Complexities of Determining Who is a Descendant

August 28, 2023

Not using specific names and terms open to definition could significantly impact who might inherit from your estate or trust. The complexities of determining who is a descendant can make beneficiary distribution more difficult. There are situations where some people may choose to deliberately restrict or expand the definition of the group, which might be included in these definitions, explains the article “Who Is Your Descendant: Intentional Limitations Or Broadening Of Definitions In Your Will Or Trust” from Forbes. For some people, creating a new role of a special trust protector who holds a limited or special power of appointment to determine who should be included or removed from the definition of “issue” or descendant is worth considering.

What might arise if the wish only considers children descendants if they belong to a particular faith? Is this type of legal restriction permitted? Clauses limiting heirs to members of a particular faith or a sect within the faith may raise questions about the constitutionality of the clause. Potential heirs excluded under such provisions have argued that a religious restriction on marriage violates constitutional safeguards under the Fourteenth Amendment protecting the right to marry.

Courts have held clauses determining if potential beneficiaries qualify for distributions based on religious criteria enforceable, if the potential beneficiaries have no vested interest in the assets. Another court upheld the provisions of a will conditioning bequests to their sons as long as they married women of a particular faith.

These decisions are narrowly tailored to the specific fact patterns of the cases, since individuals are generally allowed to disinherit an heir with the exception of a spousal elective share or a community property interest. The courts have reasoned that the restriction is not on the heir to marry but on the right of the testator to bequeath property as they wish.

An alternative approach to addressing the complexities of determining who is a descendant is to create a single trust for all heirs, mandating the funds in the trust be used for the cost of religious education, attending religious summer camps, taking relevant religious studies, religious institutional membership, etc. The trust could use the assets to encourage religious observance. However, it may only partially address the question. What about the remainder of the assets—should it be used for all heirs regardless of religious affiliations?

An estate plan compliant with Islamic law may involve a different determination of who is a descendant. The Sharia laws of inheritance are similar to the intestacy statute. One-third of the estate may be distributed as the decedent wishes. However, the remainder must be distributed as mandated under Islamic law. The residuary inheritance shares after the first third are restricted to Muslim heirs. Additional laws prescribe specified shares of the estate to be distributed to certain heirs, depending upon which heirs are living at the moment of the decedent’s death.

Suppose you or a family member is lesbian, gay, bisexual, transgender, or queer (LGBTQ). The law may not address the unique considerations regarding who may be considered a descendent. Special steps may be needed to carry out your wishes as to who your descendants are. What if you view a particular child as your own, but share no genetic material with a child? Children may be adopted or born through surrogacy, so neither parent nor only one parent is biologically related to the child. While some states may recognize an equitable parent doctrine, this may be limited and not suffice to protect the testator.

The many new complexities of determining who is a descendant are complicated and evolving. Changing family structures and religious beliefs based on different values all impact estate planning. A special trust protector may make decisions when uncertainty arises from provisions in a will designed to carry out the wishes. This is a relatively new role and not permitted in some states, so speak with your estate planning attorney to protect your wishes and heirs. If you would like to learn more about beneficiary designations, please visit our previous posts.

Reference: Forbes (Aug. 4, 2023) “Who Is Your Descendant: Intentional Limitations Or Broadening Of Definitions In Your Will Or Trust”

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How an Intentionally Defective Grantor Trust Protects Wealth

August 23, 2023

Most parents want their children to inherit as much wealth as possible, which drives their focus to shield heirs from unnecessary taxes when they inherit. As of this writing, federal gift and estate tax laws are very friendly for building generational wealth, says a recent article from Kiplinger, “One Way to Secure Your Child’s Inheritance in an Uncertain Tax Future.” The article discusses how an Intentionally Defective Grantor Trust protects wealth.

However, this is temporary, as the Tax Cuts and Jobs Act will expire in 2025. When it does, gift and estate tax exemptions will be cut in half. How can you transfer the most wealth possible to heirs? The best tool is often the Intentionally Defective Grantor Trust or IDGT.

The incentive to take advantage of the current tax laws is even greater for those living in one of the 17 states with their own estate or inheritance taxes, especially considering those states’ exemptions are considerably lower than the federal estate taxes.

