Finseca (AALU): Optimizing Beneficiary Designations For Retirement Plan Beneficiaries

“For many clients, especially public company executives, retirement plans can constitute a significant portion of their wealth. Determining the proper beneficiary for a client’s retirement plans is an integral part of their overall legacy plan. The identity of the selected beneficiary (e.g., spouse, descendants, trust, charity) can greatly affect the income tax impact and thus a family’s lasting legacy.”

To read the full report, click here.

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Estate Planning Strategies and Techniques or Lifetime Exemption Limits – What’s More Important?

In 2021, the House and Senate proposed various bills that would have shut down virtually every estate planning strategy that ultra-high net worth clients rely on today to transfer hard-earned wealth to family members.  Taken together, these proposals would have destroyed estate planning as we know it today:

  • Eliminate grantor trusts
  • Eliminate discounting
  • Tax gains of appreciated property at death by eliminating the stepped-up cost basis
  • Raise estate tax rates on large estates
  • Sunset (cut in half) gift exemptions as of the beginning of this year rather than the end of 2025
  • Severely limit annual gift tax exclusion
  • Reduce the duration of GRATs and dynasty trusts.
  • Tax mega-IRAs (thanks to the publicity surrounding Peter Thiel’s incredible IRA)

Fortunately, these proposals all failed.  Unfortunately, the threat has not passed – largely due to the impression created by the press that the ultra-wealthy are getting away with murder.  Consider the following:

February 14, 2022 Bloomberg article entitled, “Shale King Harold Hamm Is Passing Billion to His Heirs Tax-Free.”

  • Harold Hamm executed one of the largest wealth transfers in U.S. history last week, handing each of his five children a stake worth about $2.3 billion in Continental Resources inc., the shale drilling company he founded more than 50 years ago.  Like other ultra-rich Americans, Hamm’s massive gift, years in the making, is likely to be passed down largely tax-free.”
  • Hamm, 76, seems to have relied on two of the most common loopholes for avoiding the U.S.’s 40% estate-and-gift tax levy as he shifted the majority of his fortune.  The key to these techniques, both perfectly legal, is to carefully structure transactions  so they benefit heirs but aren’t technically gifts at all.  Democrats had proposed shutting down the strategies….

https://www.bloomberg.com/news/articles/2022-02-14/shale-king-harold-hamm-is-passing-billions-to-his-heirs-tax-free

February 23, 2022, Washington Post editorial entitled, “Congress Passed Up an Obvious Policy Tool to Fix Wealth Inequality” – a call for tougher inheritance taxes.

  • The estate tax is so riddled with exemptions and loopholes that only 0.04 percent of U.S. deaths resulted in the filing of estate tax returns in which inheritance tax was owed and the effective tax rate paid was only 14.7 percent….Alas, federal policy has gone in the wrong direction in recent years.  The 2017 Republican tax bill doubled the amount of money exempt from estate taxes, from $11 million to $22 million per couple.  This exemption is due to phase out in 2026, but expect Republicans to push to keep it in place.”

https://www.washingtonpost.com/opinions/2022/02/23/congress-inheritance-taxes-fix-wealth-inequality/

We don’t know what the future holds and what changes may await us.  So many clients focus only on lifetime exemption limits.  Frankly, I’m not nearly as concerned with exemption limits as I am with a complete and total re-do of our most valuable estate planning tools and techniques.

Your thoughts?

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Finseca (AALU): “Lessons from Smaldino v. Commissioner: The consequences of rushed planning”

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“The “step transaction” doctrine is alive and well. In the foot-race to beat potential tax law changes, families often miss the forest from the trees. The economic realities and entity formalities must be respected in the execution of a gift transaction….On November 10, 2021, the Tax Court rendered its decision in the case of Smaldino v. Commissioner, which involved a purported gift of LLC interests by Mr. Smaldino to his wife, followed by a purported gift of the same LLC interests, the very next day, from Mrs. Smaldino to a dynasty trust for the sole benefit of Mr. Smaldino’s children from a prior marriage. The Court found a series of ignored formalities, and that as a practical matter there was never a time when Mrs. Smaldino would have been able to effectively exercise any ownership rights with respect to the LLC interests “given” to her. The Court held that Mr. Smaldino never effectively transferred any LLC interest to Mrs. Smaldino, and consequently the dynasty trust received its entire LLC interest from Mr. Smaldino, creating a taxable event.”

