The General Durable Power of Attorney - A Document for Guardianship Avoidance and Young Adults
A General Durable Power of Attorney (“POA”) is a legal document where a principal gives legal and financial authority to an agent to act on his or her behalf. A POA allows an individual (principal) to choose who they want to make decisions for them if they are unable. This document helps individuals plan for both short-term and long-term disability, because the document remains effective even after an individual becomes incapacitated.
A POA is extremely important for aging individuals, when the ability to manage finances and make financial decisions can begin to decline. This is particularly concerning when an aging individual does not have a POA and is no longer competent to sign legal documents.
When this occurs, family members and loved ones are presented with the stark choice of (a) allowing the aging individual to continue without any help in managing their finances, leaving them open to possible financial exploitation; or (b) filing a guardianship in District Court asking their loved one to be declared no longer competent to manage their personal and financial affairs and that a guardian should be appointed. This is the proverbial - Rock and a Hard Place!
Changes in tax policy, among other platform proposals, will likely turn on the state of Georgia’s runoff elections for its two U.S. Senate seats. The Senate runoff elections will occur on January 5, 2021. Georgia holds an early runoff election for local officials on December 1, 2020, but the federal runoff election will not occur until January 2021.
In the Georgia runoff elections, it appears that Democratic wins in both races will secure majority control of the Senate. A Democratic majority can be obtained with 50 members, through the Vice President’s tie-breaking vote as President of the Senate.
Our nation’s first Vice President, John Adams, exercised this power more than any other Vice President. Given the current polarization among the parties and the potential 50-50 divide in the Senate, the 2020 election could set the stage for our country's most active Vice President since George Washington was President.
The Biden Harris campaign has proposed an immediate repeal of the 2017 Tax Cut and Jobs Act, which provides many tax benefits to small business owners and the record high estate and gift tax exemption ($11.58 million).
Democratic control in both houses of Congress and the White House paves the way for implementing sweeping changes on platform issues, which include taxes. History tells us to expect these types of changes, and you do not have to look far to see evidence. The Trump administration implemented sweeping changes under the same conditions; the Obama administration implemented sweeping changes under the same conditions; and the list goes on…
Our October 15 blog post: www.wealthlaw.net/blog/2020-election-and-your-estate-plan has more details of some of the tax specific changes proposed by the Biden Harris Campaign and the Democratic party.
The impact of the potential changes is significant for small business owners and from an Estate and Tax Planning perspective. For estates in excess of $3 million, the proposed tax changes will likely have a material impact on your estate.
Now is the time to act and implement appropriate planning.
2020 Election and Your Estate Plan
Over the next few weeks political parties, tax policies and good old fashioned politics will have a profound impact on your estate plan and the planning tools at your disposal.
What can we be certain of?
Currently, we have record high estate tax exemptions of $11.58 million per person; the estate and gift tax exemptions are unified; 40% top estate tax rate; and grantor trust planning and valuation discounts are powerful tools that can be utilized to slash your taxable estate and avoid unnecessary tax dollars going to Uncle Sam.
The current law stays in effect through December 31, 2025. On January 1, 2026 the American taxpayer will lose over $6 million in federal estate tax exemption which equates to $2.4 million in additional estate taxes. Let that sink in – New Year’s Eve 2025 a $12 million estate is nearly non-taxable and on New Year’s Day 2026 the same estate has a $2.4 million tax obligation.
How does the election impact the current law?
Taxes are clearly a point of contention in the upcoming election, and a change in the Oval Office or a change in Congress could result in significant changes. However, before looking at the “Off-the-Shelf” proposal which could be headed our way, we need to ask the question: “where is the American tax policy headed in light of the economy, social policy and needs?”
Politics and tax policy swing like a pendulum from one extreme to the other over time. Thanks in large part to the 2017 Tax Cut and Jobs Act, the United States tax policy is heavily favored towards the taxpayer, particularly in the context of income tax and transfer tax.
