Dynasty Trusts

Trusts are very useful, flexible tools to hold assets. They allow for management of assets during your life, upon your incapacity, and for the continued management of the assets after your death. Perhaps you’d continue to hold the assets in trust until your children reach a suitable age to manage the money for themselves, like age 25 or 30. But you could keep the assets in trust even longer. You could keep the assets in trust for the lives of your children, and your children’s children, and so on.

These trusts, sometimes called “Dynasty Trusts” continue for the longest possible time allowed by law. Some states have a “Rule Against Perpetuities.” The Rule in common law says that the asset must vest, if at all, no later than 21 years after the death of a “life in being” when the trust became irrevocable, typically the death of the grantor of the trust. In jurisdictions with the common law Rule Against Perpetuities, you could have the assets in the trust and then at your death, you’d look around and see who is the “measuring life.” Typically, the measuring life is the living beneficiaries of the trust, like your children and grandchildren. The trust must distribute within 21 years of the death of the last of them to die. Let’s say at your death your grandchild is 4 and lives until their 104th birthday. The trust can continue until 21 years after that. So, the trust could continue 121 years in that case.

Many states have adopted the Uniform Statutory Rule Against Perpetuities, which allows a trust to last either the traditional Rule Against Perpetuities period (a “life in being” plus 21 years) or 90 years, if longer. Some states have modified the Rule so that a trust might last 150, 365, or even 1,000 years. Some states have completely repealed the Rule so that a trust could last forever!

Why might you want to keep your assets in a trust that long? First, you can have professional management of the assets to make sure the assets aren’t squandered by the beneficiaries and make sure the assets are distributed in the manner you’ve chosen even long into the future.

Next, a Dynasty Trust can save on taxes for those with a taxable estate. Let’s look at a quick example:

John (age 80)(1st generation) dies and leaves $5 million to his daughter, Sally (age 50)(2nd generation), outright. Sally lives another 30 years and the $5 million grows at 7.2%. The $5 million turns into $15 million by Sally’s death. Sally was a prudent investor and had a taxable estate in her own right even before inheriting from John. Therefore, the inheritance from John and the growth on it are all taxed at the estate tax rate, which is currently 40%. Sally’s estate pays $6 million of estate tax on the money and Sally leaves the $9 million inheritance to her child, Beth (3rd generation), who’s also very savvy with investments and has a taxable estate in her own right. Beth lives another 30 years and the $9 million she inherited from Sally triples to $27 million. Beth’s estate pays an estate tax of 40%, or $10.8 million. Beth leaves the inheritance to Josh (4th generation), who invests similarly. So, the $10.8 million he inherits grows to $32.4 million and his estate owes tax of $12.96 million, leaving $19.44 million for future generations. So, by the end of the 4th generation, the $5 million inheritance from John has grown, after transfer taxes, to $19.44 million in 90 years. That’s not bad, it’s nearly quadrupled.

But there is a better way. If at his death John (1st generation) left the $5 million to a Dynasty Trust for the benefit of Sally (2nd generation) and her descendants and allocated his GST exemption, the assets wouldn’t have been included in Sally’s estate. At Sally’s death, the $15 million wouldn’t have faced a 40% reduction due to the estate tax. Instead, the full $15 million could have continued to grow for the benefit of Beth (3rd generation) and her descendants. After 30 more years it would have tripled to $45 million and at Beth’s death, it wouldn’t have been reduced but would have passed to Josh without further estate taxes. After another 30 years of prudent investing by the 4th generation, the inheritance would have grown to $135 million.

Without a Dynasty Trust, the assets increased by 4x. However, with a Dynasty Trust, the assets went up by 27x over the same period of time and with the same investment assumptions. While a Dynasty Trust isn’t for everyone, it can have some transfer tax advantages for those with a taxable estate. 

