What Is a Fiduciary and a Fiduciary Duty ?

First, a fiduciary duty is the requirement that certain professionals, like attorneys or financial advisors, work in the best financial interest of their clients. By law, members of some professions with clients are bound by fiduciary duty.

Forbes’ recent article entitled “What Is Fiduciary Duty?” explains that in a fiduciary relationship, the person who must prioritize their clients’ interests over their own is called the fiduciary. The person getting the services or assistance is called the beneficiary or principal.

You will frequently see a fiduciary relationship with certain types of professionals, like attorneys and financial advisors. A fiduciary duty is a serious obligation, and if a fiduciary doesn’t fulfill his or her duties, it’s known as a breach of fiduciary duty. Fiduciaries must act in a beneficiary’s best interest. They have two main duties: duty of care and duty of loyalty. Fiduciaries may have different or additional requirements, depending on their industry.

With the duty of care, fiduciaries must make informed business decisions after reviewing available information with a critical eye. Lawyers must act carefully in performing work for clients. Care is determined by the prevailing standards of professional competence in the relevant field of law and geographic region. To abide by the duty of loyalty, fiduciaries must not have any undisclosed economic or personal conflict of interest. They can’t use their positions to further their own private interests. For example, fiduciary financial advisors might adhere to the duty of loyalty by disclosing recommendations from which they’ll receive a commission.

Other common professions or positions that require fiduciary duties include directors of corporations and real estate agents, as well as those discussed below:

Trustee of a Trust. When you want your assets to transfer to someone after you die, you can put them into a trust. The trustee who’s in charge of the trust has a duty to manage the trust and its assets in the best interests of the beneficiary who will one day inherit them.

Estate Executor. The person who manages your estate and handles your affairs is your estate executor. He or she has a fiduciary responsibility to your heirs and next of kin to distribute the estate according to your wishes.

Lawyer. Your attorney must disclose any conflicts of interest and must work with your best interests in mind.

Financial Advisors. Financial advisors who are fiduciaries must act in the best interest of their clients and offer the lowest cost financial solutions to fit their clients’ needs. However, it important to note that not all financial advisors are fiduciaries.

Reference: Forbes (July 28, 2020) “What Is Fiduciary Duty?”

 

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How to Make Beneficiary Designations Better

Beneficiary designations supersede all other estate planning documents, so getting them right makes an important difference in achieving your estate plan goals. Mistakes with beneficiary designations can undo even the best plan, says a recent article “5 Retirement Plan Beneficiary Mistakes to Avoid” from The Street. Periodically reviewing beneficiary forms, including confirming the names in writing with plan providers for workplace plans and IRA custodians, is important.

Post-death changes, if they can be made (which is rare), are expensive and generally involve litigation or private letter rulings from the IRS. Avoiding these five commonly made mistakes is a better way to go.

1—Neglecting to name a beneficiary. If no beneficiary is named for a retirement plan, the estate typically becomes the beneficiary. In the case of IRAs, language in the custodial agreement will determine who gets the assets. The distribution of the retirement plan is accelerated, which means that the assets may need to be completely withdrawn in as little as five years, if death occurs before the decedent’s required beginning date for taking required minimum distributions (RMDs).

With no beneficiary named, retirement plans become probate accounts and transferring assets to heirs becomes subject to delays and probate fees. Assets might also be distributed to people you didn’t want to be recipients.

2—Naming the estate as the beneficiary. The same issues occur here, as when no beneficiary is named. The asset’s distributions will be accelerated, and the plan will become a probate account. As a general rule, estates should never be named as a beneficiary.

3—Not naming a spouse as a primary beneficiary. The ability to stretch out the distribution of retirement plans ended when the SECURE Act was passed. It still allows for lifetime distributions, but this only applies to certain people, categorized as “Eligible Designated Beneficiaries” or “EDBs.” This includes surviving spouses, minor children, disabled or special needs individuals, chronically ill people and individuals who are not more than ten years younger than the retirement plan’s owner. If your heirs do not fall into this category, they are subject to a ten-year rule. They have only ten years to withdraw all assets from the account(s).