Combine this with the ever-increasing federal debt obligations and budget deficit, and the future of the current taxpayer centric policy is unlikely to continue. We could make the future of American tax policy look particularly grim if we look at the historical extremes of federal tax policy in the opposite direction.
Under the current circumstances, we can reasonably assume that the federal government will begin to increase taxes, particularly if there is a change of control in the White House or Congress.
Further, the tax increases will occur in areas where those in power can assure themselves of both favoring the federal government and meeting the popular political concerns – i.e. tax the “wealthy.”
We have already seen efforts to increase tax revenue in the current administration with the Secure Act (enacted December 20, 2019). The revenue provisions of the Secure Act, in effect, limit the vast majority of all non-spouse beneficiaries a 10-year mandatory withdrawal period, forcing all non-spouse beneficiaries to pay the full federal income tax obligation of their tax-deferred retirement benefits within 10 years.
When it comes to retirement accounts, Congress is borrowing from Jerry Maguire and screaming – “SHOW ME THE MONEY!” It is no longer willing to wait for non-spouse beneficiaries to withdraw the account over their lifetime, and this is indicative of other tax initiatives to follow.
What would a regime change mean for your Estate?
In the federal estate and gift tax arena, we do not have to look far to find the Democratic tax proposal. As part of a prior estate tax bill proposed to Congress by Sen. Bernie Sanders, the “Off-the-Shelf” proposal is to:
These are significant and dramatic changes and would significantly limit the ability to reduce taxable estates and save tax dollars.
Democratic presidential candidate Joe Biden has not officially provided his estate and gift tax policies, and one would presume his administration would fall in line with the Off-the-Shelf proposal created by Sen. Bernie Sanders.
Vice President Biden has given some insight into his views on the income and transfer tax system. His platform favors:
Considering the “Off the Shelf” Proposal and Vice President Biden’s proposals together, an estate would potentially be subject to a $3.5 million estate tax exemption and no “step-up” in basis.
For an estate that is currently on the cusp of being taxable, the changes are drastic. The loss of $8.5 million in tax exemption equates to $4.25 million in estate tax. The estate would likely be required to sell assets to satisfy its estate tax obligation. Because there would be no increase in income tax basis and all gains would be taxed as ordinary income, the result is a potential 45% income tax assessed on the assets sold to pay federal estate tax!
Given the potential for such significant and dramatic changes to the estate tax, it behooves taxpayers to utilize the powerful estate planning tools that are currently available to us.
Simple gifting strategies to utilize the elevated estate tax exemption and utilizing grantor trusts and valuation discounts to freeze and reduce your taxable estate could result in a multimillion dollar tax savings. Further, a solidly executed and well maintained estate plan can provide security and legacy planning of immense value, irrespective of the tax benefits associated with planning.
Kentucky’s New Forward Thinking Estate Planning Tool - Community Property Trust Act
On July 15, 2020 Kentucky joined a small group of forward-thinking states by enacting a powerful tax planning tool, known as a Community Property Trust. Kentucky is only the fourth state in the union, to allow a married couple to opt in to the “community property” regime, joining other tax-advantaged and estate planning proactive states, Alaska, South Dakota and Tennessee.
Community Property Trusts receive favorable tax treatment by allowing all trust assets to receive a 100% “step-up” in basis for federal tax purposes at the death of the first spouse. This is significantly different from the traditional planning/"separate property" system, where at the first death, only 50% of the marital assets will receive a step up in basis.
A 100% basis adjustment is not only extremely valuable for transfer tax purposes (i.e. capital gains tax), it also increases the depreciable basis for some business assets providing additional income tax benefits.
Kentucky’s new Community Property Trust Act also creates planning opportunities for non-Kentucky residents, thereby bringing additional assets to the state. Facts are that most states are governed by “separate property” laws. If a resident of a “separate property” state has or develops close ties with Kentucky, they can also avail themselves of the benefits provided by a Kentucky Community Property Trust.
To implement a Community Property Trust, a married couple must establish a joint revocable trust and at least one trustee must be an individual who is a Kentucky resident or a bank/trust company authorized to act in the Commonwealth of Kentucky. Community Property Trusts can change the dynamics of property division if the couple divorces, and such circumstance should be specifically addressed in the trust.
