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A Simple Guide to Estate Planning Best Practices


All of your clients, regardless of how much wealth they have, should engage in estate planning. This remains true even with the COVID-19 pandemic winding down in certain parts of the world. As an accountant, you can talk your clients through setting up everything from basic wills to GRATs and other, more advanced types of trusts. 

Jun 23rd 2021
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How does one plan an estate given the current state of affairs? Kiplinger notes that the pandemic can exacerbate the pain of poor estate planning. Does that mean that it's too late to get your affairs in order? While the fatality rate of the virus is relatively low, it's still significant. The best time to do estate planning is ten years ago, but the second-best time to do so is now. What sort of estate planning advice can an accountant offer his or her clients when it comes to getting their affairs in order?

Set Up a Will

Putting together a will to ensure that your worldly possessions are accounted for after your death is something you should try to do. Regardless of the total worth of your estate, having a will ensures that you will be able to grant those assets to someone in the event of your demise. If you don't have a will, it falls to state law to distribute your estate. This method of distribution makes certain assumptions that might not be true. A will also gives you the power to appoint a guardian for any minor children you might have. Finally, you have the option of designating an executor that can administer your assets after your death. Wills may include trusts that can offer long-term income for beneficiaries in the right conditions. Looking into setting up a trust alongside your will is also a positive development.

Revisit Your Estate Planning Goals

If you went through the process of estate planning, you might want to revisit your current goals. Understanding your current estate plan and its goals may encourage you to change your focus. The first thing to define would be who gets what in the event of your death. This consideration includes assets, property and money. Previous plans might have catered to distribution differently, but the current situation may change how you approach this matter.

Additionally, legislation may have changed since your initial plan, meaning you may have to recalculate estate tax owed upon the inheritance. As an accountant, you can help clients work around this issue by developing tax-free trusts and gifts to keep wealth within the family. Liquidity analysis helps to determine how taxes will be paid in the event of inheritance and what the local authorities are entitled to.

Consider Low-Cost Wealth Transfers

While still alive, you can engage in some wealth transfers to your next of kin that allows them access to assets and capital. One of the most common methods of doing so is to offer a loan to a family member. By providing younger members of the family a loan with a minimal federal interest rate attached, the younger generation can invest in assets that are likely to appreciate outside their elders' taxable estate. Federal tax rates also make it a viable strategy to refinance existing loans. Federal rates vary from 0.25 percent for a short-term loan to 1.15 percent for a long-term loan.

Grantor Retained Annuity Trusts (GRATs)

A GRAT is a well-known method that the Treasury has approved as a means of wealth transfer. In a GRAT, you retain an annuity interest in a separate trust while leaving the remainder to your beneficiaries. When dealing with the gift tax, the value of the annuity is removed from the value of the GRAT-constrained property. Your beneficiaries only need to pay taxes on the remainder of the value. The low interest rates make a GRAT an attractive option for many individuals. The low entry requirements and the volatile markets provide a unique opportunity to appreciate assets within the GRAT while avoiding gift tax that might have been levied on the investments were they passed down through a will. Managing a GRAT effectively may mean combining assets in a series of short-term and long-term trusts to better ride the market's volatility.

Grantor Trust Acquisition of Assets

One of the cleverer ways of reducing tax on assets is by selling them to a grantor trust. The sale may still be liable for taxation, but at a much-reduced rate. An individual can form and fund a trust using a portion of their gift tax shelter allowance. This trust formation ensures that the assets in the trust would be sheltered from transfer tax in the future. The trust structure is designed to work as a "grantor" trust for income tax purposes with the individual as the taxpayer, who is liable to report all income generated from the trust. The interesting fact is that the individual may sell their appreciated assets to the grantor trust without expressing capital gains. The assets that form the trust will be enhanced over the years, letting the trust estate develop without fear of taxation.

Establishing Family Trusts

At the moment, the exemptions on the federal estate, gift, and generation-skipping transfer (GST) taxes are massive. According to Investopedia, GST tax exemptions stand at $11.18 million per individual. However, this ceiling is expected to be reduced significantly to $5 million per individual by 2026, suggesting that this is the best time to take advantage of the current exemption levels. Establishing a trust utilizing exemptions keeps wealth within the family. Accountants can set up trusts that move assets out of the taxable estate of an individual or a married couple. In this case, the trust would transfer to the beneficiary without paying exorbitant federal estate, GST and gift taxes on the inheritance.

Understanding a Changing World

COVID-19 may be here to stay, but even so, the world around us is developing and evolving. Already, politicians are looking at ways to increase taxation on inheritances. The demands of COVID-19 have forced them to go into deficits while dealing with the pandemic. These taxes are intended to shore up their spending. Estate planning is a crucial part of avoiding the taxes associated with gifting and inheritance. Trusts are ideal for protecting wealth while still leaving it open to transfer to the next generation. Uncertain times usually have families considering their options for retaining their wealth. This is as good a time as any to approach clients about estate planning, to plan for the inevitable.

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