Estate and Gift Tax Update

by Lloyd McAlister

In early 2017, the provisions of the Tax Cuts and Jobs Act went into effect. The act contained a variety of provisions that are set to sunset at the end of 2025. One of the sunset provisions is tied to the estate and gift tax exemption. As real estate values have increased and wealth has accumulated for many property owners these past few years, estate tax planning will become a concern for many families in the years ahead of the sunset.

 The Tax Cuts and Jobs Act doubled the estate tax exemption up to roughly $11 million per person. With that exemption level indexed annually to inflation, the current exemption threshold is $12.92 million per person, increasing to a projected $13.61 million for persons dying on or after January 1, 2024. This means the first $12.92 million ($13.61 million in 2024) in a person’s estate at the time of death is exempt from estate taxes to the extent the exemption has not previously been used to offset gift tax for lifetime transfers.

 Fast-forward to 2026 and the estate and gift tax exemption amounts will sunset unless otherwise extended by Congress and the president. Projections for the post-sunset exemption level place the new amount about $7 million per person. Keep in mind, every dollar over the exemption level is subject to a 40% tax. And keep in mind the estate tax applies to life insurance and retirement benefits owned by the deceased person.

 Families should be proactive when planning in anticipation of this sunset event.

With the November 2024 general election scheduled before the sunset date, it is impossible to predict whether the sunset will occur or if the higher exemption levels will be extended. Regardless, taking proactive steps today can save a lot of time and money if urgent changes to your succession plan are required.

 If your family could be in estate tax territory after the sunset, the best strategy is beginning proactive estate planning efforts now. Waiting to engage a succession planning team and develop a strategy for managing potential estate taxes could be costly.

CALM

By Lloyd McAlister

CALM in times of crisis should be the result of an active state of mind.  Be calm.  Do CALM. Consider relevant facts, assess the impact of those facts, lead with responsible decision making and minister to others.

Global health crisis. Global political upheaval. Global economic collapse. 2020?  No, not just 2020, but the history of mankind! A somewhat common state of affairs on this spinning globe we call earth is the uncertainty and danger associated with the condition of mankind.

How shall we then live, confronted as we are with our desire for certainty and a sense of control, in uncertain times in a world which seems very much out of control? As counselors at law, serving individuals and families in the legal aspects of their relationships and activities, we here at the law firm feel a responsibility and have an opportunity to help our clients plan for and navigate the troubled waters of life.  It may sound exaggerated and dramatic, but the concerns that jump off the front pages of our newspapers and newsfeeds are real and have very real consequences for us which demand our attention, our concern and, if we are wise, our thoughtful responses.

Hopefully, these words will help you and those dear to you address the twin realities of uncertainty in the world around us and our lack of personal control over circumstances which affect us.

CONSIDER: Consider the facts, including the uncertainty inherent in those facts.  Are deaths in China a fact of relevance to you today?  For some of us, possibly; for most of us, no.  Are contagious illnesses in our community a relevant fact for you today?  Absolutely, always have been, always will be.  Is the price of tea in China a fact of relevance to you today?  For some of us, possibly; for most of us, no.  Is the availability and price of essential food in your local grocery (or your online grocery service) a relevant fact for you today? Absolutely; except for the totally self-sufficient among us, the availability and price of our food always has been a relevant fact, always will be.

ASSESS: Assess the real impact of the relevant facts upon your life today and for the foreseeable future.  Though extreme (and extremely unlikely) circumstances could make the need for a year’s supply of toilet paper a reality, truthfully, the need for a year’s supply should be a low concern today.  You would not know that to watch the news about runs on toilet paper in local stores.  A more realistic concern would be whether you have essential supplies for daily living for a reasonable period of time, considering the possibility of supply shortages due to so-called supply chain disruption (a rational possibility in a global marketplace) or due to irrational panic buying and hoarding by some of our fellow citizens.

LEAD: Lead, both in your private life and in your public life, with responsible decision making. You may never have considered your own daily decision making as being a form of leadership but daily decision making in one’s personal life is the place where true leadership begins.  Indeed, it is where the greatest impact of leadership is felt by each of us and those who depend upon us in family, faith, and work.  The President’s decisions about international travel bans are of great interest and potential personal concern but, for most of us, our own decisions about where we go today are unaffected by the President’s decisions.  And, whether the President’s decisions are relevant to you today or not (we have dear friends traveling internationally today; we care about the arrangements they must make to remain safe and return home to us), undoubtedly there are personal decisions you can make today to lead wisely in your corner of this big, connected world.