The IDGT, despite its name, is not at all defective. Removing assets from an estate lowers or eliminates taxation on the estate and heirs. By selling assets from the estate to a grantor trust, they are no longer subject to estate taxes. The trust then pays an installment note over a number of years, which is designated when the trust is created.

So, why is it called Intentionally Defective? The term refers to the fact that the trust is not responsible for paying its own income taxes. Instead, they pass to the grantor or person who created the trust. Consider an estate with $20 million placed in an IDGT. This might generate a $500,000 tax bill, paid by the grantor. This accomplishes two things: The $500,000 paid in taxes is removed from the estate, lowering the estate’s value and the estate tax. Second, the trust is not responsible for paying income taxes on the appreciation of assets so that it can grow faster. Since the trust is not subject to estate taxes, any appreciation of assets inside the trust won’t add to any estate taxes due upon the grantor’s passing.

IDGTs and S Corporations. Many family-owned businesses are S-corporations that shield personal assets from business-related liabilities. If someone successfully sues the business, any judgment will be placed on the business, not the family’s assets. S corp owners hold shares in the corporation, which can be transferred to the IDGT. When family members move their stock into the trust, business ownership is transferred to heirs free of estate tax. If the business grows between the time the trust is established and your death, the growth happens separately from the estate, so there is no estate tax implication to continued business growth.

What’s the downside? The IDGT removes assets from the estate and provides cash flow in installment payments to fund retirement. However, if you die before the installment term ends, the trust pays out the rest of what it owes to your estate, which increases the value of your estate and the estate taxes owed. However, there’s a remedy for this. The IDGT can be set up with a self-canceling installment note or SCIN. The SCIN automatically cancels the trust’s obligation to pay installments upon your death.

Remember that you will be responsible for the trust’s tax liability, so don’t gift so many assets to the trust that you’re scrambling to pay the tax bill.

IDGTs are complex and require the help of an experienced estate planning attorney to ensure that they follow all IRS requirements. He or she will explain how an Intentionally Defective Grantor Trust protects wealth and if it is a useful planning tool for your family situation. If you would like to learn more about Trusts, please visit our previous posts.

Reference: Kiplinger (July 28, 2023) “One Way to Secure Your Child’s Inheritance in an Uncertain Tax Future”

When Life Insurance becomes Taxable

August 22, 2023

A life insurance policy benefit is usually paid to the beneficiary in a lump sum, which isn’t taxable. However, there are situations when life insurance becomes taxable.

A life insurance beneficiary may receive the policy amount in installments. If so, the benefit is placed into an account that can accrue interest. While the beneficiary won’t pay taxes on the benefit itself, they’ll be responsible for paying income taxes on any interest accrued.

Fed Manager’s recent article, “When Is Life Insurance Taxable? Four Scenarios to Consider,” gives the example of Jenny being the beneficiary of a $500,000 death benefit that earns 10% interest for one year before being paid out. She’ll owe income taxes on the $50,000 in interest growth.

The death benefit of a life insurance policy is usually paid directly to the beneficiaries named. If the benefit is included in the estate, it’s subject to potential federal and state estate taxes if it is above the tax exemption amount. About a dozen states have state estate taxes with exemptions, so if the death benefit amount is above these exemptions, any amount above the threshold would be subject to estate taxes.

A life insurance death benefit would be subject to taxes in the event of a taxable gift. This happens when three people serve three different roles in connection to the policy:

The policyholder is the individual who bought the policy and is responsible for payment of the premiums
The insured is the person whose life is covered by the policy and
The beneficiary who receives the death benefit when the insured passes away.

Assume that Tommy buys a life insurance policy for his wife, Tilly. They designate their son Teddy as the beneficiary. If Tilly dies and Teddy receives the death benefit, the IRS considers this a taxable gift from Tommy to Teddy because Tommy was the policyholder. In this situation, Tommy may have to pay gift taxes for any benefit amount that exceeds federal gift tax exemption limits.

The annual gift exclusion is $17,000 per individual. The lifetime limit is $12.92 million per individual. (These “numbers” are for 2023 and are adjusted for inflation.) To avoid this, Tilly could purchase and make payments on a policy herself, with Teddy still named as the beneficiary. Work closely with your estate planning attorney and financial advisors to understand when a life insurance policy becomes taxable and how to avoid the unnecessary financial headache. If you would like to learn more about life insurance and estate planning, please visit our previous posts.