Biden Administration Could Reduce Estate Tax Exclusion

The estate tax exclusion is the amount you can give without facing an estate tax. Under current law, you may give this amount during life or at your death and after that amount is used, you face a federal tax of 40% on assets beyond that amount. The amount has fluctuated a great deal over the years. It was $675,000 as recently as 2001. In 2021, the exclusion is a whopping $11.7 million per person. This exclusion consists of a “permanent” exclusion of $5 million, adjusted for inflation since a 2011 base year, and then temporaril doubled through 2025 as a result of a 2017 law. So, unless Congress acts to extend the doubled exclusion, it will revert to $5 million adjusted for inflation beginning in 2026. Confusing, isn’t it?

However, Congress could act sooner than 2026 to reduce the exclusion. Congress has tinkered with the estate tax many, many times over the decades. So, this would be nothing new.

Proposals from the Biden campaign indicated a desire to reduce the estate tax exclusion to $3.5 million. Such a proposal would need to pass through the House of Representatives, which Democrats control by a narrow majority of 222 seats to 211 seats held by Republicans, with 2 seats currently vacant. Assuming legislation to reduce the estate tax exclusion were to pass through the House, it would then proceed to the Senate.

At the beginning of January, the Senate consisted of 50 Republicans and 48 Democrats (and independents caucusing with the Democrats) and two seats pending runoff elections in Georgia. Beating long odds, Democrats won both those runoff elections in Georgia, so the Senate is now tied 50-50. This means the Vice President casts the tie-breaking vote in the Senate. Prior to January 20, 2021, Vice President Mike Pence enables Republicans to retain the majority. However, on January 20, 2021, Vice President-Elect Kamala Harris will be sworn in as Vice President and the majority in the Senate will shift to the Democrats.

Thus, beginning January 20, 2021, Democrats will have the narrowest of majorities in the House and Senate. Even with a narrow majority, there are hurdles to passage in the Senate. Senate rules require 60 votes to end debate on most matters. Also, it’s not at all certain every Democrat would agree, as they’re often a fractious caucus.

But, with deficits mounting, Congress may seek to raise revenue from many sources, including reducing the estate tax exclusion. Why wait to see what Congress does? Your best chance of taking advantage of the current unprecedently high exclusion is to use it now.

If you’re married, you could give assets in the amount of your remaining exclusion to a trust for the benefit of your spouse and/or descendants. Your spouse could be the trustee of the trust and would have the ability to use the assets for their support. If you’re unmarried, you could give your assets to a trust for the benefit of your descendants.

January’s political events have altered the political landscape substantially. Consider whether taking advantage of the current estate tax exclusion is right for you.

Starting the New Year Right

Welcome to the dawning of 2021! Most of us will leave 2020 without any hesitation. 2020 was not the best year for most of us. But you have an opportunity to start 2021 prepared for anything. You can do the responsible thing and get your estate plan in order.

The tumultuous events of 2020 show just how important it is to have your planning in order. Millions became seriously ill from the coronavirus. All too many of them died. When they became ill, those who had their estate plan in order could focus on more important things, such as spending precious time with loved ones.

Even as we hope 2021 will be much better than 2020, it’s important to start out right, by putting an estate plan in place.

What’s an estate plan? At its most basic, it’s a set of instructions about how you want your affairs handled if something happens to you. It’s a message that shows your loved ones you care. A basic estate plan includes a Healthcare Power of Attorney, a General Durable Power of Attorney, a HIPAA Authorization, a Will, and typically also a Trust.

First, what’s a Power of Attorney? It’s a document by which you appoint someone as your “Agent” to act on your behalf. If that Agent is unwilling or unable to act, the document can appoint one or more successor Agents. In other words, you give someone else (the Agent) powers you inherently already have yourself. With a Financial Power of Attorney, otherwise known as a General Durable Power of Attorney, you appoint your Agent to make financial decisions for you. The Power could be drafted to be “immediate.” In other words, the Agent would have the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, you could make the Power “springing,” in other words it would only become effective upon you not being able to act for yourself because of incapacity. A Power of Attorney is “durable” if it continues notwithstanding you having incapacity. A Power of Attorney which is not durable would not allow your Agent to act during your incapacity.

