Estate Planning Tips For Registered Independent Advisors

There’s been a drastic shift in the major concerns regarding estate planning by advisors recently. Estate tax exemptions are considerably higher these days, so there’s less concern and worry over estate tax minimization. Replacing that, instead, is a greater emphasis in income tax considerations, and more opportunity and diversity in valuable planning ideas.
A few of the following estate planning tips might necessitate the involvement of a client’s lawyer or CPA; there are many that fall into the scope of a registered independent advisor. Here are ways that you can add value for elderly clients (and their heirs!)
For Elderly Clients
Estate planners that have older clients need a checklist to cover with clients.
Watch for waning capacity
If its been years since your client have seen their estate planning attorney, it should fall into the hands of the estate wealth manager to sound the alarm. The most important step is to assure your clients update all existing estate planning documents while they are capable. Not just so the documents reflect your client’s current wishes, but to ensure documents are flexible enough to address any possible changes when it’s no longer possible to modify them.
Exercise Swap Powers
There are many irrevocable trusts that give a right tot he person that set up the trust to exchange assets outside of the trust for assets in the trust. This is beneficial, because, if highly appreciated assets are swapped back into your client’s estate before death, the tax basis– on which capital gains are calculated, is increased to the fair value at death. Estate Planning Advisors need to monitor appreciation in trust portfolios and make sure there are adequate lines of credit in the client’s name to carry out the estate plan.
Review trust principal distribution standards.
A large majority of trusts pay out income to beneficiaries, but there are some that allow distributions of principal. This could provide another way to move highly appreciated trust assets back into the estate to increase your client’s tax basis.
Shift timing of charitable gifts.
Taxable estates are the only ones that benefit from an estate tax charitable contribution deduction. If the estate doesn’t face any taxation, clients can (and notably, should) prepay charitable bequests while still living so that they may qualify for income tax deductions. If the client becomes incapacitated, their agent (under a power of attorney) may be permitted to make charitable bequests. Just ensure that the charity itself acknowledges in writing that the donation is a prepayment of the bequest under the will to avoid accounting errors later on.
Amend family limited partnerships.
Historically, family limited partnerships were formed to provide tax valuation discounts. Take, for example, a forty percent interest in a family partnership worth about $1 million might be valued for tax purposes– not as $400,000, but possibly $250,000…because it is a non-controlling interest. These discounts may possible be counterproductive in the new tax environment– the 2015 estate tax exemption is at $5.430,000…because the discount may reduce the basis step-up on death, which could cause higher capital gains taxes when a sale is made down the road.
Simple Solution: The counsel to the partnership needs to amend the agreement to eliminate discounts. If one partner can liquidate their interest– at fair value, by giving 30 days’ notice, there should be no discount. Another alternative might be to liquidate your client’s interest and put actual assets back into their name.
Trust situs.
Situs- the state where a trust is based out of and, therefore, …whose law governs trust operations. Traditionally, wherever a client created a trust, that state’s laws applied. However, more than 20 states permit decanting– a practice in which one trust can be merged into another trust. It is also becoming more common to draft trusts with provisions permitting a change in situs…and governing law. This is exciting because it opens new estate planning opportunities: If a trust is in a jurisdiction whose laws are not particularly favorable, it could just be feasible to move that trust to a jurisdiction that permits better investment opportunities. Let’s consider the state-by-state variations on the Uniform Principal and Income Act. In New York, their statutes allow for unitrust payment to permit a 4% antitrust election. Delaware permits a unitrust payment of 3-5%. Some of your clients may benefit from moving a unitrust to a state that permits a more desirable payment.
Estate planning and preparation for what happens after your client dies is also quite different in this new advisor environment. And, as with pre-death estate planning, there is a myriad of different planning opportunities that advisors should be aware of.
Executor commissions.
Historically, it was not uncommon for family members to take executor commissions. Commissions often provided a valuable estate tax deduction at the high estate tax rates…which were, at the time, much higher than income tax rates. Now the difference between the highest income tax rates and the estate taxes are the lowest in history. Currently, with the high exemption, the estate tax is eliminated for many estates…so paying executor commissions may generate a significant income tax hike for the executor without producing any benefits from estate tax. Advisors should review the personal economic and tax consequences of paying commissions. Have the executor formally waive commissions if it isn’t beneficial to do so.
Unfunded trusts.
You will find that many of your clients have not revised their wills in years. Outdated documents might necessitate funding a credit shelter trust on the first spouse’s death…but many client families won’t wish to bother doing so if the estate tax benefit is non-existent. They may then attempt to distribute the assets outright to the named beneficiaries– skipping hte trust. Advisors should warn their clients to address legally nonuse or termination of such trusts if possible. If not, they should avoid legal entanglements– transfer the required assets to the mandatory trust, even if the tax purpose no longer applies.
Funding bequests or trusts with appreciated assets.
If your client’s will bequeaths a specific dollar amount and that bequest is met using appreciated assets, a taxable gain is triggered. Income tax rates are higher, and there’s now a 3.8% surtax that’s part of the equation, this issue is much more significant. Take care when selecting which assets to use for which purpose.
Asset distributions.
The majority of wills provide for equal shares of the estate to each beneficiary…but sometimes, the beneficiaries would much prefer to receive non-pro-rata distributions of various assets…as long as they’re equivalent value. Let’s take, for example, instead of splitting all assets 50/50, one beneficiary may want the vacation home while another would prefer the equivalent in securities. Just be mindful that unless the will or state law permits non-pro-rata distributions, the IRS may view this as the equivalent of a sale and exchanges of the various assets.