Press Release: Years of hard work, planning and saving will pay off for retirement but then leaving it for your children and grandchildren could ruin their lives.
During the recent elections, there was discussion about possibly changing the estate tax thresholds. The recommendation has been to raise the estate tax from its current $5.45 million personal exemption ($10.9 million for married couples) to heirs tax-free. Most Americans will never have to worry about the amount since they’ll never attain that level of wealth. The Tax Policy Center estimates that, in 2017, only about11,000 estate tax returns will be filed of which, about 5200 will be taxable. The Census Bureau projects that approximately 2.7 million people will die in 2017. Of those, estate tax will be filed for only approximately one in 243 decedents and only one in 517 will pay estate taxes.
“I’m finding many people who are concerned about possible changes to the estate tax laws and how it impacts their personal situation” stated Christopher Krell, CFP, CFS, a leading nationally recognized financial adviser. He feels, however, that worries about the law are misplaced concerns. “What it means for most people is that they’ll have to rework their estate plan and documents,” he explains. He also goes on to state that people need to update their estate plans at least every five years anyway. “Even if it’s a matter of simply updating the plan,” said Krell. “When you are sick or die, the financial and health care institutions will look for the most recent plan and they’ll expect it to be dated within the past five years. If not, they reserve the right to not accept the old documents because they are too old and afraid there may be a newer version and they are liable for acting on an old document.”
He further explains, “Basically, the estate tax only applies to about 1 percent of the population as most of the country isn’t going to have $5 to $10 million to leave.” In spite of the low numbers of heirs paying estate taxes, the tax collected in 2016 was more than $19 billion, according to the Tax Policy Center.
“Whether or not your estate is large enough to potentially warrant paying estate taxes, you should still have a well thought out estate plan that everyone in the plan understands in advance,” added Krell. “Good estate planning is key to the future of your heirs—your children and/or your grandchildren.”
Krell often gathers the family for a “family summit” where everyone can discuss and understand the details of the future distribution of an estate. He believes strongly that careful estate planning will ensure that heirs don’t think they’re on track to win the “DNA lottery,” and that incentive trusts can be set up to maintain motivation. “Too often, I’ve seen heirs who, knowing they’ll receive a big payout, have no motivation to work or be productive,” stated Krell. “And, then once they’ve received the money, it is often squandered and not responsibly handled and appropriately invested.”
“What you do with your money should be well thought through and well communicated in advance,” Krell advised. While trusts are fairly tax inefficient vehicles to leave money to the next generation, an incentive trust that rewards heirs for attaining specific life goals and benchmarks is a popular vehicle for parents who don’t want to dis-incentivize their children from working and having productive lives. For instance, a clause in the trust allows for a portion of the trust to be distributed if the heir reaches a specific salary. In example, if the heir reaches a salary of $100,000, the trust may distribute $50,000. Trusts can also be set up to reward doing good. So, if the heir wants to work for a nonprofit, a clause can be added that allows a distribution for working 40 hours, or more, per week for a nonprofit.
There are also clauses where a trust doesn’t give cash but assists in paying down a mortgage or school loans. Life benchmarks for distribution of a trust include providing funds for a wedding, a house down payment, a grandchild’s education, etc. Trusts can also be tied to specific age distributions.
“Some estate planners tend to use an off-the-shelf estate planning template to set up a trust,” said Krell. “This is dangerous as it often leaves the estate plan open to broad interpretation and abuse.” Instead, estate plans should be carefully crafted and very specific as to how the money will be distributed.
It’s also critical to carefully choose a trustee. This should be someone who knows the family well and will help the heirs manage their wealth.
Lastly, Krell recommends spending extra money and investing the time to hire a corporate trustee as a protector. This is a mediator who oversees the trust and the trustee and makes sure that the inheritance is handled exactly as specified. It can often be easier for the corporate trustee to play the roll of ‘bad cop’ and stop abusive withdrawal requests as compared to a family member alone.
While there are many options available, there are basically three overarching concepts—to leave nothing to children or grandchildren and give the estate solely to charity—in all states, except Louisiana, you can cut children out of the estate; leave all of the estate outright to children or grandchildren; or set up a detailed trust that rewards heirs for specific events or activities. In some cases, families change their estate plans as they become older and the children become productive adults. In those cases, leaving the estate is less of a burden and, depending on amount of the estate, could be tax free.
Trusts can also be set up that allow the trustee to make decisions as to when the heirs are worthy of distributions. These are known as sprinkle or spray trusts and discretionary trusts. Special needs trusts can be set up for heirs that are disabled. In all cases, Krell advises that it is critical for the families to maintain open communication and that everyone fully understands the stipulations of a trust and the trustee(s).
“Many people have been ruined by an inheritance,” Krell added. “While leaving an estate to charity is a noble action; with careful estate planning, you can still leave all or a portion of your estate to heirs where it will be a benefit and not an albatross.”