A Healthcare Power of Attorney appoints an agent to make medical decisions for you when you are unable to do so for yourself. A HIPAA Authorization appoints an agent to access protected health information.

It’s important to keep your Powers of Attorney up-to-date so that you have the people you want as your agents. The agents you select under your Powers of Attorney are vital to your incapacity plan. Make sure you keep the right people in those roles.

Without a Will, the assets titled in your name go as set forth in state intestacy law. This typically is not exactly how you would like. A Will allows you to select to whom and how you want your assets to go. It also allows you to name who you would like to handle your estate after your death. If you have minor children, your Will allows you to nominate guardians to care for them.

Both intestacy and a Will are subject to a public probate proceeding. Depending upon the state, this can be a lengthy and costly process. If you want to avoid probate and maintain your privacy, you can use a Trust. With a Trust, you transfer the assets to the Trust during your lifetime and can manage them as the Trustee. This allows you to avoid the probate process since the Trust doesn’t die. The Trust has the added benefit of making incapacity even easier. Due to cases of fraud, often institutions more readily recognize a successor Trustee acting on your behalf than an agent under your power of attorney.

Hopefully, 2021 will be better than 2020. Even a basic estate plan will allow you to face whatever 2021 has in store for you. Resolve now to get your estate planning done this year, sooner rather than later.

Tax Planning for 2021

As 2020 draws to a close and a new year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. While 2020 held plenty of surprises with coronavirus and an election, it was a relatively quiet year for legislative changes. Still, even in a quiet year, some things change due to inflation increases, etc.

Estate Tax Planning

Applicable Exclusion rises from $11.58 million in 2020 to $11.7 million in 2021.

GST Exemption rises from $11.58 million in 2020 to $11.7 million in 2021.

Annual Exclusion for present interest gifts remains at $15,000.

Annual Exclusion for gifts to a Noncitizen Spouse rises to $159,000 in 2021.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the Exclusion and Exemption to cover the transfers. You still have a few years before the law is set to change, unless Congress changes things dramatically before then.

Income Tax Planning

Standard deduction amount:

Married, filing jointly, increases from $24,800 in 2020 to $25,100 in 2021

Single, increases from $12,400 in 2020 to $12,550 in 2021

Head of household, increases from $18,650 in 2020 to $18,800 in 2021

State and Local Tax (SALT) deduction cap remains at $10,000 in 2021

The income tax brackets also creep slightly higher, as well.

As you plan for 2021, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary make $14,000 of charitable contributions to their church or alma mater each year. They have state and local tax deductions above the $10,000 limit. They have a total of $24,000 of deductions and they’d be better off taking the standard deduction ($25,100 in 2021). Rather than giving $14,000 for each of three years to charity, they could give 3 x $14,000 ($42,000) in one year and they’d get a much better tax result. If they gave $42,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $52,000 of deductions instead of the standard deduction of $25,100. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($25,100 in 2021). The charities would get their funds each year just as usual. John and Mary would get a much better tax result. In year 1, they’d have $52,000 of deductions instead of $25,100, an increase of $26,900. Their deductions in years 2 and 3 would not change. If John and Mary are in the highest income tax bracket, this increased deduction could save them nearly $10,000 in taxes.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2021!

Updating Your Plan: Beneficiary Designations

A beneficiary designation instructs where the asset goes upon your death. Some important assets which transfer by beneficiary designation are IRAs, 401(k)s, and life insurance. These assets could be a large part of your overall assets, so it’s important to make sure those beneficiary designations complement your overall estate plan. These designations control the disposition of the asset, notwithstanding the fact that your Will or Trust has terms that conflict with it. For example, let’s say your Will or Trust leaves everything to your two children. However, you have an asset, like an IRA, which designates your mother as the beneficiary. Perhaps the designation predates the birth of your children. In that scenario, your IRA would go to your mother and not to your two children. That’s why it’s important to check beneficiary designations on assets that have them.