Further, an obligation incurred by one spouse prior to or during the marriage may be satisfied only from that spouse’s one-half share of a Community Property Trust.
Kentucky's new Community Property Trust Act gives significant estate planning and income tax planning opportunities. Those who will benefit the most from this Act are couples with stable marriages and significant appreciated property.
Kentucky’s Community Property Trust Act is codified at KRS 386.620.
Long ago in a far-away land before COVID-19, Congress passed and President Trump signed the SECURE Act, Setting Every Community Up for Retirement Enhancement Act. I also recently heard a well-respected authority on Asset Protection Planning describe the Act as Setting Every Community Up for Failure Act, and other little spins on the name. To say that SECURE’s popularity is “checkered” would be an understatement.
Love it or hate it, we must address the changes made by SECURE. SECURE was passed in December 2020 and it completely changes the way tax laws apply to your Retirement Accounts and how they get distributed upon your death. SECURE also changes the landscape for how trusts can be used to protect your Retirement Accounts.
Surviving spouses and disabled individuals will not see a significant change in the tax benefits they receive. That is not the case for other beneficiaries, which are now subject to a 10-year pay-out period subject to some limited exceptions.
Important Retirement Account distribution aspects of SECURE are:
You should pay particular attention to these new rules if:
We have also seen some positive Retirement Account legislation in the CARES Act response to the COVID-19 pandemic. CARES provides relief from required distributions, as well as penalty-free emergency access in certain circumstances. Penalty free access to these funds and the ability to allow assets to continue growing tax deferred are important benefits you may be able to utilize.
Retirement Account Succession Planning is essential and the SECURE Act makes it essential to review your designations and ensure they are coordinated with your Estate Plan.
Reviewing this Important Private Wealth Tool Could Prove Critical to Your Estate Plan
COVID-19 has spurred many people to consider the necessities in life and being sure they have all their needs covered. Top of the list items are things like toilet paper, hand sanitizer, food staples, and the list goes on. But, have you taken a look at what may be called upon to meet your largest necessity in the event that true disaster strikes….your life insurance.
We have seen many estate plans and estate administrations blessed by life insurance, as well as those that do not incorporate this essential piece of personal wealth. Each and every client should not only utilize life insurance, but you should incorporate it into your estate plan and review it periodically.
Your Estate Plan is dynamic and changes with your needs and circumstances over time, and your life insurance is no different. Part of your regular review process should include reviewing the performance and appropriateness of your life insurance. If you have a Trusted Advisor that helps you with your life insurance, your regular review process should involve collaboration between your Trusted Advisors.
You took great care crafting your Estate Plan to reflect your wishes, and it is critical to ensure that you receive the liquidity you are expecting in order to make these documents work as they were designed. It is important to review and update your beneficiary designations. If you have established a trust for your spouse or family, your life insurance should be coordinated with your Estate Plan. Best laid plans and good intentions do not always result in the desired outcome. Asset Alignment is a critical and proactive part of the planning process, designed to ensure that your life insurance is incorporated into your Estate Plan.
Why should you want to review your life insurance? There are three main reasons:
1) Since you implemented your plan, your life has changed and possibly laws have changed. You want the level of funding you have to match what you need. You may need more, you may need less.
2) The life insurance industry has changed. All companies have adopted new mortality tables that have reduced the costs in newer policies. Even if you are older, the cost of a newer policy may be less expensive for you, and
3) Most life insurance policies have moving parts inside that are affected by the economy, specifically interest rates and the stock market, depending on the type you purchased. These moving parts may affect what your family receives and we should make sure that the performance is in line with what you were promised when you originally bought the policy.
Click here or call my office to schedule your planning review. If you are not sure whether this applies to you, please contact us and I will help you figure it out. I cannot stress enough how important this is. Even if you purchased your life insurance outside of any planning we did together, we should sit down and make sure you have everything you think you have.