If your goal is to maximize the distribution period and you are married, the best beneficiary is your spouse. This is also required by law for company plans subject to ERISA, a federal law that governs employee benefits. If you want to select another beneficiary for a workplace plan, your spouse will need to sign a written spousal consent agreement. IRAs are not subject to ERISA and there is no requirement to name your spouse as a beneficiary.

4—Not naming contingent beneficiaries. Without contingency, or “backup beneficiaries,” you risk having assets being payable to your estate, if the primary beneficiaries predecease you. Those assets will become part of your probate estate and your wishes about who receives the asset may not be fulfilled.

5—Failure to revise beneficiaries when life changes occur. Beneficiary designations should be checked whenever there is a review of the estate plan and as life changes take place. This is especially true in the case of a divorce or separation.

Any account that permits a beneficiary to be named should have paperwork completed, reviewed periodically and revised. This includes life insurance and annuity beneficiary forms, trust documents and pre-or post-nuptial agreements.

Reference: The Street (Aug. 11, 2020) “5 Retirement Plan Beneficiary Mistakes to Avoid”

 

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Financial Planning – How Do I Survive My 50s?

Financial Planning – More than 50% of the workers who entered their 50s with stable, full-time jobs were laid off or forced out at least once by age 65, according to an analysis of employment data from 1990 to 2016 by the nonprofit newsroom ProPublica and the Urban Institute. Only one in 10 of those who lost a job ever found another that paid as much, and most never recovered financially.

Considerable’s recent article entitled “5 strategies for navigating your most dangerous decade” says that these realities make it critical that you have a plan for surviving what could be your most dangerous decade.

Stay current in your field. You may want to just ease into retirement and switch to auto pilot in your last few years of your career. However, older workers who aren’t proactively updating and increasing their skill sets are more likely to be laid off. They may be the first to go. Seek out training opportunities at work and volunteer for new assignments. You can also ask to be both “a mentor and mentee,” where a younger co-worker helps you stay up-to-date with the latest technologies used by your office, and you can share you knowledge of the company and industry with them.

Save early, save often. “Catch up” provisions were added to help workers supercharge their savings in the years right before retirement. As a result, in 2020, workers who are age 50 and older can contribute up to $26,000 to workplace retirement plans, like a 401(k)s, compared with the limit of $19,500 for younger workers. This may motivate you to start saving as soon as possible and to increase your savings rate, whenever you can. It’s also a good idea to bolster your emergency fund. The average length of unemployment for people 45 to 54 is about five months. In this pandemic and down economy, the time may be even longer.

No more borrowing. Many people see their ability to save blocked, because of debt. Limiting how much you owe as you get older, can provide you with more financial flexibility. If you’re refinancing a mortgage, get a loan term that lets you be debt free by retirement or earlier. Use care in borrowing money for education, either for yourself or a child, because those obligations typically can’t be discharged in bankruptcy and could be hard to pay back, if you lose your job.

Cut the cord. More than a few parents provide their adult children with some financial support—typically for household expenses not an emergency. These continuous gifts may wreak havoc with your financial health, as well as theirs. Create some clear financial boundaries you help you wean them off the distribution of the “Bank of Mom and Dad” welfare checks.

Move quickly. You may find another job soon, if you lose your current one. If so, move ahead like you won’t by cutting non-essential spending, asking lenders about possible forbearance or hardship programs and staying in touch with your network.

Reference: Considerable (August 1, 2020) “5 strategies for navigating your most dangerous decade”

 

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Should I Create an LLC for Estate Planning ?

If you want to transfer assets to your children, grandchildren or other family members but are worried about gift taxes or the weight of estate taxes your beneficiaries will owe upon your death, a LLC for Estate Planning can help you control and protect assets during your lifetime, keep assets in the family and lessen taxes owed by you or your family members.