Reference: Fed Manager (April 25, 2023) “When Is Life Insurance Taxable? Four Scenarios to Consider”

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Important to Evaluate your Planning before a Second Marriage

August 7, 2023

Second marriage, goes the saying, is the triumph of hope over experience. It’s a happy event for everyone, but different from the first time around. You might have created an estate plan during your first marriage. Still, chances are your life is a lot more complicated this time, especially if you both have children from prior marriages and more assets than when you were first starting out as a young adult. It is important to evaluate your planning before a second marriage. This is why a recent article from The Bristol Press is aptly titled “Plan your estate before you remarry.”

Here are some pointers to protect you and your new spouse-to-be:

Take an inventory of all assets and liabilities. This includes assets and debts, life insurance policies, retirement plans, credit card debt and anything you own. It’s important to be open and honest about your debts and assets, so that both people know exactly what they are marrying. Once you are married, you may be liable for your partner’s debts. Your credit scores may be impacted as well.

Decide how you are going to handle finances. Once you know what your partner is bringing to the marriage, you’ll want to make clear, unemotional decisions about how you’ll address your wealth. Are you willing to combine all of your assets? Do you want to keep your investment accounts separate?

For example, if one person is selling a home to move into the home owned by the other person, what costs, if any, will they contribute to the cost of the house? If one person has significant debt, do you want to combine finances or make joint purchases? These are not always easy issues. However, they shouldn’t be ignored.

Decide what you want to happen when you die. You and your future spouse should meet with an experienced estate planning attorney to create a will, Power of Attorney, Health Care Proxy and other documents. This lets you map exactly where you want your assets to go when you die. If there are children from prior marriages, you’ll want to ensure they are not disinherited when you die. This can be addressed through a number of options, including creating a trust for your children, making them beneficiaries of life insurance policies, or giving children joint ownership of property.

Even if there are no children, there may be family heirlooms or items with sentimental value you want to keep in the family, perhaps passing to a cousin, nephew, or niece. Discuss this with your future spouse and ensure that it’s included in your will.

Meet with an estate planning attorney. You should take this step even if you don’t have many assets. If you have children, it’s even more important. You’ll want to update your will and any other estate planning documents. If you have significant assets, you may decide to have a prenuptial or postnuptial agreement. The estate planning attorney will also help you determine whether you need a trust to protect your children.

If you had planning done in the past, it is important to sit down with an estate planning attorney to evaluate it in before to a second marriage. If you would like to learn more about estate planning for blended families, please visit our previous posts.

Reference: The Bristol Press (July 14, 2023) “Plan your estate before you remarry”

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Estate Tax Exemptions available for Married Couples

August 1, 2023

Estate tax avoidance and mitigation are central considerations for financial security for surviving spouses. Estate tax exemptions are available for married couples to help ensure a surviving spouse is cared for. According to a recent article from The National Law Review, “Basic Estate Tax Planning for Married Couples: Opportunities For Use Of Estate Tax Exemptions,” the first spouse may leave property of unlimited value to the surviving spouse without incurring any estate tax upon the death of the first spouse. This unlimited marital deduction shields assets from estate taxes and helps support the surviving spouse. Assets can be distributed directly to the surviving spouse or through an indirect transfer to a qualifying trust for the surviving spouse’s benefit.

Most couples use trusts for asset protection, most commonly for the preservation of assets for children from a prior marriage and asset management help for the surviving spouse. The marital deduction is a valuable estate tax avoidance tool for married couples.

However, estate tax law is not generous for non-spouse beneficiaries. Legislation passed in 2013 allowed individuals to leave assets totaling $5 million in value (indexed to inflation since 2011) to non-spouse, non-charitable beneficiaries and then doubled this amount following the Tax Cuts and Jobs Act to $10 million. However, if additional legislation is not passed before the sunset date of January 1, 2026, this amount will be cut in half.

In 2013, Congress made the portability of a spouse’s estate tax exemption permanent. This allows the surviving spouse to capture and use the first decedent spouse’s remaining estate tax exemption and the surviving spouse’s own exemption. To capture this estate tax exemption, an estate tax return must be filed in a timely manner after the death of the first spouse.