MINISTER. Here at the law firm, we share the conviction that our work, though the source of our families’ livelihoods, is what some call a vocational ministry.  We aren’t just here to make a living.  We are here to serve others and help meet their needs and the needs of their families and businesses.  The uncertainties of daily life present each of us with opportunities to serve others, to help them meet their needs and, in doing so, help one another deal with the uncertainty in the world around us and the dangers those uncertainties present.  As we Consider the facts that are truly relevant to decisions we must make today and as we Assess the impact of those facts upon our life and the lives of those dependent upon us, we have the opportunity and indeed the necessity to Lead with responsible decision making.  In doing these things, thoughtfully giving consideration to the counsel of trusted advisors (good counsel, like charity, begins at home!), you and I serve others and help them meet the true needs of their day.  And, in that, we’ve fulfilled our purpose in being here. 

May you and I be a CALM influence today: Considering the facts relevant to decisions we must make, Assessing the impact of those decisions for us and those dependent upon us, Leading first ourselves in the very personal and private decisions of our day and then others by both example and in the more public decisions, we may have the privilege and authority to make and, last, Ministering to others.  It has been said that we don’t need to think less of ourselves but we may need to think less about ourselves!  As you are CALM today, you will undoubtedly be helpful to others.

Generational Trends in Estate Planning

by Lloyd McAlister with the assistance of Ashley Ray

Estate planning is not a single, one-size-fits-all document or decision made at the end of life; it is a long-term strategy shaped by an individual’s life. As lives change, plans adapt to fit new needs and desires. There are many influences that impact an individual’s life, but one critical factor is family. When guiding clients in planning the future of their assets, our estate planning lawyers consider the developments occurring inside the family unit. For instance, changes in generational characteristics, family demographics, and family structure have led to transformations in estate planning and trust management.

Each generation’s characteristics have been shaped by the unique circumstances and trends of the world they’ve grown up in. The Boomer Generation, individuals born from 1946 to 1964, have had different experiences than the Millennial Generation, individuals born from 1982-2002. For example, a defining question for a Boomer may be, “where were you when President Kennedy was shot?” but a defining question for a Millennial may be “where were you on 9/11?”  Technology has also been an impactful force on generations. For instance, a Boomer could probably describe when their family got its first television, but a Millennial would be more apt to remember how old they were when they got their first iPhone. One influence that has influenced all generations is the increase in life expectancy. From 1970 to 2010, the US life expectancy increased gradually from age 68 to 75 for men and from age 75 to 80 for women. Between the years of 1990 and 2010, the percentage of the global population over 65 steadily increased, while the population under 5 steadily decreased. It is projected that from 2015 to 2050 the global population over 65 will increase from 8% to over 16%, while the population under five will remain fairly constant at 7%.

These and other trends have shaped how the individual generations make decisions, balance work and life, and raise their children. The Boomer generation’s parental model usually includes a breadwinner and a breadserver. Instead of children being taught to strictly obey adults, like the children of past generations, children accommodate adults. This generation is generally optimistic, competitive, and lives to work. Decision making shifted from being command and control to consensus based. For the Boomer generation, competence and expertise come before self-esteem. In contrast to the previous generations, Gen X, which includes individuals born between 1965 and 1981, has a parental model of two breadwinners. Additionally, children frequently teach adults. Gen X is skeptical, suspicious of authority, and focuses on achieving a work/life balance. Decision making is pragmatic, independent, and impatient. Self-reliance and validation lead to self-esteem. Like Gen X, the Millennial generation features two breadwinners. Adults generally accommodate and consult children. This generation is optimistic, has a delayed adulthood, and is collaborative. Decision making is net-educated and networked. This generation works to live. Self-esteem generally precedes competence. All of these generalized traits have developed from each generation’s unique circumstances.

