Wealth Planning Review: 10 Questions to Ask Now

The year 2020 has been one for the record books. From a global pandemic to wildfires and other natural disasters to protests in our city streets and a highly contentious election season, this year has brought an abundance of chaos and uncertainty.

During times of stress, shifting focus to areas of our lives we have some control over can help us stay grounded while we navigate through challenges. A thoughtful, well-designed financial plan can provide a sense of stability and security by ensuring you are on track to meet your financial goals even during times of uncertainty. That’s why the end of this year presents an excellent time to reflect on what’s important and set aside time to ensure your wealth planning needs are in order.

If you’re asking if a financial check-up is something you really need right now, review the following 10 questions to see whether any resonate with your situation. If they do, it’s probably a good time to contact your advisor and get that check-up on the calendar.

1. Are you part of a blended family?

When you consider that nearly half of first marriages in the U.S. end in divorce, then the assumption logically follows that at least half of children in the U.S. have a stepparent and many people have stepchildren. Add to this the financial triangle of “yours, mine and ours”—and you’ve got ground ripe with emotional potholes.

Complicating this even further, it is not uncommon in a blended family for there to be litigation over the division of assets after the death of a spouse. It is important to begin thinking about how to minimize potential discord by ensuring that your wishes are clearly and accurately documented, and that you are optimally utilizing strategies available to help you pass on your estate as efficiently as possible. These include:

Write down the “why” of your estate plan. Wills and trusts only tell us what you want done; they don’t tell us why you want it done. The lack of the “why” makes it easy for litigious individuals to make all sorts of arguments about what you wanted and why. This is often at the center of estate-related litigation. A carefully drafted Letter of Wishes or a Statement of Donative Intent can be helpful in providing the why. You should be sure you have your estate planning lawyer review your Letter of Wishes or Statement of Donative Intent.

Think twice before naming your spouse as the sole Trustee of any trust where your spouse is the beneficiary and where your children are beneficiaries (now or in the future, after your spouse’s death). When a person assumes the role of Trustee, they also assume fiduciary duties to all current and future beneficiaries (future beneficiaries might be your children, grandchildren or other younger descendants who only begin to receive trust distributions in the future, often after the death of your surviving spouse). Thus, if you establish a marital trust or a bypass trust for your spouse as is customary in estate planning with the remainder interest held for your children, the Trustee, in this case your spouse, must manage the assets as a fiduciary for themselves as well as for your children born of a prior marriage. These arrangements can be difficult for the spouse and the children and require a significant degree of trust; otherwise suspicion and hurt feelings can arise—feelings which could lead to courtroom battles.

Also, think carefully about the “distribution standard” in any trusts for your spouse. Do you want your spouse to have unfettered access to all the assets in the trust? Or do you want the principal preserved for your children after your spouse is gone? These are two opposite ends of the spectrum, with many choices in between. Yet often this is not discussed in appropriate detail with the attorney drafting the estate plan. People often assume that the surviving spouse has full access and control, but this is not always the case.

2. Has a friend or family member named you to act as executor or trustee?

Accepting the role of trustee is a serious decision because the role requires careful attention, the stakes can be high, and errors can be costly. If you do decide to accept the role of trustee, you don’t need to go it alone. Consider working with a bank trust department to provide professional guidance, help you navigate your responsibilities as a fiduciary and help you make sound decisions.

To help you better understand the role of the job, consider the following:

• It’s complicated. Among a host of other duties, the job of trustee includes overseeing investments to make sure they are managed prudently, provide competitive returns, and are diversified to deliver reasonable growth at appropriate risk. The trustee must faithfully follow the trust document, keep accurate records, report to the beneficiaries while treating all of them impartially, and never use trust assets for personal benefit.
• It demands a comprehensive approach. A trustee can’t solely attend to the tasks he or she finds most interesting or feels most comfortable doing. It’s a big job and an important one, with many responsibilities, including:
  • Valuing the estate, including cash, business interests, personal items, securities and real estate
  • Managing all trust property as an investment on behalf of the beneficiaries, both those now living and potentially those who will be born in the future
  • Paying legally enforceable debts, bills and obligations, including selling appropriate assets to settle debts
  • Completing all tax returns
  • Evaluating and planning for the cash flow needs of the beneficiary, particularly if there’s a need for long-term care for any length of time
  • Planning for appropriate income and principal growth
  • Balancing the needs of primary and remainder beneficiaries
  • Selling or transferring real estate, securities and other assets when it's a prudent investment decision and in the best interest of the beneficiaries to do so
  • Determining the fair division of all personal and real property

• It can leave you legally liable. Each Trustee is required to administer the Trust in accordance with the Trustee’s duties and in light of any special skills the Trustee possesses. That means you are required by law to know the duties of the Trustee and execute them properly. As such, you need to carry out these responsibilities with the highest degree of care, honesty and loyalty. If you fail in this regard, you can be held legally liable.