To read the full report, click here.

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Finseca: “How Can Blended Families Use Life Insurance to Simplify Legacy Planning and Minimize Conflicts”


“While conventional estate plans focus on a “traditional” family notion of one husband, one wife, and their children, families today often involve far more complex relationships. Thus, modern-day families often present unique planning issues, such as the need to satisfy obligations under marital agreements, the goal to provide simultaneously for both the surviving spouse and children from prior relationships, and the desire to ensure “fair” treatment of children from prior relationships, all while minimizing potential conflicts between the spouse and those same children. The acquisition of life insurance, as well as other “tweaks” to the conventional core plan, can address these objectives.”

To see the full report, click here.

 

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Finseca (AALU) – “Life Insurance Mistakes that Keep Attorneys Up at Night”

2021 was a strange and challenging year in the estate and tax planning field, particularly life insurance….In the rush to address and mitigate potential consequences before they came into existence, practitioners, advisors, and clients all made decisions and took actions which, in retrospect, may not have been most advisable, were just plain mistakes, or failed to plan for the problems that these actions had potential to cause in the future, regardless of whether any of the concerning factors came to fruition. This article describes many of these “mistakes” which occurred due to rushed planning and may serve as a warning if we are (and we will be) faced with similar situations in the future.

To see the full report, click here. 

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Finseca (AALU) – First, do no harm – Estate planning for an unknown future

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There is an adage in the medical field that applies to planning for insurance trusts right now, namely: “First do no harm”.  What is particularly difficult for estate and tax practitioners today is they are being asked to plan for previously proposed legislation that, while currently out of the legislative debate, might resurface and pass in the future. Given this situation, what can we do to position our clients so that we are helping them in the event that the now shelved legislation reenters the debate and is passed, while simultaneously not hurting them if the laws do not change?

To read the full report, click here.

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What You Know and What You May Not Know

What You Know:  We Just Dodged the Defective Grantor Trust Bullet (or did we?)

What You May Not Know:  It Is Still Important to Consider Hedging Re-Introduction of DGT Provisions

Please click here to see three planning/drafting scenarios to consider.

 

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Finseca (AALU) 🔴 President Biden Releases Framework on Spending Package

BREAKING NEWS from Finseca:

This morning, President Biden delayed his trip to see the Pope to meet with Congressional Democrats about moving forward on the Bipartisan Infrastructure bill (BIF) and on the reconciliation bill (Build Back Better plan, or BBB). In concert with that meeting, the White House released two documents (below) explaining the current state of play on the reconciliation package.

We view this as an offer, not a conclusion. These documents are focused on the big picture items. They leave out many important details. There are other items not covered here that key Democrats have said must be addressed in a final deal (i.e. SALT).

Here are the things we are watching closely:

  • Grantor Trusts. We do not read their absence from this document as a guarantee that they are off the table.
  • Millionaires Surtax. To what definition of income is this being applied?
  • 199A. While this document is silent on 199A adjustments, it does reference expansion of the Net Investment Income Tax. The House bill expanded that to cover active passthrough income, a small business tax increase.
  • Estate Tax Exemptions Expiration. Not addressed in the announced framework.

Again, this is a very fluid situation. Please don’t hesitate to reach out with questions.

Armstrong Robinson
Chief Advocacy Officer, Finseca

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Finseca (AALU) – Grantor Trust Developments

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“Contained in the House Ways & Means version of the reconciliation package was a significant change that would materially impact the usage of grantor trusts for estate planning. Since its release, Finseca has been advocating to preserve the tax treatment of life insurance death benefits and to protect the clients who utilize your services to meet the anticipated liquidity needs at death inclusive of the taxes to be paid. Your Finseca team has had several constructive conversations with policymakers in Congress about correcting the unintended impact on life insurance. As always, nothing is final until the President signs the bill, and we do expect changes. We anticipate an updated draft of the bill in a few weeks when it moves to the House Rules Committee. Notably, the crafters of the provision have changed effective date for Section 1062 that would disregard ownership for any sales/transfers/swaps between the grantor and the trust and subject them to a tax realization event.”

To see the current update, click here.

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