Uncover the benefits of Portability in Trust and Estate Law with this informative article written by Attorney Evan Y. Lin for the State Bar of Wisconsin. Learn how leveraging portability can help you minimize estate tax liabilities and protect your family's financial legacy.
Read the full article here: https://www.wisbar.org/NewsPublications/Pages/General-Article.aspx?ArticleID=30066
Category Archives: Estate Planning
What is an Irrevocable Life Insurance Trust?
By Attorney Curtis A. Edwards
Irrevocable Life Insurance Trust (ILIT) is a powerful estate planning tool that can provide several benefits to individuals and their families. An ILIT is a trust that is designed primarily to own a life insurance policy. The policy proceeds are paid to the trust upon the death of the insured, and the trust distributes the funds according to the trust document. The trust is irrevocable, meaning that once it is created, the grantor cannot change its terms or reclaim the assets transferred to the trust.
ILITs can provide significant benefits to individuals and their families. One of the primary benefits is that they can help reduce estate taxes. When an individual passes away, their assets may be subject to estate taxes if they exceed the estate tax exemption amount. Life insurance proceeds are also included in an individual’s estate, so if the policy is owned by the insured, the life insurance proceeds may be subject to estate taxes. However, if the policy is owned by an ILIT, the proceeds are not included in the insured’s estate, and therefore not subject to estate taxes.
In addition to estate tax benefits, ILITs can provide a source of liquidity for the trust beneficiaries. Upon the death of the insured, the ILIT receives the life insurance proceeds, which can be used to pay estate taxes, debts, or other expenses. This allows the beneficiaries to inherit other assets without having to sell them to pay expenses.
In conclusion, an ILIT is an effective estate planning tool that can provide significant benefits to individuals and their families. An ILIT can help reduce or eliminate estate taxes and provide liquidity to a decedent’s beneficiaries, among other things. By understanding what an ILIT is and how it works, individuals can make informed decisions about their estate planning strategies.
If you have any questions or are interested in learning more about this topic, please contact Lin Law LLC at (920) 393-1190.
When Your Beneficiaries Could Receive An Inheritance – Which Distribution Method Is Best?
The method in which you choose to distribute a beneficiary’s inheritance upon your passing is an important part of the estate planning process. There are a variety of ways to do this, and you should consider the method that best meets your estate planning goals.
Distributed Outright After all bills and expenses are paid, assets are divided and distributed to your beneficiary(ies) directly. This distribution method is an option for parents who have financially responsible adult children.
In Trust, Distributed Outright at a Certain Age, at Certain Ages, or Upon a Life Event The assets that are held in trust for a beneficiary’s lifetime are distributed by a trustee in accordance with the trust’s provisions. Usually the provisions of a children’s trust or beneficiary’s trust provide that when the beneficiary attains a certain age (common age distribution choices are thirty (30) or thirty-five (35)), the trustee will distribute the assets of the trust outright to the beneficiary at the specified age, thus terminating the trust. Trust assets can also be distributed at multiple distribution ages. For example, the provisions of a trust can provide that the beneficiary shall receive one-third (1/3) of the trust assets at the age of twenty-five (25), one-third (1/3) at the age of thirty (30) and the residue of the trust outright at age thirty-five (35). A less common, but still useful option, would be to distribute the assets of a trust outright upon an event, such as graduating from college.
Asset Protection Trust Another common distribution structure is an asset protection trust that is held and maintained for the lifetime of a beneficiary with no mandatory distributions of principal and income. An asset protection trust can provide for the beneficiary to become co-trustee or sole trustee of his or her trust upon attaining a certain age. Upon the death of the beneficiary, unless the beneficiary exercises a valid power of appointment, the assets would continue to be held in trust for the benefit of the beneficiary’s issue by representation. The benefit of this option is that the beneficiary of the trust, if he or she is also acting as the trustee, has control of the trust assets and can protect the trust assets in the event of creditors’ claims or divorce. The right method depends on your unique circumstances and goals. The best strategy to leave assets to your beneficiaries may change over time. To ensure that your estate plan meets your needs, be sure to review your estate plan on a regular basis.
If you should have questions regarding this topic, please contact Lin Law LLC at (920) 393-1190.
Taking Care of the Family Cottage
As Wisconsin residents close up their family cottages for the winter, it may be a good time to consider a structure to conveniently allow your family to continue to enjoy the cottage for future generations.
In some cases, it may make sense to set up a limited liability company or trust to facilitate indirect ownership of the cottage and protect it from certain liabilities. This would allow a current owner to provide a structure for transfer of cottage ownership, use and management of the cottage and payment of expenses.