If the court determines that you have breached your duty as Trustee, it may hold you responsible to restore the Trust to the position it would have been in had the breach not occurred.

3. Does your life insurance reflect your current priorities?

Although life insurance might be part of your overall wealth plan, many people confess that they haven’t looked at their policy—or even thought about it—since its inception. Because insurance needs change over time, a regular review of your existing policy is warranted to ensure it still serves a role in your plan. Perhaps you initially purchased life insurance when you began your fledgling business to provide an income stream to your spouse in the event of your premature death, but have since grown your business to the extent that your estate will now be subject to estate taxes. In that case, the old income replacement policy you bought many years ago may just be another asset in the estate that serves to exacerbate your estate tax problem. Since your current concern is estate taxes, not income replacement, transferring the policy to an irrevocable trust is one possible strategy that could remove the policy from the taxable estate yet provide the beneficiaries liquidity to deal with estate taxes. It is important to consult your estate planning lawyer to determine if such a trust might work for you.

Perhaps your goals include leaving a legacy for your family for generations to come, assuring the continuation of a business you have built, or making a significant impact through philanthropy. The strategic use of life insurance can help you create a taxe-fficient method for ensuring these goals are met.

Your wealth advisor, working together with insurance specialists, trust specialists and your attorney, can help you identify the right life insurance strategy for you.

4. Have you named someone to make medical decisions for you, including decisions about life support?

Traditionally, there are two types of Advance Medical Directives. One is the healthcare power of attorney, in which you name a person to make medical decisions for you when you are temporarily unconscious or otherwise unable to make decisions for yourself but are expected to recover. The second is the living will, which provides end-of- life instructions to your doctor as to when you would like to receive or abstain from life support if you are not expected to regain consciousness or are expected to have a short period of time to live. Many times, these two critical documents are incorporated into a single document. Both are important in that they ensure that healthcare decisions are being made by you or by those you trust, not a court or other person you may not have chosen yourself. It is also important to make sure that the person you expect to make important healthcare decisions for you has their own healthcare power of attorney naming you as their agent. Otherwise, the law may not automatically provide you authority to make health decisions for a child over age 18 or for other adults.

As a result of relatively recent legislation in some states, there is a third document, called a Physician Orders for Life Sustaining Treatment, or POLST. You and your healthcare provider work together to create the POLST, which will document the treatment you want or don’t want if you are unable to make medical decisions for yourself. Because the POLST is a physician’s order, it is likely to be followed even if your family is divided on the care you should receive.

5. Are you subject to “nanny taxes”?

If you hired the services of outside workers to help with household duties during 2020—such as a tutor who comes regularly to help the kids with remote learning or even a fitness trainer you meet with virtually—you might owe taxes on these employees. Called “nanny taxes,” they apply to any household worker employed directly by you, if the worker is classified under IRS rules as an employee and not an independent contractor and is not employed through an agency or service. For the 2020 tax year, nanny taxes (both federal and state) come into play when you pay any domestic employee more than $2,200 in wages over the calendar year, whether a nanny, housekeeper, gardener, fitness trainer or tutor.

Your tax obligations will vary depending on hours and rate of pay, as well as where you live. In general, you and the worker must each pay 7.65 percent of the wages toward Social Security and Medicare taxes. In states with an income tax, state income taxes must also be withheld and remitted to the state and employers must pay unemployment insurance costs to the state. Some employers choose to pay the nanny’s share themselves instead of withholding from their wages. As with any tax issue, this tax issue has technical details that are beyond the scope of this piece. If you think that you might have a Nanny Tax issue, you should consult with your accountant or estate planning lawyer.

6. Does your trust do what you intended?

You invested a lot of time and money in drawing up trust documents, but lives change, tax laws change, people are born and die, and people marry and divorce. Because of this, we recommend regular reviews of your existing estate plans to ensure the plan still meets your needs. The following are some common considerations for comprehensive review of your existing trust documents:

Descendants. As your children and grandchildren come of age and their needs and aspirations become more apparent, you might be able to tailor your documents to reflect your shared values and to provide for your beneficiaries to reflect their unique needs and abilities.