Changes in generational characteristics have corresponded with changes in family demographics. According to data from the U.S. Census Bureau, over the last 75 years there has been a steady decrease in the percentage of married households and a steady increase in the percentage of non-family households. Notably, from 1995 to 2015, married households decreased from around 58% to 50%. Additionally, from 1996 to 2016, the number of unmarried couples without children increased from around 3 million to over 8 million. Couples are also waiting longer to get married. From 1985 to 2015, the median age for a first marriage increased from 26 to 29 for men and from 22 to 28 for women. Instead of marriage taking place right after courtship, the increasing social norm is for marriage to occur after cohabitation, attainment of financial security, and the birth of children.

Generational differences and shifting demographics have impacted the structure of the archetypal family unit. It has been said that “[t]he demographic changes of the past century make it difficult to speak of an average American family. The composition of families varies greatly from household to household.” Troxel v. Troxel, 530 U.S. 57, 63 (2000). Families come in all shapes, sizes, and configurations. For example, according to the Pew Research Center, one-out-of-six American children live in a blended family. Additionally, 40% of American adults have at least one step-relative in their family. The Census Bureau reported that in 2013 the composition of American families was: 35% traditional, 34% modern (blended, multigenerational, etc.), and 31% households without children.

The above developments of the family unit have led to a recasting of the traditional estate planning paradigm. Planning has evolved from being hierarchical and oriented towards the nuclear family to being more humanistic and sensitive to family structure. Additionally, instead of individuals being predominantly focused on financial wealth, a holistic understanding of family wealth has developed. A further change is that grantor intent is becoming more flexible, aspirational, and better conducive to beneficiary engagement. The transformations to the family have led to a reconsideration of how families do their planning. For prior generations, estate planning was a decision made before mortality, and the decision would be disclosed to family afterwards. However, contemporary families usually begin the planning process with family dialogue between the spouses and their children. The plan is then designed, implemented, and then concludes with family disclosure.

While estate planning decisions are being formulated, strategic issues must be addressed that involve considering the context of the American family. According to Hugh McGill from Northern Trust Company, the major questions that must be addressed are:

·        “How and to Whom will Financial Wealth be Allocated,

·        How will Trusts Evolve for Modern Families,

·        Are There Limits to Longevity, and

·        How will Modern Families Collaborate and Make Decisions.”

It has been estimated that, as of 2009, 68% of adults had no will, 11% had a self-drafted will, and 20% had a will drafted by an attorney. To ensure you have an effective plan tailored to your family’s unique needs, please contact our office. We will be happy to guide you through the dynamic world of estate planning with special attention to the people and purposes important to you. 

Food for Thought

by Lloyd and Karla McAlister

In this holiday season, much thought is given to food.  Here is some food for thought, for the good health of your personal estate planning ... and with no calories!

1.    Proper funding of a revocable trust.  Primarily the tool of the wealthy in the past, revocable trusts have become a common document in many personal estate plans today.  Revocable trusts can be crafted to accomplish many planning objectives.  However, avoiding the need for a court to appoint and oversee a guardian to manage ones financial affairs in the event of incapacity and avoiding the court supervised administration of ones estate after death, called probate, are by far the most frequent reasons for having a revocable trust in ones estate plan.  If you have a revocable trust for the purpose of avoiding the need for guardianship and/or probate, you should review every asset in which you have any interest to confirm each and every asset is properly integrated in your overall plan through ownership and/or pay on death provisions.  Although most assets can and should properly be owned by your revocable trust, there are very important exceptions.  So you should review your estate plan at least annually in order to confirm every asset is properly integrated in your plan to accomplish all your planning objectives, both non-tax objectives, such as probate avoidance, and tax objectives.  An annual review might be done at years end, with each newyear serving as a reminder for that review, or in conjunction with the preparation of ones annual income tax returns when you are handling your financial information for tax purposes anyway.

2.    Beneficiary designations, payable on death (POD) and transfer on death (TOD) accounts.  It is common for certain types of assets to pass from the owner to the person(s) of their choice at the owners death by a contractual designation, rather than by the owners Will or trust.  For example, life insurance and certain types of retirement benefits often pass to beneficiaries designated by the owner.  It is, therefore, critical for you to review any such arrangements in light of your overall estate plan to be certain those assets and benefits will pass in the event of your death to the person(s) or charities you intend.  Since a well drafted Will or trust can consider and provide for many contingent events, such as the unexpected death of the person(s) you intend to be the beneficiaries of your estate, it may be preferable to have such assets arranged so that the provisions of your Will or trust will control the disposition rather than relying upon beneficiary designations and payable/transfer on death arrangements.