Both a limited liability company (“LLC”) and trust can provide the owner some liability protection, but there are some differences between the two structures. If an owner wants to leave some money or investments for future generations to utilize for cottage expenses, such funds could, in most instances, be protected within a trust. However, structuring cottage ownership in a trust may provide less flexibility for future generations than an LLC would because a trust becomes irrevocable (and thus harder to modify its terms) upon an owner’s passing. So, in the event of a dispute over, for example, maintenance and expenses, a trust can be more cumbersome than an LLC regarding settling or bypassing such disputes.
On the other hand, an LLC’s advantage is its flexibility. LLC’s are governed by operating agreements, which can be modified by current members of the LLC. Because an LLC is a flexible entity, it can be a particularly helpful vehicle when it comes to handling unforeseen circumstances, facilitating ownership transfers, particularly if a family member does not want to be involved with the cottage, and managing usage of the cottage.
Whichever route an owner may choose, there are certain fundamental considerations for inclusion into the operative language for trusts or LLC’s. Those include provisions regarding maintenance, cost sharing and budgeting, dispute resolution and creditor protection and tax implications with respect to the cottage.
If you should have questions or concerns regarding these issues, please contact Lin Law LLC at (920) 393-1190.
Should Your Graduate’s To-do List Include Powers of Attorney?
It’s that time of year when many high school graduates are preparing to leave home, whether it be to attend college or join the workforce. While families prepare for this change in their child’s lives, many parents forget that they will no longer be able to make health care and financial decisions on behalf of their child once he or she turns 18. Without the proper advanced planning documents in place, parents would need to obtain a court order to exercise this authority on behalf of their adult child, even if the child becomes incapacitated. For this reason, we recommend that all parents encourage their children to implement a Durable Power of Attorney, Power of Attorney for Health Care, and HIPAA Authorization for Release of Protected Health Information upon attaining age 18. In doing so, it may be helpful to more fully understand what these documents do.
Durable Powers of Attorney: Authorizes the designated attorney-in-fact to act on behalf of the adult child with respect to most financial matters. This could include managing bank accounts, paying bills, signing tax returns, applying for government benefits, applying for a lease, etc. Durable Powers of Attorney can be either immediate or “springing”. To activate a springing Durable Power of Attorney, the adult child must be deemed incapacitated by two different physicians (or pursuant to recent legislation, one physician and one psychologist, physician’s assistant, or nurse practitioner).
Power of Attorney for Health Care: Authorizes the designated health care agent to make medical decisions on behalf of the adult child if he or she is incapacitated. Like a springing (as opposed to immediate) Durable Power of Attorney, a Power of Attorney for Health Care must be activated upon the adult child’s incapacitation.
HIPAA Authorization for Release of Protected Health Information: Authorizes an adult child’s health care providers to release information to and discuss the child’s medical care with the designated individuals. Without this authorization, health care providers are legally prohibited from discussing the adult child’s care with third-parties, even if those third-parties are the child’s parents. The HIPAA Authorizations is also effective even if the adult child’s Power of Attorney for Health Care has not yet been activated.
Most of the time, a parent will never need to utilize these documents (at least they hope not to) on behalf of their child. However, it is better to hope for the best and plan for the worst.
If you should have questions regarding these issues, please contact Lin Law LLC at (920) 393-1190.
U.S. Congressional Bills Introduced Regarding Estate, Gift and Generation-skipping Taxes
A bill was introduced in the Senate to reduce estate, gift, and generation-skipping transfer tax exemption amounts and increase tax rates. The bill would also eliminate or reduce the tax benefits received from certain estate planning techniques.
Senator Bernie Sanders (I-VT) introduced Senate bill 994, also known as the “For the 99.5 Percent Act”, which would amend the Internal Revenue Code to increase the rates regarding taxes on the transfer of the taxable estate of decedents who are US citizens or residents.
For estates over the basic exclusion amount, the rate would be 39%. For estates over the basic exclusion amount and not over $10 million, the rate would be 45%. For estates over $10 million and not over $50 million, the rate would be 50%. For estates over $50 million and not over $1 billion, the rate would be 55%; and for estates over $1 billion, the rate would be 65%.
The bill would also reduce the basic exclusion amount, which for 2021 is $10,000,000, adjusted for inflation, to $3,500,000 for estates of decedents dying, and generation-skipping transfers and gifts made, after December 31, 2021. (The text of the bill does not include an annual inflation adjustment for the basic exclusion amount).