Health. While most living trusts address distributions during times of the grantor’s disability and name a successor trustee to act when the existing trustee becomes seriously ill or dies, consider whether your trust should include special needs provisions that might protect state and federal benefits available to a beneficiary should he or she develop a debilitating injury or illness. Without these special provisions, many government benefits currently may require depleting most if not all assets available to a disabled person before they will provide benefits. Carefully drafted special needs provisions may allow the disabled beneficiary to continue to enjoy some benefits from the trust without losing some or all of their government benefits. The rules governing such provisions are technical and change often. Accordingly, you should consult with your estate planning lawyer for a more complete discussion of this issue.

Real estate. It is all too common for people to obtain a new property and forget to record title in the name of the trust. Neglecting to do this can present problems down the road, such as subjecting your estate to probate even though you have a living trust.

Refinancing. When you refinance your mortgage, some lenders might require you to take title directly. It is important to remember that in most states, only assets titled in the trust avoid probate at your death. Thus, it is important to retitle the house in the name of the trust once the refinance is complete.

Life changes, like those above, are not the only reason to keep your trust updated. Laws change over time too. Therefore, it is generally recommended that you review your trust documents with your estate planning attorney every three to five years. As part of your regular review, take a look at all elements—including assets titled in trust and those that are not, as well as beneficiaries of life insurance policies and qualified retirement accounts—to ensure your beneficiary designations reflect your wishes.

7. Are you certain your business could survive your death?

If the unthinkable were to happen to you—or your business partner—the business you built together could be in danger of falling apart if the proper planning and agreements are not in place. Especially in the case of small businesses, the passing of a partner can lead to a number of issues regarding ownership, with the future of the organization in doubt. Without a buy-sell or voting agreement in place, the heirs of your business partner may suddenly be your business partners. What happens if they want to make business decisions and have 50 percent of the vote? What if the surviving spouse wants to sell their stake to an unrelated third party that you don’t know? This new partner might not share the same vision or expect the same operating culture as you do.

To avoid this turmoil, a buy-sell agreement may take the guesswork out of what happens upon the death, disability or termination of an owner. It does this by clearly establishing the terms and timing for an orderly sale of the deceased’s stake from the heirs back to the company or its owners. There are multiple ways to structure and fund a buy-sell agreement. Each has advantages and disadvantages in tax planning, asset protection, cost and ease of management, and each depends on ownership type and personal preferences.

8. Do you know the tax benefits of charitable giving?

There are numerous ways to contribute to the charitable causes that match your philanthropic values, your pocketbook and your goal of trimming your annual tax bill. Here is a bird’s-eye view of the four most popular gifting vehicles.

Private Non-Operating Foundations. Ultra-high-net-worth individuals who wish to operate their own gift giving foundation can establish a private foundation to operate in perpetuity, which can encourage a family legacy of giving. Key advantages are that they allow the donor to retain significant control over the donated assets prior to their ultimate contribution to charity and they can also serve as a great vehicle to introduce younger generations to the joy of giving back to their communities. Donations are deductible in the year they are contributed, allowing the donor to lock in their tax deduction for the current tax year while the actual charitable gift payout can be executed over time. In addition, no capital gains are realized when appreciated assets are donated to a foundation and donated assets are excluded from the donor’s estate. Operating a private foundation does involve a host of administration burdens and should be pursued only by those willing to make larger donations and those ready to take on the responsibilities of running an organization subject to technical and limiting provisions of the Internal Revenue Code and oversight by the Attorney General.

Donor Advised Funds (DAFs). A DAF is a simplified way to achieve a result much like the private foundation without the administrative headaches. To contribute to the DAF, funds or assets are transferred to a DAF sponsor, itself a 501(c)(3) public charity, and those assets are held and managed until the donor provides non-binding recommendations of select charities to receive donations. DAF contributions are tax deductible in the year they are made. For the 2020 tax year, a donor can deduct cash gifts up to 100 percent (usually 60%) of their adjusted gross income (AGI) and can further reduce their taxable income up to 30 percent of AGI through the donation of appreciated assets held for at least 12 months. Because the DAF is treated as a public charity, the amount of the charitable deduction may be more than that available for donations to private foundations. Deductions will depend on your income and the assets given.

Charitable Remainder Trust (CRT). A CRT is an irrevocable trust designed to provide an income stream to the donor, or other individuals that the donor designates when he or she creates the trust, for a specified time or for life. One key advantage is that a CRT is not a taxable entity, so you can contribute appreciated assets to it, cause the CRT to sell the assets, and you only recognize a portion of the capital gains over time as you receive the annuity stream—thus allowing the donor to defer the capital gain. In addition, contributed assets are no longer included in your taxable estate for purposes of calculating the estate tax owed at your death. At termination, remaining trust assets go to the charity or group of charities the donor has chosen. Generally, an income tax deduction can be taken in the year the CRT is funded equal to the value of the remainder interest in the transferred assets.