Many other assets, such as a bank account or a brokerage account could have a “POD” (Pay on Death) or “TOD” (Transfer on Death) designation. Like a beneficiary designation, a POD or TOD designation supersedes the instructions which you’ve laid out in the rest of your estate plan, such as in your Will or Trust.

There’s nothing inherently wrong with TOD, POD, or beneficiary designations. When used properly, they can be a simple, effective part of your overall plan. However, it’s important to coordinate your entire estate plan and consider the impact of each part on the other.

It’s easy for a plan to become inconsistent with your wishes when you use beneficiary designations, TOD, or POD because the designations are fixed even as asset values change. For example, let’s say Mary intends to leave her assets to her three children equally. Mary has a small brokerage account with a POD to one of her children, Betty. Mary doesn’t think anything of this, because there’s language in her Trust which considers what Betty receives from the brokerage account. However, when the brokerage account going to Betty skyrockets in value, Mary’s Trust can no longer make sufficient adjustments because it doesn’t control sufficient assets to balance out the brokerage account going directly to Betty.

However you choose to leave your assets, it’s important you consider changes in your wishes, changes in asset values, etc. If you want your wishes carried out, it’s important to keep your entire plan up-to-date and consider how changes in asset values might have a substantial impact on your plan.

Updating Your Plan: Your Trust or Will

Every state has laws controlling what happens to your assets if you die owning them in your name and don’t leave instructions indicating what you want to happen to those assets. Those laws are called “intestate succession” laws. While they are designed to cover what people will want generally, they often aren’t what you want to happen in your precise situation. For example, state law might leave the assets equally to your children outright. You may prefer unequal shares for your children due to your situation. Also, you may prefer to have the assets held in trust. For example, a beneficiary might have special needs and an outright distribution could deprive them of needs-based benefits. A will is how you leave instructions to override the intestate succession laws. If you have assets in your name at death, they will be subject to probate and will be controlled by your will, if it exists, or intestate succession.

However, you can have your assets owned by a revocable trust. If you do that, your assets won’t be in your name at death and they won’t have to go through the probate process. The probate process may be more or less expensive and time-consuming depending upon the jurisdiction. But, it’s almost always a public process. A revocable trust allows for streamlined management of your assets. While you’re alive and well, typically you’d be the trustee, in other words, the person managing those assets. Upon your incapacity, the person you’ve chosen as your successor trustee would step into that role. This incapacity protection can be invaluable. It’s much easier than if you don’t have a trust holding your assets.

Whether you’ve chosen a will or a trust as the engine of your estate plan, it’s important to re-examine your plan periodically to be sure it’s doing what you want. Are you comfortable with the successor trustees who would take over in the event of your incapacity? Are you comfortable with who would get your money, when, and how?

Many things can happen in the course of a year. This is especially true in a year like this one! It’s good to take a look at your plan and make sure it’s still consistent with your wishes.

Updating Your Plan: Powers of Attorney

This is the first in a two-part series of articles on updating your plan. This first article examines the importance of updating Powers of Attorney, both Financial and Medical. The second part of the series looks at the importance of updating your primary estate planning documents, such as your Trust or Will. Together, these documents are the keystone in even the most basic estate plan and it’s important to keep them up-to-date.

First, what’s a Power of Attorney? It’s a document by which you appoint someone as your “Agent” to act on your behalf. If that Agent is unwilling or unable to act, the document can appoint one or more successor Agents. In other words, you give someone else (the Agent) powers you inherently already have yourself. With a Financial Power of Attorney, otherwise known as a General Durable Power of Attorney, you appoint your Agent to make financial decisions for you. The Power could be drafted to be “immediate.” In other words, the Agent would have the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, you could make the Power “springing,” in other words it would only become effective upon your not being able to act for yourself because of incapacity. A Power of Attorney is “durable” if it continues notwithstanding you having incapacity. A Power of Attorney which is not durable would not allow your Agent to act during your incapacity.

