges to secure, transfer, protect and ultimately gift crypto-asset wealth is crucial to your estate plan.
Estate planning may seem incompatible with decentralized cryptocurrency systems. Joel Revill, CEO of Two Ocean Trust, says, “The idea of handing over your crypto-assets or your private keys to someone else goes against that original ethos of the self-sovereign asset.” Continuing about the asset class, he admits, “A self-sovereign asset is a wonderful concept, but when you put it into the context of succession planning or multigenerational planning, you begin to appreciate the fragility of that custody.”
Whether you bought Bitcoin early and are managing millions or have more modest sums, understand when formalizing a plan for your crypto-assets, they are vulnerable to being lost forever without preparing to convey the access information to a beneficiary. A private key (public/private key encryption), typically alphanumeric characters, is known to the crypto-asset owner and permits access to the currency’s value through a distributed digital system called a blockchain. If your spouse or other heir is not crypto or technically savvy, they may have no clue how to access your crypto-assets without explicit instructions.
Suppose you have a small number of crypto-assets on an exchange such as Kraken, Binance, Coinbase, or others. In that case, the focus of your estate plan is to leave a comprehensive trail of information to your fiduciary so that they may locate and access the account. This trail can be as direct as a list of the crypto-asset on your schedule of trust assets with certainty that the successor trustee has login protocols to the client’s account on the exchange.
Does My Cryptocurrency Need to Go into a Trust?
For those with more extensive cryptocurrency assets, seeking professional help to establish a custodian and trustee may be necessary. You can use one or a combination of these solutions that help you both protect and make your estate plan for digital assets:
- Share your seed phrase (master password) and private keys with a very trusted family member or friend.
- Divide your seed phrase and private keys among multiple highly trustable individuals so that no one person has complete control of your digital assets.
- Create a trust and transfer into the trust crypto-asset ownership with a designated loved one or corporation to serve as trustee.
- Put your crypto-assets in custody, such as a software application or hardware wallet.
- If you have the technical expertise, you may prefer to use a dead man’s switch app.
- Implement a cascading multi-signature wallet, thus dividing responsibility instead of a self-sovereign wallet.
Digital asset custodian services like BlockFi, Unchained Capital, Anchorage, Casa, Genesis, and more also provide secure protection for crypto-assets alongside trustee services. Many of the trusts created for cryptocurrency are lifetime discretionary trusts; however, there is no widely accepted digital asset estate plan template. Some owners prefer a simple approach while others tend to the very complex; still, others favor flexibility.
Beyond the safe storage and ultimate successful transfer of digital cryptocurrency, ownership is the question of what your beneficiary will do with the asset. There are tax implications when transferring or possibly selling digital assets. In this instance, some of the more traditional capital gain tax strategies are applicable. The inheritor can hold until their short-term gain becomes a long-term gain, thus reducing the tax consequence. They might also offset capital gains with capital losses or sell in a low-income year. Each beneficiary will have to weigh their financial situation to identify the best approach for themselves.
Cryptocurrencies are ushering in a new age where primary estate planning documents like a will are not enough to meet the digital needs of this asset class. The nature of cryptocurrency is somewhat volatile as improper passing of digital requirements may mean the loss of the asset in total. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
You would hope your living will is properly prepared and your resuscitation instructions or DNR (do not resuscitate) are in order. While your wishes in a living will may be appropriately documented, that does not guarantee the instructions will be carried out as you stated. The frightening truth is that mistakes about your end-of-life instructions are made while you are at your most vulnerable. Dr. Monica Williams-Murphy, medical director of advance-care planning and end-of-life education for Huntsville Hospital Health System in Alabama has said, “Unfortunately, misunderstandings involving documents meant to guide end-of-life decision-making are surprisingly common.”
The underlying problem is that doctors and nurses have little if any training at all in understanding and interpreting living wills, DNR orders, and Physician Orders for Life-Sustaining Treatment (POLST) forms. Couple the medical professionals’ lack of training with communication breakdowns in high-stress environments like a hospital emergency ward where life and death decisions are often made within minutes, and you have scenarios that can lead to disastrous consequences.
In some instances, mix-ups in end-of-life document interpretation have seen doctors resuscitate patients that do not wish to be. In other cases, medical personnel may not revive a patient when there is the instruction to do so resulting in their death. Still other cases of “near misses” occur where problems were identified and corrected before there was a chance to cause permanent harm.
There are some frightening worst-case scenarios, yet you are still better off with legal end-of-life documents than without them. It is imperative to understand the differences between them and at what point in your life you may change your choices based on your age or overall health. To understand all of the options available it’s important to meet with trusted counsel for document preparation and to review your documented decisions often as you age. In particular, have discussions with your physician and your appointed medical decision-maker about your end-of-life documents and reiterate what your expectations are. These discussions bring about an understanding of your choices before you may have an unforeseen adverse health event, and provides you with the best advocates while you are unable to speak for yourself.
There are several documents that may be appropriate as part of your overall plan. Each of those is discussed below, and we are available to answer any questions you may have about them.
A living will is a document that allows you to express your wishes about your end-of-life care. For example, you can document whether you want to be given food and hydration to be kept comfortable, or whether you want to be kept alive by artificial means.
A living will is not a binding medical order and thus will allow medical staff to interpret the document based on the situation at hand. Input from your family and your designated living will appointee are also taken into account in your best decision-making strategy while you are incapacitated. A living will become activated when a person is terminally ill and unconscious or in a permanent vegetative state. Terminal illness is defined as an illness from which a person is not expected to recover even though they are receiving treatment. If your illness can be treated this would be regarded as a critical but not terminal illness and would not activate the terms of your living will.
Do not resuscitate orders (DNRs) are binding medical orders that are signed by a physician. This order has a specific application to cardiopulmonary resuscitation (CPR) and directs medical professionals to either administer chest compression techniques or not in the event you stop breathing or your heart stops beating. While your living will may express a preference regarding CPR it is not the same thing as a DNR order. A DNR order is specifically for a person who has gone into cardiac arrest and has no application to other medical assistance such as mechanical ventilation, defibrillation, intubation, medical testing, intravenous antibiotic, or other medical treatments. Unfortunately, many DNR orders are wrongly interpreted by medical professionals to mean not to treat at all.
Physician orders for life-sustaining treatment forms (POLST forms) are specific sets of medical orders for a seriously ill or frail patient who may not survive a year. This form must be signed by a physician, physician assistant, or nurse practitioner to be legally binding. The form will vary from state to state and of the three instructive documents the POLST is the most detailed about a patient’s prognosis, goals, and values, as well as the potential benefits and risks various treatment options may bring about.
A power of attorney for a health care decision, sometimes referred to as a health care directive, allows you to name an agent to make decisions for you if you are unable to. Unlike a living will which only covers end-of-life decisions, a power of attorney for health care decisions allows the agent to act at any time that you cannot make decisions for yourself.
We can help you determine which documents best suit your current needs, and help you clearly state your wishes in those documents. Please contact our Cincinnati office at (513) 815-7006, we look forward to hearing from you and helping you with these important planning steps.