Charitable Lead Trust (CLT). A CLT might be a useful strategy for charitably inclined donors who want to experience the impact of giving during their lifetime and have no need for the income generated by the assets. Unlike a CRT, the CLT initially provides an income stream to one or more qualified charities for a defined period of time or for a lifetime and then redirects the trust balance to the grantor or to another non-charitable beneficiary at the conclusion of the trust term. A CLT can be drafted so that an income tax deduction equal to the value of the income interest designated for charity can be taken in the year the CLT is funded up to certain AGI limitations; however, the grantor may continue to be responsible for income taxes on earnings in the trust during the charitable term. Whether the CLT provides gift and estate tax benefits depends on an array of factors, such as whether the grantor is entitled to the remainder after the conclusion of the CLT term and whether the trust requires a guaranteed annuity or unitrust payment to the charity. Further, CLTs can be drafted so that there may be generation-skipping transfer tax benefits.

9. Are you prepared for potential tax increases in 2021?

President-elect Joe Biden issued a broad-strokes tax plan during the campaign in which he outlined his tax goals. Though it remains to be seen whether Congress supports those plans, recent actions in Congress suggest that without winning control of the Senate, Mr. Biden may have a difficult time achieving these goals. With that said, it is always advisable to be prepared for potential changes. Accordingly, you may wish to consult your wealth team, including your wealth advisor, to map out a plan of action to fit your unique circumstances. To get started, here are some key changes to consider:

• Ordinary income. There may be an increase to the top tax bracket to the pre-TCJA (Tax Cuts and Jobs Act) rate of 39.6 percent for individuals with annual income over $400,000. At this time it appears that income brackets for those with annual income levels under $400,000 would remain unchanged.
• Itemized deductions. Tax benefits of itemized deductions might be capped at 28 percent.
• Capital gains. Long-term capital gains and qualified dividends might be treated as ordinary income at the top rate of 39.6 percent for those making more than $1 million. Strategies you might want to discuss with your advisor to mitigate the impact of this would be to realize some capital gains before the end of the 2020 tax year and reduce investments in your portfolio that produce dividends.
• Qualified Business Income (QBI). The QBI deduction for certain pass-through business owners (such as partnerships, LLCs, S-Corporations, and sole proprietorships) might be eliminated in part.
• Estate tax. Though not directly proposed by Biden, a repeal of the TCJA would reduce the current exemption of $11.58 million to pre-TCJA levels of $5.79 million prior to the automatic sunset in 2026. In addition, the Biden Tax Plan did propose eliminating the asset basis step-up to fair market value at death, which would result in a beneficiary recognizing capital gains tax upon the sale of inherited assets. If this were to happen, life insurance could see renewed potential as a tool to provide liquidity in the event of a high tax liability from an inheritance. Alternatively, a structured gifting strategy might mitigate ses for beneficiaries under the proposed Biden plan.
• Corporate tax. The corporate tax rate might increase.

10. Do you have sufficient cash flow to get you through uncertain times?

Has the COVID-19 crisis exposed weaknesses in your financial plan? Have you been forced to tap into your cash reserves? Are they sufficient? Are you too dependent on fixed-income securities to generate sufficient income in retirement?

If you’re concerned about the amount of cash flowing out of your accounts versus the amount flowing in, you’re not alone. Job losses, the market downturn and the on-again, off-again threat of recession have negatively impacted the ability to meet income needs. The days when investors could rely on traditional bonds as safe, income-producing securities that hedge equity risk and deliver reasonable returns have greatly diminished over the last decade.

While fixed-income opportunities still exist, a close look at your entire financial landscape in conjunction with your wealth team can help identify those that might be most rewarding for you. As an example, many investors might do well to consider preferred shares, an asset class that’s overlooked even though it’s currently paying a higher after-tax yields than many fixed-income investments. Traded as shares of stock, the yield on preferred shares is mainly in the form of qualified dividends—a key reason for their superior after-tax yields.

COVID-19 has also taught us the importance of building cash reserves during times of surplus cash flows, so that when the next pandemic or other calamity strikes, you have sufficient cash flow to cover your expenses.

To schedule time to discuss your unique situation and review your wealth plan, contact your relationship manager or click on “Connect with The Private Bank” below.