A Healthcare Power of Attorney appoints an agent to make medical decisions for you when you are unable to do so for yourself. A HIPAA Power appoints an agent t to access protected health information.

It’s important to keep your Powers of Attorney up-to-date so that you have the people you want as your agents. Every year around the holidays, it’s a good idea to look at your Powers of Attorney just to check if they name the people you’d want as your agents. Maybe one of your agents is no longer appropriate. Maybe the person whom you’d named as an agent is now too old or too frail to be your agent. Maybe you have someone else you’d prefer as an agent. Perhaps one of your children is now an adult and you’d want to serve as your agent instead.

The agents you select under your Powers of Attorney are vital to your incapacity plan. Make sure you keep the right people in those roles.

How to Create Meaningful Memorial Activities

How can estate planning attorneys help families hold meaningful, memorable memorial activities, especially with the restrictions of a global pandemic?

Kyle Tevlin, founder of I Want a Fun Funeral, spoke about “Raising the Bar on Our Funeral Traditions” at the fourth annual Before I Die New Mexico Virtual Festival.

She showed a cartoon featuring two homo sapiens making cave paintings. The father had drawn a stick figure animal and the son had produced an illustration of a deer. The father says, “No Og, no! That’s not how we’ve always done it.”

“This is my analogy for funerals,” Tevlin explained. “We have this picture of what we think is great and we have no idea that there was something so much better, more elegant, and beautiful.”

Tevlin suggests making a memorial service a project that can help make the world a better place, take on a life of its own, and preserve the story of a loved one. She shared the inspiring example of Aaron Collins.

Aaron Collins died on July 7, 2012 at the age of 30. He left a note requesting that his family go out to eat and leave an “awesome tip,” suggesting $500 for a pizza. The experience was recorded and uploaded to YouTube by Aaron’s brother, Seth.

Generous people all over the world donated to reproduce “Aaron’s Last Wish” again and again. More than $60,000 was raised, Seth gave $500 tips to more than 100 waiters and waitresses. As a result, Aaron’s life story gets told over and over.

“From sadness and tragedy, now his family gets to talk about that loss with joy, a smile, and Aaron becomes a superhero who makes people happy,” said Tevlin. “This all only happened because Aaron Collins wrote this down ahead of time. The family only planned to do it once, but that’s all the more reason to do something little, because you don’t know where it’s going to take you.”

Tips for Engaging Memorial Actions

So, what do you do to be an engaged creator of a good goodbye? Tevlin recommends these seven tips to raise the bar on our funeral traditions.

  1. Brainstorm an objective for what you will do to honor a person. Find a theme, a vision related to the essence of that person. An objective makes it easier for people to contribute, participate, and generate a wonderful memory.
  2. Make your person’s personality shine, keyed to a hobby, passion, trait or quirk everyone will recognize. It can be fun or solemn, anything that is fitting.
  3. Decide the scope of the tribute, from an event for immediate family to a global affair on the Internet. Bigger isn’t necessarily better, but step outside your comfort zone a bit for a greater reward.
  4. “Roll Up Your Sleeves” means DIY as much as possible, enlisting the talents, contributions, creative ideas and resources within your circle. Involvement is where the bonding happens.
  5. Enjoy the process. While sadness is unavoidable, these activities should bring joy. It’s a way of thanking the person for being in your life, warming your heart and providing an uplifting feeling.
  6. Perfection is not required. Do what you can in whatever way you can, generating personal engagement and emotional connections.
  7. There’s no time limit. Whatever the action or event, it does not need to be done immediately. It can easily be held on an anniversary, birthday, or other meaningful date.

Whatever is done in honor of a loved one, make it an event. Give it a name. Almost any activity can be made into a contest, which is practically guaranteed to be fun and memorable.

What the 2020 Election Could Mean for Your Estate Plan

How did the 2020 elections shape the political landscape and what does that changed landscape mean for your estate plan? First, at the top of the ticket, it appears Joe Biden and Kamala Harris are the new President-Elect and Vice-President Elect, with an apparent 306 electoral votes to Donald Trump and Mike Pence’s apparent 232 electoral votes. Democrats retained control of the House of Representatives, although with a narrower majority.