The bill would also eliminate a step-up in basis for certain grantor trusts, the assets of which are not includible in the grantor’s estate. This foregoing change would make clear that assets in an intentionally defective grantor trust (IDGT) would not receive a step-up in basis at the death of the grantor unless the assets were includible in the grantor’s estate.
Additionally, the bill would apply an inclusion ratio of one to any generation-skipping transfer trust that is longer than 50 years, and would impose a limit of two donees for annual exclusion gifts.
A bill was also introduced in the U.S. House (H.R. 2576) to amend the Internal Revenue Code “to reinstate estate and generation-skipping taxes, and for other purposes”, although text has not been received for this bill as of this date.
THE BOTTOM LINE
Under the proposed legislation, estate tax exemption levels would fall and rates would rise. It is important to remember that each bill has only been introduced and may have only a small chance of passage into law. However, the proposed legislation represents another indicator that revisions to the tax code will likely remain a Congressional priority.
If you should have questions or concerns regarding these issues, please contact Lin Law LLC at (920) 393-1190.
Biden Administration Likely to Propose Increasing Capital Gains Tax and Other Estate and Income Taxes
President Biden will likely propose almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help with social spending that addresses inequality.
Although the plan is not yet public, people familiar with the proposal have indicated that for those earning $1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could reach 43.4%. A new marginal 39.6% rate would be an increase from the current base rate of 20%. The existing 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income.
This proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor. President Biden campaigned in part on equalizing the capital gains and income tax rates for wealthy individuals, stating that it’s unfair that many of them pay lower rates than middle-class workers.
The Biden administration has also recently indicated its desire to enhance the estate tax for the wealthy. The current estate tax exemption of $11.7 million per individual (and $23.4 million per couple) could be reduced by approximately 50%. The step-up in basis at death, which increases the tax basis for inherited assets to their full fair market value upon death, could also be repealed.
These proposals are likely to be released soon in the administration’s forthcoming “American Families Plan”, which is expected to include a new wave of spending on children and education, including a temporary extension of the expanded child tax credit.
According to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform, the capital gains increase would raise $370 billion over a decade.
OTHER POSSIBLE PLAN DETAILS
- The top individual federal income tax rate could rise from 37% to 39.6%.
- The corporate tax rate could increase from 21% to 28%, and a 15% alternative minimum tax could apply to corporate book income of $100 million and higher.
- Individuals earning $400,000 or more could pay additional payroll taxes.
- The maximum Child and Dependent Tax Credit could rise from $3,000 to $8,000 ($16,000 for more than one dependent).
- Tax relief could be offered for student debt forgiveness and the first-time homebuyers tax credit could be restored.
- The social security tax could be extended to higher income levels.
The outline of the previously-referenced “American Families Plan” is expected to include measures aimed at helping Americans gain skills and have more flexibility in the work force. The details of the plan remain a work in progress and could also change before the announcement.
THE BOTTOM LINE
Under the expected plan, federal taxes imposed on corporations and wealthy and higher income taxpayers would increase. Lower-income individuals’ rates generally would not change and families would be entitled to expanded credits and deductions.
If you should have questions or concerns regarding these issues, please contact Lin Law LLC at (920) 393-1190.
What is an estate plan, and why do I need one?
At its most basic, an estate plan dictates how your assets will be managed and distributed upon your death. An estate plan can, and should, however, encompass more than just the disposition of your assets. It can include planning for future incapacity, estate tax mitigation, and burial and funeral arrangements, among other things.
The following are some of the fundamental benefits of implementing an estate plan:
- You decide who inherits your assets upon your death. Without an estate plan, state law determines who inherits your assets.
- You decide how and when your beneficiaries receive their inheritance (e.g., outright vs. in trust, distributions immediately or over time). Without an estate plan, the terms and timing of distributions are set by law, which can result in your beneficiaries receiving a sizable inheritance outright, with no restrictions.
- You choose who will manage your assets upon your death. Without an estate plan, a court will appoint individuals to fulfill these duties.
- You designate a guardian for your minor children. Without an estate plan, a court will appoint their guardian, and may not choose the person you would have picked.
- You can minimize or avoid the probate process, if desired. Without an estate plan, some or all of your assets will likely be subject to probate.
- You can minimize taxes payable by your estate and your beneficiaries upon your death. Without an estate plan, Uncle Sam may be the ultimate beneficiary.
- You decide who will make financial and health care decisions for you if you become incapacitated. Without an estate plan, a court will appoint a guardian to make financial and health care decisions for you.
In other words, estate planning gives you control over the management and distribution of your assets and your health care decision-making, both during your lifetime and upon your death. Without one, you may be leaving certain important details to chance.
If you have questions on this topic, please contact Lin Law LLC at (920) 393-1190.
