The current global pandemic has had an impact on every one of us in one form or another. The short-term focus has naturally been on health and safety along with immediate financial issues. Have I lost my job either permanently or temporarily? Is my business closed or struggling? Do I have the resources I will need to get through the crisis? While it is a natural reaction to address the most urgent matters, it is also a time to consider how this crisis should be a call to action to get your personal, legal, and financial affairs in order. It is a critical time to address your estate plan and it is of vital importance to FOCUS ON WHAT COUNTS to ensure that your plan reflects your wishes and goals for you and your family.
The items below may be prudent first steps to consider.
The first question we ask when discussing estate planning is if there is an estate plan in place. If a client does not have an estate plan, then consideration should be given to addressing this immediately. Not having a plan could leave one’s affairs in disarray and require additional, costly professional assistance. Dying without a will leaves the decedent with no control as to who inherits his or her assets, as the applicable state’s intestacy laws will then control the disposition of the estate. In addition, without a will, the appointment of guardians for minor children and a personal representative to administer the estate will be in the hands of a probate court. Furthermore, the lack of a plan could lead to potential disputes and possibly litigation.
If an estate plan is in place, when was the last time it was reviewed? This would include all wills, trusts (of any kind), powers of attorney, and health care proxies.
Does your estate plan successfully address all of the personal, legal, and financial considerations given your current health – both physically and financially? Also, does it reflect the current physical and financial health of your heirs?
Does your family know where your documents (and passwords where needed) are located?
Are your beneficiary designations on your life insurance policies and retirement accounts up to date?
Have you designated someone to act on your behalf, in the event you become incapacitated?
Do all of your children who are 18 years or older have health care proxies and power of attorney documents in place?
As part of the review of your overall estate plan, important components that you can address relatively quickly with your estate planning attorney, if necessary, are your living wills and healthcare proxies (sometimes it is a combined document). Many such standard documents contain an absolute prohibition on intubation, which people presumably would not have intended in the current environment for treating coronavirus. If this is the case, the document can be revised to contain more reasonable prohibitions on intubations, given the current circumstances.
While it is always important to have an estate plan in place, the current environment creates a unique opportunity for discussion in considering sophisticated estate planning for the following reasons:
Therefore, it is imperative to consider the immediate opportunity to move highly-appreciated assets out of your estate at lower values, thereby reducing the amount of lifetime estate and gift tax exemption used.
If a client believes the economic downturn is temporary, gifting should be considered as soon as possible. Those who wait until the end of the year to make annual exclusion gifts of shares of stock may be doing so at a higher value, resulting in less value passing to the intended recipient.
The opportunity to gift interests in the family business to the next generation can be extremely attractive with lower valuations and interest rates. These gifts can pass wealth to the next generation and utilize valuation discounts to reduce the value of the gift for gift tax purposes. This gifting plan also offers a pathway to discounting the value of the remaining shares in the hands of the older generation, which could lower the estate tax impact upon death.
The following can potentially be effective tools to be considered in planning, depending on the client’s particular circumstances:
Grantor Retained Annuity Trusts
Sale of Business Interest to Intentionally Defective Grantor Trust (IDGT)
If an individual is in a lower tax bracket because his or her income is down substantially, he or she may want to consider converting a Traditional IRA to a Roth IRA. The amount the individual chooses to convert will be taxable as ordinary income, but perhaps at rates lower than the owner may see again. The current tax cost of recognition may be offset by the potential for tax-free growth within the Roth IRA as future distributions are not taxed.
Under the CARES Act, Required Minimum Distributions (RMDs) are suspended for 2020. For distributions that have already occurred, it may be possible to roll them back, if it has been less than 60 days since the distribution.
Under the Secure Act enacted at the end of 2019, the age requirement for RMD’s was pushed back from April 1st of the year after an individual reaches age 70 ½ to instead April 1st of the year after an individual reaches age 72. This change applies to individuals who turn 70-1/2 after January 1, 2020. Accordingly, under the new rules, if an individual turned 70 on or after July 1, 2019, he or she does not have to take an RMD for 2019, but instead, must take the first RMD for 2021 (the year the individual turns 72) by April 1, 2022.
There are also new provisions under the Secure Act relating to non-spousal beneficiaries of qualified retirement plan assets that should be addressed when considering one’s estate and income tax plan.