Investopedia’s article entitled “Using an LLC for Estate Planning” explains that a LLC is a legal entity in which its owners (called members) are protected from personal liability in case of debt, lawsuit, or other claims. This shields a member’s personal assets, like a home, automobile, personal bank account or investments.

Creating a family LLC with your children lets you effectively reduce the estate taxes your children would be required to pay on their inheritance. A LLC also lets you distribute that inheritance to your children during your lifetime, without as much in gift taxes. You can also have the ability to maintain control over your assets.

In a family LLC, the parents maintain management of the LLC, and the children or grandchildren hold shares in the LLC’s assets. However, they don’t have management or voting rights. This lets the parents purchase, sell, trade, or distribute the LLC’s assets, while the other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company. Therefore, the parents keep control over the assets and can protect them from financial decisions made by younger members. Gifts of shares to younger members do come with gift taxes. However, there are significant tax benefits that let you give more, and lower the value of your estate.

As far as tax benefits, if you’re the manager of the LLC, and your children are non-managing members, the value of units transferred to them can be discounted quite steeply—frequently up to 40% of their market value—based on the fact that without management rights, LLC units become less marketable.

Your children can now get an advance on their inheritance, but at a lower tax burden than they otherwise would’ve had to pay on their personal income taxes. The overall value of your estate is reduced, which means that there is an eventual lower estate tax when you die. The ability to discount the value of units transferred to your children, also permits you to give them gifts of discounted LLC units. That lets you to gift beyond the current $15,000 gift limit, without having to pay a gift tax.

You can give significant gifts without gift taxes, and at the same time reduce the value of your estate and lower the eventual estate tax your heirs will face.

Speak to an experienced estate planning attorney about a family LLC, since estate planning is already complex. LLC planning can be even more complex and subject you to heightened IRS scrutiny. The regulations governing LLCs vary from state to state and evolve over time. In short, a family LLC is certainly not for everyone and it appropriately should be vetted thoroughly before creating one.

Reference: Investopedia (Oct. 25, 2019) “Using an LLC for Estate Planning”

 

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Full Retirement Age Working and Collecting Social Security Benefits

Full Retirement Age – For decades, Americans have taken comfort from knowing that no matter what else happened with their retirement savings, they would be able to get Social Security benefits when they stopped working. Even better, the benefit grows with inflation and continues for as long as the person or their spouse lives, explains the article “How working changes your Social Security benefits” from The Sun.

Workers and spouses who qualify for Social Security have the option of starting to receive benefits at any time from age 62 to 70. Benefits received before reaching Full Retirement Age (FRA) will be smaller than those received after a worker reaches their FRA. These amounts are worked out in a series of complex calculations by actuaries to ensure that everyone receives their fair share. If you retire later, after FRA, the monthly benefit will be higher. If you wait until age 70, the monthly benefit will have reached its maximum level.

Less well understood is the effect of continuing to work, while collecting Social Security benefits. You can decide to stay in the workforce and apply for benefits. However, if you claim benefits before your Full Retirement Age and your income exceeds certain levels, there’s a reduction in the full monthly benefit that you would otherwise receive.

This is known as the Retirement Earnings Test, or RET. It does not apply to earnings from investments and pensions, but it does apply to earned income.

Someone who will be younger than their FRA during the entire calendar year will lose $1 in benefits for every $2 they earn above $18,240 in 2020. There was a $600 increase from the 2019 earnings test.

For every two dollars you earn above $18,240, Social Security will deduct one dollar from your benefits. However, the money that is withheld will be added back into your benefits when you reach Full Retirement Age .

Let’s say you earn $20,240 in 2020 and you’re 62 years old. You’ll temporarily give up $1,000 in benefits for going $2,000 over the earnings limit test. However, you will get it back.

What if you are reaching FRA in 2020? The earnings test limit is $48,600 in 2021, a jump of $1,680 from the 2019 limit of $46,920. In this situation, once your earnings reach $48,600 in 2020, $1 in benefits will be withheld from every $3 you earn.

