A summary of the key facts and figures you need to know for estate planning and long-term care planning in 2019.
The beginning of a new year is an invitation to review what you’ve accomplished the prior year and to think about what things you might like to accomplish this year. As your make your 2019 New Years Resolutions, I’d like to suggest that you take some time this year to think about your estate plan.
If you don’t have a plan yet… consider making one! Keep in mind that just because you haven’t done any formal planning doesn’t mean you don’t have a plan. Without your own plan, the government will make decisions for you. State laws govern what happens to your assets when you pass away, and in some cases state laws govern who makes decisions for you if you need help doing so. But these default rules are set aside if you make your own plans and turn those plans into legal documents. So, if you don’t yet have a plan, make a resolution in 2019 to sit down with an estate planning attorney and discuss your wishes and make a plan. If nothing else, make sure you get a health care directive if you don’t already have one.
If you already have an estate plan… consider reviewing it to make sure it’s still consistent with your wishes. Ask yourself whether there have been any major life changes since you last did your estate planning documents. Have you moved? Has a spouse, child, or other beneficiary or person named in your documents passed away? Have minor children reached adulthood? Did you give or loan money to a beneficiary, and you want that beneficiary’s share reduced to reflect that? Were you or your spouse diagnosed with a long-term, serious illness that may require long-term care? Was a beneficiary diagnosed with a permanent disability? Have you acquired real estate? Do your assets now total more than $3 million? Did you or a beneficiary go through a divorce? Do your documents simply not make sense to you anymore? If you answered “yes” to any of these questions, you should talk to an estate planning attorney about whether your documents need to be updated or changed.
Estate planning doesn’t have to be expensive or complicated, and knowing that you have a plan in place provides significant peace of mind for both you and your family. Contact me or one of our estate planning attorneys at FMJ to discuss options for your estate plan in the new year.
Happy new year!
I’m often asked what are the essential legal documents that everyone needs. While it’s true that most people need to put an estate plan in writing and most will need to decide between a will or a trust plan, there is really only one document that everyone needs, and it’s not a will or a trust. It’s a health care directive.
If you are reading this and you don’t have a health care directive, get one. Anyone over the age of 18 needs a health care directive. Why? While a health care directive can do a number of important things, the most important thing it does is nominate someone else to make health care decisions for you if you cannot. If a serious illness or accident happens and you become brain dead but remain on life support, do you have someone with the legal authority to make the decision to remove life support? Or if you have a terminal condition, is there someone who can decide for you whether to pursue treatment or palliative-only care? As some people like to say, who can “pull the plug” without having to go to court to get a court order to do it? If you don’t have a health care directive, then then answer is, no one.
You might think that, if you’re married, your spouse can make these decisions. But, there is no law in Minnesota that makes your spouse the default decision-maker for your healthcare decisions. If you want your spouse to be able to make those decisions without question, then you need to have a health care directive.
You might also think that, if you’re a young person, your parents can make health care decisions for you. Again, not necessarily. For people over 18, your parents no longer have legal authority to make healthcare decisions for you. So again, if you want your parents to have this ability, you need to sign a health care directive. If you have a child who just turned 18, I strongly recommend you have them sign a health care directive in case something were to happen to them.
In addition to nominating someone to make health care decisions for you, a health care directive can also state your wishes regarding organ donation and final disposition of your remains. There are many different forms available for health care directives, and some are quite short while others go into great detail regarding your wishes for your health care (a popular one is called the “Five Wishes”). Most physicians and clinics can also provide you with a health care directive form. You can choose any form you like, but it must have the following components to be valid in Minnesota: It must be dated and signed by you, it must nominate at least one person to act as your health care agent, and it must be either witnessed by two people or notarized. If you use witnesses, at least one cannot be a healthcare provider, and none can be your agent (or agents). Also, keep in mind that your spouse or close family member cannot notarize your documents based on legislation passed last year.
As an attorney, I’m always a bit tickled when a relatively obscure estate planning device makes the national news. Just a couple years ago, the untimely passing of Prince (legendary Minnesota musician and personal favorite of mine) brought the importance of estate planning to the national stage. Even more recently, the passing of Aretha Franklin, another great talent who neglected to make a will, has reiterated the point. Even so, the statistics reveal that the vast majority of Americans do not have any estate plan in place. But this post is not about celebs who failed to plan, but rather celebs who planned quite well, and what we can learn from them.
In a recent investigation by the New York Times, reporters revealed that President Trump’s father, Fred Trump, a billionaire in his own right, used something called a “GRAT” to pass his fortune onto his children. The Times revealed that, using this GRAT, Trump’s estate paid far less in estate taxes than it otherwise might have had to do. So, what is a GRAT?
A GRAT is a grantor retained annuity trust. It has its origins in an estate tax loophole in Internal Revenue Code Section 2702. Section 2702 was enacted in 1990 to eliminate what were called grantor retained income trusts (or “GRITs” — see, isn’t this fun?). Congress wanted to stop people from being able to transfer assets to their children in a trust while retaining the income to themselves and using the income to offset the transfer taxes that would ordinarily be owed to the government. While the law outlawed “GRITs”, it continued to allow a very similar arrangement so long as the grantor received a fixed amount of income, or an annuity, instead of a variable income stream. Thus, the GRAT was born.
The advantage of a GRAT is its ability to freeze the present value of an asset for transfer tax purposes even though the asset continues to appreciate. Suppose you have an asset that you know is going to grow in value in a big way — say stock in a closely held company that’s about to go public. Later on you might want to gift the stock to your children, but by then the stock will be so valuable you might have to pay gift or estate tax on it; but you don’t want to give the stock to your children now before it appreciates. If you create a GRAT, you can transfer the stock to the GRAT, the GRAT will pay income to you for a fixed term (2-10 years is typical) based on the present day value of the stock, the annuity income can zero out the transfer tax obligation you would otherwise have, and your children will later receive the stock after it has grown in value, tax free. In short, you transfer an asset to the GRAT, the GRAT pays you pack the initial value of the asset upon the date of transfer, and then your children receive the appreciated asset later on, tax free (or tax reduced).
You might be thinking that you have lots of assets — stocks, real estate, etc.—that are likely to appreciate, so why aren’t we all using GRATs? First, because most people today will never owe any estate or gift tax. The current federal estate tax exemption is $11.2 million per person. That means a married couple can transfer $22.4 million combined tax-free. If you’re wealth is below this figure, a GRAT probably isn’t for you. Second, if your asset fails to appreciate as expected, there’s no advantage. The assets in the GRAT have to appreciate at a rate greater than a rate established by the IRS under Internal Revenue Code Section 7520, and that can be hard to predict in the real world. Third, if the grantor dies before the end of the GRAT annuity term, the whole thing is included in the grantor’s gross estate for the calculation of the estate’s tax obligation. That’s a lot of “what ifs”!
Last, there are alternatives to GRATs that most people should consider. If you live in a state, like Minnesota, that has a state estate tax exemption that is much lower than the federal exemption, you could still have to worry about estate tax even if you don’t have a Trump-sized portfolio. For these folks, an irrevocable life insurance trust (ILIT) or charitable giving may be a more appropriate, less risky, and less complicated alternative.
So, while GRATs aren’t for everyone, estate plans are. Borrow a play from the Trump family play book and contact a lawyer today to get started on your estate plan. An attorney like me or my colleagues at FMJ can help you find the right plan for you.