3.    Deaths, including the unexpected death of a beneficiary.  In planning ones estate, thoughtful consideration is given to formulating a plan which is to be carried out in the event of your death.  However, all too often estate plans fail to consider the death of another person which can be critical to the success of your plan, your beneficiary.  What if the person(s) and/or charities you intend to benefit are deceased or incapacitated (or no longer in existence, as to charity) at the time of your death?  Or, what if they are alive at your death, but suffer death or incapacity (or legally dissolve, as to a charity) shortly after your death?  All too often a person will designate their spouse or adult child(ren) to receive some or all of their property, only to have one or more of those persons die or become incapacitated at points in time which were unexpected and cause unintended results such as a probate where probate was intended to be avoided, or estate taxes which could have been avoided, or property passing to persons who were not intended to benefit (such as unintended benefit or control passing to the spouse or even the ex-spouse of a child).  You should give careful thought to the possibility of your intended beneficiaries not being in existence, as you anticipate, at your death and, if that were the case, how you would prefer for your estate plan to operate in those alternative events.

4.    Family harmony and the family fiduciary.  Each of the five legal documents in a basic estate plan include the appointment of a fiduciary (Will - personal representative; trust - trustee; power of attorney - agent; advance directive - proxy).  The appointed fiduciary is delegated the legal authority to carry out the duties assigned to them, such as a trustee managing trust assets or a healthcare agent giving instructions to medical personnel.  Although family members, such as a spouse, parent or adult children, are logical candidates due to the intimacy of the relationship and their personal interest in the responsibilities to be undertaken, you should be mindful of the potential for family disharmony which can result from appointing family members.  It might make sense to involve a corporate fiduciary (a corporation whose business it is to handle such fiduciary matters, for a fee) or trusted friends who have the professional skills to handle such responsibilities with objectivity, either along with family members or alone.  In instances where family members are clearly the preference, which will undoubtedly continue to be the majority, careful consideration should be given to making those decisions and structuring such arrangements in the way which is believed will foster family harmony and not fuel the flames of conflict and disharmony.  Since there is no one way which is best, and people and circumstances change over time, you should review the fiduciaries named in your documents at least annually in order to determine whether any changes need to be made, either with the persons named or the guidelines for their performance of the delegated duties.

A Year-End Check-Up!

by Lloyd McAlister

Year’s end or the beginning of a new year, whichever you prefer, is an excellent time to get in the habit of checking your important personal paperwork – documents that are legally and financially important for you and your family.  So, consider taking an hour or so to do the following paper check-up:

1. Locate your documents!  Isn’t it amazing how many times we need some piece of paperwork and aren’t sure where to look for it? If you can’t relate to that problem, move on to #2!   If you’ve experienced that problem, though, you know it is a good idea to gather all your important records.  
    
2. Confirm the documentation you have! Your important records might include: military service and discharge papers; retirement plan papers; insurance policies; documents evidencing your ownership of all your assets, including vehicle titles, financial account statements, deeds for land and minerals, ownership records for assets received by gift or inheritance, trust papers for any interests you have in existing trusts, and so on.  And, last but by no means unimportant, your estate planning documents, including your last will and testament, your revocable trust, your durable power of attorney, your healthcare power of attorney (for general health and personal care decisions), your advance directive for healthcare (for end of life health decisions) and your consent for your attorney to communicate with your fiduciaries.  
    
3. Confirm you have the necessary signed, original documents!  In most of our business and personal matters it is acceptable to simply have a copy of documentation, rather than a signed and dated original document.  This is so either because we aren’t the party responsible for possession of an original or the original document is not necessary.  However, as you well know, it can be very important to have the original paperwork proving ownership of certain types of assets, either in order to transfer ownership to a new owner or in order to establish our own ownership.  Likewise, original estate planning documents, properly executed with your signature and, if required, the signatures of witnesses and/or a notary public, can be critical in carrying out plans and instructions in the event of your incapacity or death.  
    