The Senate is a more complicated matter. Republicans control 50 seats and Democrats control 48 seats in the Senate. Both Senate seats in Georgia will be up for runoff elections on January 5, 2021. There are Republican incumbents in both seats and the Democrats have an uphill battle to defeat them in runoff elections. However, if Democrats prevail in both runoff elections, the Senate would be tied with 50 Republicans and 50 Democrats and, beginning January 20, 2021, Vice President Kamala Harris would be the tie-breaking vote to give Democrats the majority in the Senate.

With Democrats in control of the Presidency, the Senate, and the House, they might be able to enact legislation similar to then-candidate Joe Biden’s Tax Plan. That plan included a reduction of the amount which could be passed free of estate tax from the current $11.58 million to $3.5 million. The Biden plan also called for increasing income tax rates and capital gains tax rates, as well as other changes.

What could this mean for you and your family? If you have assets that could be over $3.5 million by your death, this could mean you’d owe an estate tax of 40% on those assets above $3.5 million. You may be able to plan now to take advantage of the current exclusion of $11.58 million. (Note, even without Congressional action, under current law the current exclusion will be cut in half at the end of 2025.)

A possible Democrat-controlled government could change the estate tax exclusion retroactive to January 1, 2021. So, you’d need to act in 2020 to be certain to avoid a possible reduction in the exclusion. You could do this by gifting outright to your children or other beneficiaries. However, by gifting to a trust, you could protect them and the assets from creditors, divorcing spouses, and their own mismanagement. If you’re married, you could gift the assets to an irrevocable trust for your spouse’s benefit. Such trusts could distribute for the benefit of the beneficiaries under the distribution terms you’ve specified, such as for their health, education, maintenance, and support.

If you believe income tax rates will be higher in 2021, you might consider recognizing income in 2020 or deferring deductions to 2021 when they might be more valuable.

Preparing for the Unexpected…and the Eventual

All of us face difficulties and tragedies in our lives. Some of these difficulties are expected and some are unexpected. 2020 has been a year of many unexpected difficulties. While all of us get sick from time to time, nobody anticipated the COVID-19 pandemic. Over 9 million Americans have caught the disease, resulting in the deaths of over 230,000 Americans.

Apart from coronavirus, there are many unexpected tragedies, such as 795,000 Americans suffering a stroke each year, according to the CDC. Another 805,000 Americans experience a heart attack each year, according to the CDC. Additionally, automobile accidents claim about 39,000 lives in the United States annually and injure many more.

Further, there are many lesser-known ways to face tragedy or death. An example is an amoeba that can eat the brain. While rare, the amoeba can come from the soil or water and can be lethal.

Few of us know exactly when or how we will face tragedy or death. But we know that we are all mortal and so we know we will face death eventually.

We may not be able to protect ourselves from everything, but we can prepare now for whatever might happen. Do your estate planning now. That way, when tragedy strikes, you’ll be prepared. If you’re prepared, it will be much easier for your loved ones.

To prepare, consider:

  • A Property Power of Attorney in which you appoint someone, your “Agent,” to handle your property if you are unable to do so yourself.
  • A Healthcare Power of Attorney in which you appoint an Agent to make medical decisions for you, if you are unable to make those decisions for yourself.
  • A HIPAA power which gives people whom you designate, such as your Agent, access to your protected health information.
  • A Revocable Trust to allow management of assets during life and at death. Such a trust allows the avoidance of the delays and expense of probate, which vary from state to state. Through this trust and the PourOver Will discussed below, you can spell out how you want your assets distributed to your beneficiaries to help them the most.
  • A PourOver Will which sends any remaining assets to the Revocable Trust at your death and nominates guardians for any minor children.

Once you have all your ducks in a row, you’ll be ready for whatever life has in store for you, even a year like 2020!