By Julius H. Giarmarco

Part 1 / Part 2 / Part 3 

Don’t let the chaos of the holiday season prevent you from minimizing federal estate taxes and fine-tuning your estate plan. What better gift for your heirs than avoiding the 40% federal estate tax and making sure your affairs are all in order? Although many of the tips discussed below are not time sensitive, year-end is a good time to revisit and review these matters.

17.) Minimize Income Taxes for Your Heirs. If charities play a part in your estate plan and you anticipate that your non-charitable beneficiaries will owe income taxes on the amounts they inherit, you might be able to minimize these taxes. For example, leave taxable assets (e.g., regular IRAs and annuities) to your charities (which do not pay income taxes), and leave your tax-free assets (e.g., Roth IRAs, life insurance and non-qualified assets) to your non-charitable beneficiaries. And, if you are not including charities in your estate plan, offset the income taxes with the income tax-free proceeds of a life insurance policy payable to your beneficiaries.

18.) Trust Income Tax Planning. While a trustee of a non-grantor trust will generally have 65 days after the end of the tax year to shift trust taxable income to a beneficiary, it is recommended to monitor the issue at year-end to get a jump start on evaluating what to do. For 2015, a trust hits the highest tax bracket (39.6%) at only $12,300 of income, compared to $413,201 for individuals and $464,851 for married couples. Another consideration is the 3.8% net investment income tax which applies to trusts with income of $42,300 (for 2015), compared to $200,000 for individuals and $250,000 for married couples. Therefore, trustees of non-grantor irrevocable trusts should consider whether it is appropriate under the discretionary terms of the trust agreement to disperse distributable net income (DNI) to beneficiaries in lower tax brackets.

19.) Decant an Irrevocable Trust. Trust decanting is the act of distributing assets from one irrevocable trust to a new irrevocable trust with different terms. Decanting is essentially a “do over”. Among the most common reasons for decanting a trust are to extend the term of the trust, to change the dispositive provisions, change the governing law, change trustees and/or the process of selecting successor trustees, creating a special needs trust, qualifying a trust to own Subchapter S stock, and to correct drafting errors or ambiguous terms. Decanting is done outside of court, making it less expensive. However, the ability to decant is based on state law. Not all states have decanting statutes, and the limits on what decanting can do varies from state to state.

20.) Provide for Family Members with Special Needs. If you have a child or grandchild with a disability that will require lifelong care, use a special needs trust (SNT), also known as a supplemental needs trust. An SNT allows you to provide for a special needs child or grandchild without jeopardizing his or her eligibility for government benefits, such as Supplemental Security Income (SSI) and Medicaid. SSI and Medicaid pay for basic medical care, food, clothing and shelter. But to qualify for these benefits, the recipient’s “countable assets” cannot be more than$2,000. Generally, every asset is countable – with a few exemptions, such as a principal residence (regardless of value), automobile, burial plots or prepaid burial contracts, furniture, clothing, jewelry and a small amount of life insurance. An SNT is an irrevocable trust which merely supplements, rather than replaces, the government assistance. In other words, the SNT is prohibited from providing for the beneficiary’s “support”. For example, an SNT can be used to pay for everything that government benefits do not cover (e.g., unreimbursed medical expenses, wheelchair-accessible vehicles, travel, entertainment and computers). Parents may leave a portion or all of their assets to the SNT; and inheritances from other family members, such as grandparents, can be left to the SNT. Determining how much is needed in the SNT to provide for the special needs child, while at the same time providing for your retirement and not “disinheriting” your other children, is a daunting task. There is also the possibility that government benefits will be reduced in the future as Congress deals with the deficit, thereby jeopardizing the special needs child’s standard of living. For many families, life insurance may be the most feasible way to fund the SNT, without negatively impacting the parents’ retirement or disinheriting the other children. Given that the insurance must be in effect at the death of the parents, permanent life insurance is the best product to effectively provide financial security and give the parents peace of mind. Most commonly used are whole life policies, no-lapse universal life policies, and survivorship policies.

21.) Obtain General and Health Care Powers of Attorney for Your College-Bound Children. Once your children attain the age of majority (18 in most states), have them execute a general power of attorney and a patient advocate designation. If desirable, the child can name both parents as co-attorneys-in-fact and co-patient advocates, with either parent being able to act without the consent of the other. In absence of these documents, state law generally prohibits you from making decisions on your child’s behalf without being appointed as a guardian or conservator by the local probate court.

22.) Check Your Beneficiary Designations. Do you know who will receive your retirement plans, IRAs, life insurance and annuities when you die? Beneficiary designations are incredibly important and often forgotten, and override your will and living trust. To avoid these assets going to people you don’t want them to go to, verify who you have named as beneficiaries (both primary and contingent) of your retirement plans, IRAs, life insurance and annuities. Same goes for bank accounts and brokerage accounts with POD (payable on death) or TOD (transfer on death) designations.

23.) Review Your Existing Life Insurance Policies. Many whole life, universal life and variable policies have non-guaranteed variables that will change over time. Among these variables are interest rate fluctuations, varying investment results and cost of insurance charges. Any or all of these factors can have a dramatic impact on how a policy will perform in the future. The current low interest rate environment and recent poor stock market performance in general have caused problems with many of these types of policies. Confirm with your life insurance professional that your life policy is not at risk of lapsing in your later years of life. Ask your insurance professional for an in-force illustration of your whole life or universal life insurance policy. The illustration will show you the exact results of what has happened from the initial policy inception to the present, with future projections based on current assumptions. If necessary, policy adjustments can be made to assure your policy does not lapse.

24.) Take a Digital Inventory. What is going to happen to your Facebook or LinkedIn account when you die? Or all of the songs you downloaded on iTunes? According to a 2013 McAfee study, the average person has roughly $35,000 worth of assets stored on digital services. That value includes purchased movies, books, music and games, as well as personal memories, communications, personal records, hobbies and career information. Most digital accounts are subject to complicated terms of service agreements, which can make it difficult or impossible for your heirs to access them. Moreover, state and federal laws could put those persons who try to log onto your accounts at risk for violating anti-hacking and privacy statutes. Initiatives are under way to put more consumer-friendly laws in place regarding digital assets. Until then, make sure your attorney-in-fact and trustee have detailed directions and information surrounding your digital assets. Your will, trust and power of attorney should allow your fiduciaries to deal with your digital assets and online accounts. At least annually, make a list of all of your online accounts and passwords, and make sure your fiduciaries know where to find that list.

25.) Review Your Estate Plan Annually. Consider whether any events have occurred that should be reflected in your will, revocable trust, power of attorney, health care directive, etc. (such as marriages, births, deaths, etc.). Also look at changes in the tax laws, your choice of fiduciaries, and your net worth to see if revisions to your estate planning documents are necessary. Make sure your documents are HIPAA compliant so that your doctors and hospitals can share your medical records with your patient advocate. HIPAA became law in 2003. Another consideration is revising outright distributions to your heirs so they stay in trust for their lifetime to protect them from creditors, including ex-spouses, and to assure that your assets remain in your bloodline. Check to see if your financial accounts and other assets are properly titled to avoid probate. Make sure your estate plan addresses what will happen if you become incapacitated due to illness, injury, advanced age or other circumstances. Finally, make sure all of your assets will avoid the costs, delays and publicity associated with probate in the event of your death or incapacity.