If spouses have a total estate exceeding available exemptions, they may use what is known as the “Credit Shelter Trust Planning” or “Optimal Marital Deduction Planning.” A trust is established, funded with assets of the first spouse to die, to use the spouse’s estate tax exemption. Assets in the trust are available to the surviving spouse for life but are not included in the survivor’s taxable estate upon their death. The goal benefits the surviving spouse and reduces any estate tax to maximize benefits for the children and grandchildren.

Another frequently used tool is the “disclaimer” plan, which allows the survivor to move certain assets into a trust for the survivor’s benefit rather than receiving assets directly. For married couples with estates valued at less than their available estate tax exemptions, a disclaimer plan provides the “all to spouse” plan and the option to implement a tax-advantaged trust. All assets are left to the survivor; then, based on the value of the first spouse’s estate, the surviving spouse may choose to disclaim the first spouse’s assets and divert them to a tax-advantaged trust.

Married couples should take advantage of the estate tax exemptions available to them to help protect a surviving spouse financially. It must be noted that there is no “one-size-fits-all” plan for married couples who wish to care for their surviving spouse, children, and grandchildren. It’s important to understand the basic estate tax avoidance or mitigation tools to create an estate plan to consider the couple’s planning goals and values. An experienced estate planning attorney can create a comprehensive estate plan to suit each family’s needs. If you would like to learn more about the estate tax, please visit our previous posts.

Reference: The National Law Review (June 24, 2023) “Basic Estate Tax Planning for Married Couples: Opportunities For Use Of Estate Tax Exemptions”

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The IRS has issued a Ruling that will impact Grantor Trusts

July 18, 2023

The IRS has issued a ruling that will impact grantor trusts. Completed gifts to grantor trusts will not receive a Section 1014 step-up in basis upon the grantor’s death. According to the IRS, Revenue Ruling 2023-2 concludes this is the appropriate result because such property is not acquired from a decedent for purposes of Section 1014(a) of the IRC of 1986 as amended in Section 1014(b) of the Code, as reported by Reuters in the article “IRS confirms that completed gifts to grantor trusts are not eligible for Section 1014 step-up.”

Upon their death, assets received from a decedent are afforded a basis step-up under Code Section 1014. These are assets usually included in the taxable estate for estate tax purposes. However, before the Ruling, many practitioners wondered whether the assets of an irrevocable grantor trust would be eligible for the same benefit.

The irrevocable “grantor trust” is an anomaly under the Code. A “grantor trust” is not recognized as a separate taxpayer for income tax purposes during the lifetime of the creator (usually referred to as the “grantor” or the “settlor”). All income earned during the grantor’s lifetime is reported on the grantor’s individual income tax returns. However, if the grantor trust is irrevocable and if transfers to the trusts are deemed to be completed gifts, then when the grantor dies, the assets of the grantor trust are not included in the taxable estate of the grantor for estate tax purposes. Thus, the grantor trust is deemed to be owned by the grantor for income tax but not estate tax. This led to uncertainty over the eligibility of the grantor trust assets for the Code Section 1014 basis step-up on the grantor’s death.

“Intentionally defective” grantor trusts are widely used, where the grantor is treated as the owner of the grantor trust for income tax purposes and is responsible for paying the income taxes incurred by the trust. The payment by the grantor of the grantor trust’s income taxes effectively lets the grantor make additional tax-free gifts to the grantor trust and increases the grantor trust’s rate of return.

However, since the grantor trust is not a separate taxpayer for income tax purposes, there’s no recognition of gain on the sale or interest income on the note. The interest rate on the note can be the lowest rate which will not cause adverse tax consequences. If the interest sold to the grantor trust grows faster than the applicable interest rate, the excess growth passes, transfer-tax-free, to the grantor trust.

The “Sale Technique” has been used many times since the IRS released Revenue Ruling 83-15, supporting the position that a property sale from a grantor to a grantor trust is not a taxable event. If no gain is recognized on such a sale, the grantor trust takes a carryover basis in the grantor’s property.