In the wake of COVID-19, many are considering their estate plans
This article by Lin Law LLC’s Attorney Emily E. Ames was featured in the June 22, 2020 issue of The Business News.
In the midst of a global pandemic, people are spending more time at home and have more time on their hands. As a result, many are considering their estate plans, or lack thereof.
When people think of an estate plan, they often think of a last will and testament, which is the foundation of any estate plan. For those concerned with avoiding probate of their assets upon death, they may also consider a revocable trust (sometimes referred to as a “living trust”). Probate, which is the court-supervised process of winding up a decedent’s affairs, is often vilified in light of its public and sometimes tedious nature. But, whether or not probate avoidance is desired or necessary in a given situation will depend, in large part, upon the nature of the assets that comprise a person’s “estate.” In either case, it’s important to have a good understanding of the mechanics of your estate plan in order to avoid inadvertently circumventing it. For example, failure to title assets and prepare beneficiary designations appropriately are two good ways to upend an otherwise airtight estate plan.
It’s also important to keep in mind that the will or revocable trust, which serve as an estate plan’s primary vehicle, are not the whole picture. A complete, well-rounded estate plan should also include a marital property agreement for married couples, powers of attorney for finances and health care, authorizations for the release of protected health information and electronically stored information to designated individuals, and documentation of the person’s wishes regarding funeral and burial arrangements.
For those who already have an existing estate plan in place, it’s important to periodically review and update the documents as time passes, considering not only changes in financial and personal circumstances, but also changes in applicable federal or state law. Just how often to review an estate plan depends, of course, both on the estate plan itself and the nature of the circumstances that have changed.
For example, an estate plan established upon the birth of a married couple’s first child may no longer be appropriate twenty or thirty years later, when the couple is approaching retirement. The focus of their existing estate plan was likely to name guardians and establish testamentary trusts for the benefit of the couple’s then-minor children, who are now grown adults, possibly with children of their own. The couple’s named fiduciaries, such as personal representative, trustee, and power of attorney, may have been parents, siblings, or other family members who are no longer the most appropriate choices for those roles, whether due to age, incapacity, or geographical location.
In updating their estate plan, this couple’s focus will likely have shifted from providing for their children to planning for the potential of future incapacity and long-term care needs. They may now wish to name one or more of their children as personal representative, trustee, and power of attorney. Depending on the couple’s net worth, they may need to consider implementing tax planning strategies within their estate plan, in order to mitigate potential estate tax consequences. In other words, their personal and financial circumstances have changed, and so too should their estate plan.
Should your high school grad’s college-readiness checklist include powers of attorney?
Despite recent events, many high school graduates are now preparing to leave home, whether it be to attend college or join the workforce. While preparing for this enormous change in their child’s lives, many parents forget that they will no longer be able to make health care and financial decisions on their child’s behalf once he or she turns 18. Without the proper documents in place, parents must obtain a court order to exercise this authority on their adult child’s behalf, even if the child becomes incapacitated. For this reason, we recommend that all parents encourage their children to implement a Durable Power of Attorney, Power of Attorney for Health Care, and HIPAA Authorization for Release of Protected Health Information upon attaining age 18. In doing so, it may be helpful to have a better understanding of what these documents do.
Durable Power of Attorney: Authorizes the designated attorney-in-fact to act on the adult child’s behalf with respect to most financial matters. This could include managing bank accounts, paying bills, signing tax returns, applying for government benefits, applying for a lease, etc. Durable Powers of Attorney can be either immediate or “springing.” In order to activate a springing Durable Power of Attorney, the adult child must be deemed incapacitated by two different physicians (or, under recent legislation, one physician and one psychologist, physician’s assistant, or nurse practitioner).
Power of Attorney for Health Care: Authorizes the designated health care agent to make medical decisions on the adult child’s behalf if he or she is incapacitated. Like a springing (as opposed to immediate) Durable Power of Attorney, a Power of Attorney for Health Care must be activated upon the adult child’s incapacitation.
HIPAA Authorization for Release of Protected Health Information: Authorizes an adult child’s health care providers to release information to and discuss the child’s medical care with the designated individuals. Without this authorization, health care providers are legally prohibited from discussing the adult child’s care with third-parties, even if those third-parties are the child’s parents. Importantly, the HIPAA Authorization is effective even if the adult child’s Power of Attorney for Health Care has not yet been activated.
Nine times out of ten, a parent will never need to utilize these documents on their child’s behalf, but it’s always better to hope for the best and plan for the worst.
If you have questions on this topic, please contact Lin Law LLC at (920) 393-1190.