The Tools & Techniques of Estate Planning, 19th edition

Stephan Leimberg, L. Paul Hood , Edwin P Morrow

• Publisher: The National Underwriter Company
• Year: 2019
• ISBN:
  9781949506341
• Edition: 19
• Topic: Diritto
• Subtopic: Antitrust

In the course of a single year, estate planning has been directly affected by numerous, significant revisions to the law. When rules change, every estate planner must stay completely up-to-date with all the opportunities—and pitfalls—arising from the new legislation.

The Tools & Techniques of Estate Planning, 19th edition, applies the trusted Tools & Techniques approach to all aspects of modern estate planning, enabling you to:

• Help your clients plan every aspect of their estate, including tax, investment, insurance, and estate administration decisions
• Help your clients effectively preserve their assets under current law
• Handle a wide variety of estates and specific circumstances
• Save significant amounts of time with exclusive estate planning tools

In addition to everything that made the first eighteen editions of The Tools & Techniques of Estate Planning so effective and popular, this new edition delivers several enhancements including:

• Cover-to-cover updates to reflect changes in tax code that were enacted in the 2017 Tax Cuts and Jobs Act
• A new chapter on planning techniques that utilize the new Section 199A Qualified Business Income (QBI) deduction
• Significantly updated chapters on trust planning and income tax considerations in estate planning

This book features easy-to-understand, real-world examples from expert authors on what techniques are best suited for a wide variety of circumstances, and equally important advice on how to avoid future problems. Readers will learn the most important issues and planning techniques to help clients plan every aspect of their estate. In these pages you'll also find reliable, practice-based analyses of hundreds of recent cases and rulings, helping you assist your clients in making the best decisions for themselves and for their families.

OVERVIEW OF ESTATE PLANNING

CHAPTER 1

INTRODUCTION

Often, in order to encourage cooperation and full disclosure of pertinent data, it is necessary or helpful to explain to a client:

• what estate planning is

• who should be concerned with estate planning

• how the federal estate tax laws work

• the mistakes that are commonly made because of a lack of proper planning

This chapter is presented in plain language and in a format designed to help professionals present and highlight to the client the significance and urgency of estate planning. As part of this process, it is also important to explain to the client how assets actually pass. For example, not all assets pass by operation of the will. Many assets pass by virtue of titling or beneficiary designations. Therefore, it is important for the client to understand the importance of coordinating the disposition of these “automatically passing” assets with the overall estate plan.

ESTATE PLANNING PARADIGM SHIFT

The 2012 tax act changed the estate planning paradigm that had been in place since at least the 1976 tax act. The old estate paradigm was as follows:

• During life, use the applicable exclusion amount sooner rather than later.

• It was usually better to pay gift tax than estate tax because the gift tax was cheaper (tax-exclusive v. tax-inclusive).

• During life, transfer wealth as quickly as possible.

• Avoid estate tax inclusion at every generation.

• New basis at death is less important because of the relatively low capital gain tax rates, particularly relative to the higher federal estate tax rates.

• Income tax consequences are secondary.

• State of residence will not significantly affect the estate plan.

Since the 2012 tax act, the new paradigm, which represents a radical shift in thinking, is as follows:

• Estate planning is significantly more nuanced and complex and considers many more factors in the calculus.

• Clients should consider keeping as much low basis property as possible for the new basis at death.

• Paying gift tax doesn’t make nearly as much sense today. What if there is no estate tax tomorrow?

• “Zeroed-out” transfers and freezes should be utilized instead.

• Income tax considerations must be considered in tandem with potential transfer taxes.

• Tax basis management will be a crucial part of “estate planning”-swaps of high basis assets for low basis assets in grantor trusts.

• Estate tax inclusion can save more in income taxes and should be used if the income tax savings are greater than the transfer tax cost.

• State of residence will give rise to very different types of estate planning, as far as how active versus passive the planning is.

This new paradigm requires much more intellectual rigor, as the new paradigm is much grainier than the old paradigm and is, in places, directly opposed to what was sound advice just five years ago. Estate planners must adapt quickly to this new paradigm-until the next so-called permanent law change is enacted.

WHAT IS ESTATE PLANNING?