With the release of Revenue Ruling 2023-2, how should estate planning attorneys advise their clients? There are a few strategies to consider:

Power to Exchange Assets. Many grantor trusts allow the grantor to substitute trust property for other assets of equivalent value. If a grantor trust has an asset with a low basis, during the grantor’s lifetime, they could exercise the Substitution Power to exchange the low-basis asset for property with a higher basis but of equal value. The low basis asset now becomes part of the grantor’s estate and, as long as the grantor retains it until their death, will be eligible for the Code Section 1014 basis step-up.

Second Sale to Trust. If the trust agreement establishing the grantor trust doesn’t grant Substitution Power, the grantor could purchase low-basis assets from the trust for high-basis assets. The grantor may engage in a series of sales to ensure appreciated stock continues to cycle back to the grantor, so the estate may take advantage of the Code Section 1014 basis step-up.

Granting a General Power of Appointment. In certain situations, it may be possible to grant a testamentary general power of appointment over a grantor trust to a parent or other elderly relative, the “Powerholder.” The grant of a general power of appointment results in the assets subject to such power being includable in the estate of the Powerholder for estate tax purposes. The trust assets in the Powerholder’s estate will then be eligible for the Code Section 1014 basis step-up upon the death of the Powerholder.

The grant of the general power of appointment should not exceed the Powerholder’s available estate tax exemption and only apply to assets with built-in gain. This strategy will require consideration of the Powerholder’s creditors and any possible risks to the grantor trust.

The IRS has issued a ruling that will impact grantor trusts. These are complex strategies requiring the help of an experienced estate planning attorney. If you would like to learn more about irrevocable grantor trusts, please visit our previous posts.

Reference: Reuters (June 21, 2023) “IRS confirms that completed gifts to grantor trusts are not eligible for Section 1014 step-up”

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Only leave Assets to Minor through a Trust

July 12, 2023

The only way to leave assets to a minor is through a trust. Otherwise, the assets can create a tangled mess for heirs. A recent article from yahoo! finance, “Can I Name a Minor as a Beneficiary?” explains how to address this fairly common issue. An estate planning lawyer will be able to help you set up the right kind of trust.

Property and estate laws are all state specific, with each state having its own laws for property rights, insurance, and estate laws. Even the age at which a person becomes a legal adult varies by state. A local estate planning attorney will be needed to ensure that your wishes comply with your state’s laws.

Four primary documents are used to name a beneficiary:

Wills: the beneficiary is someone named to receive assets from the estate.
Life Insurance: the beneficiary is the person who receives a payment from the life insurance policy after the policyholder’s death.
Retirement Accounts: the beneficiary receives the assets in the account after the account owner’s death.
Trusts: the beneficiary receives assets from the trust based on the terms of the trust and the trustee’s management.

Legal minors are children who have not yet reached their state’s age of majority. Most states set the age of majority at 18, although a handful of states use ages 19 or 21 when a child becomes a legal adult. Legal minors may not take legally binding actions, including signing enforceable contracts or participating in financial transactions. They also may not inherit directly through a will or receive assets through a life insurance policy or retirement account.

However, minors may be beneficiaries of a trust, since the trust’s beneficiaries do not participate in contractual or financial transactions. The trustee manages the assets in the trust and distributes them per the trust’s terms. This can range from making college tuition payments or sending assets to the beneficiary in a simple property transfer.

Most people expect that their children won’t inherit from a will or a life insurance policy for many years,.However, what happens if the parent dies while the child is still underage? If this happens, the assets are distributed to an entity that can legally receive the property and hold it on the minor’s behalf until they reach the age of majority.

There are typically three scenarios:

Legal Guardian. The guardian receives the assets and holds them on the minor’s behalf until they reach legal age.

Custodial Account. Assets are placed into an account, and a legal adult is appointed to manage the assets until the minor reaches the age of majority. This varies depending on the nature of the assets and the custodian. A parent or guardian typically acts as the custodian. However, the court will name a guardian if there is no parent or guardian.

Trust. Assets are placed in trust on behalf of the legal minor. A legal adult is named the trustee to manage the trust, with the legal minor named the beneficiary. If no trust has been created, a probate court oversees the creation of a trust and distributes all of the assets when the child reaches majority.

