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4 Tips for Estate Planning in Uncertain Times

October 30, 2020 | By Brant Cavagnaro, CFA®, CFP®
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Are you fearful about your finances during this time? COVID-19 and other current events have created financial uncertainty. While you might focus mainly on your investment portfolio, don’t forget about estate planning 101 tools like trusts, wills, power of attorneys (POAs), and advance directives.

These items and other more advanced strategies like Grantor Retained Annuity Trusts (GRAT)s could help you properly transfer wealth to your beneficiaries and minimize estate/gift taxes.

This Insight will cover the following 4 tips for estate planning in an uncertain market:

  1. Update wills and trusts
  2. Consider POA and advanced directives
  3. Look into gifting
  4. Look into Grantor Retained Annuity Trusts

1. Update wills and trusts

The current pandemic is a reminder of our own mortality and the importance of making sure one knows where their estate documents are and that they are up to date. There is no set rule for updating these documents, but a review every five years with a lawyer and/or financial professional could be helpful. These professionals will be able to identify blind spots in your documents and keep you updated on new laws. Estate planning laws change constantly, with some years bringing bigger changes than others.

For example, 2017 was a pivotal year with the implementation of the Tax Cuts And Jobs Act. This Act drastically altered unified credit limits and income taxes. Other changes were made in 2019 upon the passing of the SECURE Act.

Some events that require mandatory updates are marriage, divorce, death, serious illness (such as hospice or cancer), large business gains or losses, and bankruptcy.

One simple, yet overlooked estate planning 101 tip is to ensure your accounts have the right beneficiary designations. For instance, you likely may have named your spouse as beneficiary of your 401(k) — in the event of a divorce, you’d need to change this beneficiary designation to prevent your ex-spouse from receiving the 401(k) when you die!

2. Consider POA and advanced directives

Powers of attorney (POAs) and advanced directives (healthcare power of attorney), are powerful documents that let trusted third parties (agents) make financial or medical decisions on your behalf, respectively. They can be useful if you’re incapacitated or unable to make important decisions.

What are the types of POAs?
There are two main types of POAs: durable and springing. Durable powers of attorney are created when you’re able to make key decisions and aren’t incapacitated. These are valid once you sign the paperwork, and continue to be effective if you should become incapacitated. A springing POA “springs” into action and only becomes effective if you’re incapacitated. Regardless of the type of POA, ensure that your agent is a trustworthy, financially stable individual.

Healthcare directives let your agents make important healthcare choices like life support, organ donation, dialysis, CPR, and antibiotic dosage on your behalf. Due to COVID-19, healthcare is at top of mind for most people. It is a good idea to make sure your documents are easily accessible and reflect current standards in medicine.

3. Look into gifting

Gifting, whether it be to a charity or a loved one, can be rewarding and support the causes that are most important to you. It can also be beneficial for income tax and estate planning purposes. For example, gifting strategies can be used when planning for higher education or medical costs.

How to give a tax-free gift
Currently, you can give each person $15,000 per year gift tax-free. Any amounts above this threshold would be subject to gift taxes, which reduce your lifetime unified credit. The unified credit refers to the total amount that you can give over your lifetime without incurring Federal estate or gift taxes.

How to gift to a 529 plan
You can gift your child up to $15,000 per year, which can be used to create a 529 plan. A 529 plan is a tax-advantaged investment account that lets you invest tax-free if you use the distributions for qualified educational expenses.

The 5-year rule lets you front-load 529 contributions by letting you contribute up to $75,000 in one year to a 529 plan. You must treat this contribution as if it were spread over 5 years.

Reasons to not gift to a 529 plan
Families who have particularly high net worth may be well advised to not use their $15,000 annual gift for 529s and instead make annual gifts to a Trust for their child and the money could be used for many purposes besides education. When it comes time to pay for your child’s tuition, make the payment out of your own funds. If you pay the university directly, then those amounts would be excluded from the annual gift and unified credit limits. Also, this estate planning 101 concept applies if your child has high medical bills and you pay the medical provider directly.

4. Look into Grantor Retained Annuity Trusts

Decreasing asset prices and low-interest rates could be good reasons to look into establishing a GRAT, which is more complex than typical estate planning 101 tools. With a GRAT, you’d irrevocably gift an asset to a trust which would pay you (the donor) a stream of income or annuity for a predetermined number of years. 

So why a GRAT? In simple terms, the potential benefits are:

  1. That any growth (over the pre-determined term of the trust) on the principal amount above a hurdle rate known as the §7520 rate is removed from the grantor’s estate and left to the grantor’s heirs.
  2. If structured the right way, this ‘gift’ of appreciation to the heirs can be done with reduced or potentially zero gift and estate tax implications, unlike with a traditional gift above the $15,000 annual exclusion rate.

Why now? Since the §7520 rate is tied to interest rates, the §7520 rate is also historically low at only 0.4% (as of September 2020). In other words, with the hurdle rate so low, there is a greater likelihood that the growth on the principle amount put into the trust will exceed the hurdle rate, thereby allowing a grantor to potentially maximize the amount of appreciation removed from his/her estate and gift to the next generation.

Of course, a low hurdle rate and lower current asset prices doesn’t guarantee that there will be appreciation over the duration of the trust. Should that scenario occur, at the end of the trust term, the assets that the grantor donated to the GRAT would simply remain in the donor’s estate, and/or could even be rolled into a new GRAT. The downside is that you will not re-coop the costs involved in setting up and administering the trust. Additionally, if the Grantor passes away prior to the end of the trust term, the assets would also revert to his/her estate.

While following the above tips will put you on the right track, estate planning is a complex process that requires substantial time and expertise. A financial advisor can assist with tackling unforeseen challenges, making informed decisions, and most importantly, help secure your ideal financial future for you and your family. It is especially recommended that you speak to your financial advisor and estate attorney to understand the complex nuances of a GRAT and determine if it is right for you.

Ready to take the next step with your estate plan? Schedule a complimentary 30-minute consultation with one of our financial planners today!


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