The typical response to learning how the RET works, is that it’s a harsh penalty and why work at all?

Some people stop working altogether or work less to avoid the penalty. That is a mistake. By continuing to work, once a person does reach Full Retirement Age , Social Security increases the monthly benefit amount for the rest of the person’s life. Any benefits lost in earlier years are recouped. Think of it as a rescheduling of payments, from pre-FRA to post-FRA. It’s not a penalty, but another means of saving for the time when you are not working.

Reference: The Sun (June 21, 2020) “How working changes your Social Security benefits”

 

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Don’t Shrink Your Estate with Last Minute Tax Planning

In the best-case scenario, you’d start talking with your estate planning attorney early on about your overall goals and the various tools available for tax planning and transfer wealth to the next generation. Whether your estate is modest or significant, the article “A Recipe for Risk—Last-Minute Tax Planning for Estates” from The Legal Intelligencer explains how a last-minute plan failed on a grand scale. A recent memorandum opinion from the U.S. Tax Court provides a cautionary tale.

Howard Moore owned a large amount of property and ran a successful farm. He was admitted to the hospital late in 2004, was discharged to hospice and told he only had six months to live. He created an estate plan that included a family limited partnership (FLP), a living trust, a charitable lead annuity trust, a trust for the adult children, a management trust that acted as the general partner of the family limited partnership and an “Irrevocable Trust No. 1” that was created to act as a conduit for the transfer of funds from the FLP to a charitable foundation.

The primary focus of the plan was to transfer the farm to a living trust and then to transfer 80% of the farm property to the FLP. The management trust was to serve as a partner to the FLP, with the living trust owning almost all the limited partnership interests and with each of the decedent’s children owning a 1% partnership interest. The FLP was to offer protection against liabilities from the use of pesticides, potential bad marriages, creditors and the fact that the family was a bit dysfunctional and would need to work together to manage the FLP. The FLP had many transfer restrictions and the limited partners were not given any rights to participate in business management or operational decisions regarding the FLP.

The trust known as “Irrevocable Trust No. 1” was nominally funded at the time of the decedent’s death and received funding from the FLP. Those funds, in turn, were transferred to the charitable trust to gain a charitable deduction by the estate. Just before he died, Moore used FLP funds to make large transfers to his children that were designated as loans. He also made outright gifts to the children and to one grandchild.

The estate filed an estate tax return and a gift tax return after Moore’s death. The IRS issued a notice of deficiency for nearly $6.4 million and the case went to tax court. The U. S. Tax Court agreed with the IRS’ findings. The defense of the estate plan, the tax court maintained, was form over substance and the only reason for the estate plan and the numerous transactions was to save estate taxes.

There were a lot of hurdles in this case, in addition to the short time period for the estate plan to have been created. At the time of the decedent’s hospitalization, the sale of the farm to a neighbor was being negotiated. A contract to sell the farm was executed with days of transferring it to the living trust. There were numerous transfers and distributions made between trusts and the FLP, and the court concluded that all decisions about the FLP after its formation were made unilaterally by the decedent. An FLP is supposed to function as a true partnership. Many other issues and errors occurred in the rush to have this estate structured in such a short period of time.

Had Moore engaged in tax planning five or ten years earlier, there would have been time to create a plan in which both the substance and execution of the plan were sound and the family would have been able to save millions of dollars in taxes. By waiting until his death was imminent, the plan attempted to establish transfer requirements without the opportunity to execute them properly.

Reference: The Legal Intelligencer (May 18, 2020) “A Recipe for Risk—Last-Minute Tax Planning for Estates”

 

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Should I Use My 401(k) in the Pandemic ?
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Should I Use My 401(k) in the Pandemic ?

Many Americans are struggling with what to do with their retirement savings, as we endure the COVID-19 pandemic. Many don’t know if they should stand pat or cash in their savings and are asking should I use my 401(k) in the pandemic ?