IRA or Retirement Accounts. IRAs or retirement accounts are treated differently. Under the SECURE Act, a minor may only take assets from an IRA and must leave the money in place once they turn 18. Then they must take all assets out within ten years.

Leaving the distribution of assets to a beneficiary without proper planning could place a minor’s financial well-being at risk. Only leave assets to a minor through a trust. A court-appointed custodian is probably the last way any parent wants their child to receive assets. Parents with minor children are advised to meet with an estate planning attorney to ensure that their children are protected should unexpected events occur, such as the death of one or both parents while the child is not yet of legal age. If you would like to learn more about asset distribution, please visit our previous posts.

Reference: yahoo! finance (June 19, 2023) “Can I Name a Minor as a Beneficiary?”

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Dying Intestate can leave Family financially Crushed

July 11, 2023

Dying intestate can leave your family financially crushed. Dying intestate can mean either that you didn’t have a will or that you had one, but it was held to be unenforceable for some reason.

Intestate inheritance is governed by state law. Every state has its own set of statutes that stipulates who inherits and in what order. These laws are called the laws of succession or the laws of inheritance. The Uniform Probate Code is a template for inheritance laws, and many states have based their own code on the UPC.

Yahoo’s recent article, “What Happens If I Die Without a Valid Will?” explains that the probate courts govern intestate estates. An intestate estate goes through the same three-step process as a testate estate. Attorneys get paid first; debts, taxes, administrative fees and other legal liabilities are paid second, then the heirs receive their portions.

Most state probate codes distribute assets based on the closeness of relation to the deceased. The close relatives inherit before distant relatives in “tiers” of inheritance. Most states’ laws say that intestate succession will proceed in the following order:

Spouse
Legal descendants (i.e., children)
Parents of the decedent
Siblings of the decedent
Grandparents of the decedent
Nieces, nephews, aunts, uncles and first cousins.

As a general rule, any given category of an heir will inherit the entire estate, which is divided into pro-rata shares among all heirs; for example, if an individual died intestate with no spouse, children, or surviving parents, but two sisters and several aunts and uncles. The two sisters would each receive half of the estate, and the aunts and uncles would get nothing.

The big exception to this rule is spouses. In most cases, a spouse will automatically inherit all non-marital assets. However, the Uniform Probate Code does have exceptions for heirs, such as parents and descendants. This is important when it involves children to whom the surviving spouse is not related.

If someone dies intestate and they have no legal living heirs, their assets go to the state. Dying intestate can leave your family financially crushed. The simplest way to avoid this is by working with an estate planning attorney to craft a Will or Trust. If you would like to learn more about drafting a will, please visit our previous posts.

Reference: Yahoo (January 27, 2023) “What Happens If I Die Without a Valid Will?”

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Review Beneficiary Designations after Life Changes

June 29, 2023

Beneficiary designations guarantee that certain assets are transferred efficiently at a person’s passing. Assets with designated beneficiaries transfer automatically to the named beneficiary, no matter what’s in the original asset owner’s will or trust document instructions. It is vital that you review beneficiary designations after major life changes, such as a marriage, birth or death.

Inside Indiana Business’s recent article, “Who are your beneficiaries?” explains that because the new owner is determined without the guidance of a will document, assets with designated beneficiaries are excluded from the decedent’s probate estate. The fewer assets subject to probate, the less cost and time associated with settling the estate.

Many different types of assets transfer via beneficiary designation at the death of the original owner. These include retirement accounts (IRAs, Roth IRAs, 401(k)s, 403(b)s, 457(b)s, pensions, etc.), life insurance death benefits and the residual value of annuities. Bank and brokerage accounts can also be made payable on death (POD) or transferable on death (TOD) to a named beneficiary, if desired. POD and TOD designations bypass probate–like beneficiary designations.

The owners can name both primary and contingent beneficiaries. The primary beneficiary is the first in line to inherit the asset. However, if the primary beneficiary predeceases the owner, the contingent beneficiary becomes the new owner. If there’s no contingent beneficiary listed, the asset transfers to the owner’s estate for distribution. There’s no restriction on the number of beneficiaries who can inherit an asset.