4. Confirm your documents are current!  Have you ever felt time was passing quickly?  The speed of time passing seems especially real when we notice how “old” something has gotten without our notice.  For example, do you remember the date you did your estate planning documents (Will, trust, powers of attorney, advance directive for healthcare, etc.)?  Have things changed since then?  Do your documents still work the way you originally intended and, if so, is that still how you want things to happen?  Our clients regularly call upon us to meet with them and review their documents in order to assess whether any updating is needed or desirable.  Although this may seem inconvenient and does involve time and expense, the cost at present can be very small in comparison to the problems and costs which can be caused by having outdated documents which are no longer adequate or appropriate for the person’s situation.
    

My planning check-up:

• What documents do I have?  
• And which are signed originals?
• Will    
• Trust    
• Durable Power of Attorney    
• Healthcare Power of Attorney    
• Advance Directive for Healthcare
• Where are my documents located?
• Are my documents current?

A Word About Words

by Lloyd McAlister

Mrs. Jones’ attorney: “Mrs. Jones, your father’s life insurance is taxable and at an estate tax rate of forty percent.”

Mrs. Jones: “But I didn’t think my father’s insurance was in his estate!”

Mrs. Jones’ attorney: “The life insurance your father owned is not part of his ‘probate estate’ but it is a part of his ‘gross estate’ for estate tax purposes.”

Legal terminology can be confusing, causing people to misunderstand important legal and financial consequences.  Few legal terms create more confusion than the word “estate” and the variety of uses for the word which have different legal and tax implications.

When a person dies, we often speak of their “estate,” usually referring to the property and legal rights the deceased person owned at the time of their death.  However, sometimes we mean something narrower in meaning, with a more specific application.  For example, we might be talking about the “estate tax” due as a result of the person’s death, in which case we might use the word estate to refer to their “taxable estate.”  However, technically, to arrive at one’s “taxable estate” we must start with their “gross estate” and deduct allowable deductions.  Now, what at first might have seemed somewhat simple becomes more confusing.  

When referring to one’s estate, we might also be talking about their “probate estate.”  Again, what might seem simple can become quite confusing because we referred to “taxable estate” and “gross estate” above, yet what comprises one’s “probate estate” might be quite different than those other terms used to refer to tax matters.  If a person dies owning property titled in their name without valid transfer on death successor owner arrangements, the disposition of that property after the owner’s death is technically subject to the administration of such property by the “probate court.”  The probate court determines:  what property fits in that category (and, consequently, is subject to the jurisdiction of the probate court), whether there was a valid last will and testament of the deceased person which disposes of such property and, if no valid will exists which completely disposes of the property, the disposition of the deceased person’s property according to state law (called the laws of “descent and distribution”).

Although all the property in a deceased person’s probate estate might also be in their gross estate, it will not necessarily all be in their taxable estate due to the “allowable deductions” which are subtracted from the gross estate to arrive at the taxable estate, deductions such as the marital deduction for property passing to a surviving spouse or the charitable deduction for property passing to a charity.  Similarly, it is entirely possible some or even all the deceased person’s property is in that person’s “gross estate” (again, using the term in its technical sense to refer to the gross estate for federal estate tax purposes) yet little or none of it is in their “probate estate” because the ownership of the property was such that there was no need for a probate court to determine the lawful, successor owners.  The very common use of revocable trusts (also referred to alternatively as living trusts, inter vivos trusts, loving trusts, etc.) is an excellent example; a person might establish the ownership of some or even all their property in the name of the trustee of their revocable trust in order to avoid the court-supervised administration of their estate, a legal process called “probate.” By virtue of the legal fact that the client, now deceased, did not hold the title in their individual name but rather held title in their name (or someone else’s name) as a trustee of their trust, there is nothing to probate (nothing for the probate court to administer); the successor trustee named in the deceased person’s trust merely needs to accept or confirm their appointment as trustee.  Since the property in one’s revocable trust is subject to the “estate tax” it is included in their “gross estate” and, possibly, their “taxable estate” even though such property is not in their “probate estate.”  In fact, the deceased person may have planned their “estate” so that there will not be a “probate estate” and, consequently, no need for a court-supervised probate proceeding.

So, if you speak of someone’s “estate,” be careful to be clear about the type of “estate” to which you are referring.  Otherwise, you may believe others understand what you said, yet you may not realize that what they think you said is not what you meant!