Estate planning is the process of planning the accumulation, conservation, and distribution of an estate in the manner that most efficiently and effectively accomplishes your personal tax and nontax objectives. Every estate is planned – either by the individual or by the state and federal governments. By your actions now, you can strongly influence, if not determine, what will happen when…

Controlled estate planning is a systematic process for uncovering problems and providing solutions in clients’ L.I.V.E.S. Planners should use this L.I.V.E.S. acronym to illustrate the seven major areas of estate planning and emphasize the significance and urgency of action to solve them:

1. Lack of liquidity: Insufficient cash to pay administrative costs including the costs of maintaining property, taxes, and other estate settlement expenses. A lack of liquidity can trigger a forced sale and result in the loss of an estate’s most precious assets at pennies on the dollar. In other words, if there is not enough cash in an estate to pay for the demands as they come due, the estate’s personal representative may be forced to sell the estate’s prime assets under “fire sale” conditions. Liquidity can also become a problem when considering retirement assets. While on a superficial level, retirement assets are both available and liquid, it is important to keep in mind that when distributions are made from retirement accounts, these distributions are taxed at ordinary income tax rates. In addition, these assets are also subject to estate tax at their full value. Therefore, if the estate and/or beneficiaries take distributions from these accounts in order to pay taxes or administration expenses, these distributions will be subject to income tax and incur a significant cost for using these funds.

2. Improper disposition of assets: When the wrong asset goes at the wrong time to the wrong person in the wrong manner, the result is often disaster. For example, picture the proceeds of $100,000 of group life insurance or a $500,000 pension plan being paid to a twenty-one year-old child. All too many estates contain property that will pass outright to a person who has little, if any, training, experience, or desire to properly invest and manage that asset. This is particularly true where a family-owned business is concerned. Problems can also arise when trying to access these funds. For example, when distributions are payable directly to a minor, some states require that a court appoint a guardian when the assets passing to the minor exceed a certain amount. This creates additional costs and paperwork in order to access these assets.

3. Inflation (need to both diversify and inflation-proof portfolio): Many individuals have placed all their financial eggs in one basket or have not considered the diminished and diminishing purchasing power of life insurance or a retirement fund that may have been adequate only four or five years ago. The ravages of inflation and risk of placing all of a client’s family financial security in one investment (or business) must be factored into the estate plan.

4. Inadequate income or capital at retirement/death/disability: Planners and clients often forget that cash demands for survivors’ food, clothing, shelter, and schooling often will exhaust the funds that would otherwise be available for estate liquidity needs – and vice versa. And in an astounding number of cases, the principal necessary to maintain a given lifestyle is vastly underestimated, often because of unrealistic assumptions of long-term net-after-tax growth or the actual cost of living at the scale the client and his family wish to maintain.

5. Value and values: Clients need to stabilize and maximize the value of their business and other assets. Clients, who own businesses should build key employee protection into their plans, establish “golden handcuffs” to attract, retain, and retire key employees and use their businesses more effectively to solve personal financial problems. Plans also need to be made to encourage and perpetuate core family values.

6. Excessive transfer costs: Simply put, many clients’ families will pay a severe – and needless price – for the inaction of senior family members. The difference between an “I love you – all to my spouse” will and the use of a well-designed bypass and marital trust combination can sometimes be measured in millions of dollars of senseless federal estate tax payments. This is true even with the portability rules discussed in greater detail in Chapter 25.

7. Special problems: Clients must not overlook the extreme importance of planning for the spouse or child who cannot, should not, or does not want to, handle a family business or large investment portfolio, or for a physically handicapped or emotionally or mentally troubled spouse or child. Satisfying the desire to give back and to enrich and support charity is also often a strong planning need.

WHO NEEDS ESTATE PLANNING?

More sophisticated planning than a simple will is indicated for:

1. Individuals with estates exceeding the unified credit exemption equivalent (applicable exclusion). Currently, the federal estate, gift, and generation skipping tax exemptions are all $11,118,000 (for 2018, with such amounts being adjusted annually for inflation). The projected amount for 2019 is $11,400,000. Most clients will not have assets of a sufficient level to have to do a lot of planning to reduce or pay tax on gift, estate, or generation-skipping transfers. The planning considerations will begin for those clients who are close to the amount of the exemption. As your assets begin to exceed the estate tax exemption, it will be important to consider the extent to which you want to implement a traditional credit shelter arrangement, or to rely on the estate tax portability provisions. This is the point where more sophisticated estate tax planning starts to become warranted.

2. Individuals in combined state and federal income tax brackets in excess of 15 percent.

3. People with:

a. Children who are minors.

b. Children (or spouses or other dependents) who are exceptionally artistic or intellectually gifted or otherwise are expected to have their own wealth.

c. Children (or spouses or other dependents) who are emotionally or mentally challenged, emotionally disturbed, or physically handicapped.

d. Spouses (or children or other dependents) who can’t, or don’t want to, handle money, securities, or a business.

e. Closely held business interests.

f. Property in more than one state or persons who often move from state to state.

g. Charitable objectives.

h. Special property such as fine art, a coin, gun, or stamp collection.

i. Pets that are particularly important to them.

j. Asset protection concerns of heirs.

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