Charities can also be beneficiaries of assets. Because a charity doesn’t pay income tax, leaving a taxable retirement account or annuity to a charity will let 100% of the value go toward the charity’s mission. When an individual inherits, income tax may be due when the funds are distributed.

A trust can also be named beneficiary of an asset. This strategy is often employed when minors or those with disabilities are beneficiaries. Designating a trust as a beneficiary can be complex, so do so with the advice of an experienced estate planning attorney.

Simply naming an estate as a beneficiary is typically not a good strategy because this will subject the asset to probate, which can result in unfavorable income tax outcomes for retirement accounts.

When no beneficiaries are named, the owner’s estate will likely become the default, which leads to probate.

Take time to review your current beneficiary designations to be sure they reflect current wishes. Review these beneficiary designations every five years or after major life changes (marriage, birth, divorce, death).

Whenever you name or change a beneficiary, verify that the account custodian or insurance company correctly recorded the information because errors are problematic, if not impossible, to correct after your death. If you would like to learn more about beneficiaries, please visit our previous posts.

Reference: Inside Indiana Business (June 5, 2023) “Who are your beneficiaries?”

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LLCs can be a useful Tool in your Estate Planning

June 28, 2023

LLCs can be a useful tool in your estate planning. Limited liability companies, or LLCs, are used in estate planning to achieve estate tax savings and consolidate asset management, according to a recent article, “Estate Planning With Limited Liability Companies: Transfers of Business Interests as a Planning Opportunity,” from The National Law Review.

In many cases, the LLC is used as a business entity to facilitate gifting or transfers to children, often at discounted values, reducing the value of the donor’s assets, ultimately subject to gift and estate taxation. There are also non-tax benefits, as a properly structured LLC insulates owners from liability and provides an organizational control mechanism.

As a “manager-managed” entity, the management functions and authority over the LLC rests in designated or elected managers, as opposed to owners, also known as “members.” Separating management from ownership transfers some of the asset’s economic benefits, while retaining control over operations. Limiting managerial or voting rights also justifies using valuation discounts for the membership interests who lack control over the company, presenting a tax-planning opportunity.

An LLC offers several benefits:

A streamlined method of transferring ownership
Creating a structure for centralized management, control, and succession
Preserving family ownership through rights of purchase and first refusal
Establishing procedures to resolve internal family disputes
Gaining protection of LLC assets from claims asserted against owners
Gaining protection of owner assets from claims asserted against the LLC

Significant tax savings can be achieved through lifetime gifts of LLC interests because of valuation discounting and removing future appreciation from the donor’s estate. In addition, if transfers are made to trusts for the children, it may be possible to achieve even further benefits, including increased protection against lawsuits, dissolving marriages, and future estate taxes.

These are complex transactions requiring the knowledge of an experienced estate planning attorney and careful vetting by tax advisors. One downside to lifetime gifting: unlike assets passing as part of an estate, gifted assets do not receive a basis adjustment for income tax purposes at the time of the donor’s death. Another downside is that the donor generally cannot benefit economically from the assets after they are transferred. However, if the donor is concerned about divesting themselves of the transferred assets and the income, the transfer could be structured as a sale rather than a gift to provide increased cash flow back to the transferor.

A final note: if the LLC is not operated consistently with the entity’s non-tax business purposes, it may be vulnerable to attack by the IRS or third parties, undermining its benefits for estate tax planning and limited liability protection. The entity must be managed to support its valid business purpose as a legitimate enterprise. Remember, LLCs can be a useful tool for your estate planning, but only if it is properly created and maintained. If you would like to learn more about LLCs and business planning, please visit our previous posts.

Reference: The National Law Review (May 19, 2023) “Estate Planning With Limited Liability Companies: Transfers of Business Interests as a Planning Opportunity”

Category: Assets

Complexities of Determining Who is a Descendant

How an Intentionally Defective Grantor Trust Protects Wealth

When Life Insurance becomes Taxable

Important to Evaluate your Planning before a Second Marriage

Estate Tax Exemptions available for Married Couples

The IRS has issued a Ruling that will impact Grantor Trusts

Only leave Assets to Minor through a Trust

Dying Intestate can leave Family financially Crushed

Review Beneficiary Designations after Life Changes

LLCs can be a useful Tool in your Estate Planning

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