The new CARES Act makes it easier for us to tap our retirement accounts and 401(k) in the pandemic.  However, there may be significant long-term effects for your financial security.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress signed into law by President Trump on March 27. The law provides more than $2 trillion in economic relief to protect the American people from the public health and economic impacts of COVID-19. The Act provides fast and direct economic assistance for American workers, families and small businesses, as well as preserving jobs for American industries.

CNBC’s recent article entitled “Tapping Your 401(k): Is now the right time to do it?” says that if you need emergency cash, and your 401(k) in the pandemic is your only source of funds, taking a short-term loan from your retirement account as a “last resort” may be a wise option.

While you will be repaying yourself rather than paying 11% interest on average on a personal loan, know that you’re borrowing from your financial future and possibly risking your financial security in retirement.

The CARES Act lets you to borrow up to $100,000 (double the previous loan limit of $50,000) from your 401(k) and delay repayment for up to a year. After you borrow, you’ll typically have to repay the loan within five years, depending on the terms of your 401(k) plan. Under the CARES Act, loan payments due in 2020 can be delayed for up to a year from the time you take out the loan. However, if you can’t pay back the loan within the time frame designated by your plan, your outstanding balance will be taxed like a withdrawal. That means you’ll also pay a 10% early withdrawal penalty.

If you leave your job — regardless of  whether by choice — there’s a good chance your plan will require you to repay the money back quickly. If you don’t, your account balance will be decreased by the amount owed and considered a taxable distribution. This choice must factor in the length of time before you need your money, your ability to save, and your comfort level with risk.

You can also take a penalty-free distribution from your IRA or 401(k) of up to 100% of your balance or $100,000, whichever is less. You aren’t required to pay the 10% early withdrawal penalty, if you’re under age 59½ and you can pay taxes on the money you take out over a period of three years or pay no tax, if you pay it all back. However, your employer must agree to adopt these new rules for your existing 401(k) plan.

Reference: CNBC (April 20, 2020) “Tapping Your 401(k): Is now the right time to do it?”

Suggested Key Terms: Estate Planning Lawyer, Legislation, Tax Planning, Financial Planning, IRA, 401(k)

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Advance Designation of Representative Payee for Social Security

Advance Designation of Representative Payee for Social Security – For many years, people have had the right to designate an agent to handle a number of different legal, business and medical matters. That includes finances, medical decisions, wills and even funerals. What Americans have not been able to do until now, says the article “Social Security and you: New Advance Designation for Representative Payee” from The Dallas Morning News, is designate an agent to handle Social Security benefits.

As of April 6, 2020, the Social Security Administration announced that there is a new option that lets a recipient make an Advance Designation that names a person to serve as your “ representative payee .” This is a really big deal, but it hasn’t received too many headlines.

Maybe that’s because under this law, anyone could apply to be a representative payee, receiving someone else’s Social Security payment and using it to pay the recipient’s living expenses. There’s a lot of room for abuse.

The best way forward? Make a decision and name a person while you have capacity. The Advance Designation option is only available to “capable” adults and emancipated minors who are applying for or receiving Social Security benefits, Supplemental Security Income (SSI) or Special Veterans Benefits.

A Social Security recipient can name as many as three people, who could serve as a representative payee if the need arises. There’s a lot of flexibility: you can withdraw your choices, change the order of the three people and name new people at any time. Just in case anyone forgets who they named, Social Security is going to send a notice each year, listing advance designees for review.

How will it work? When the SSA believes a person needs help managing benefits, they will contact the advance designees. The SSA reserves the right to discard your choices and make its own appointment.

How do you make the designation? Go online to the SSA website, especially now when phone, in-person and in writing are all either backlogged or not possible to do right now. After you’ve created and successfully logged into the mysocialsecurity website, you’ll see a box titled “Advance Designation of Representative Payee.” It will be towards the bottom of the page. You’ll need the name, phone number and a description of the relationship you have with the person.

Who should you name? The SSA prefers family members, friends or qualified organizations. Your choices should be made carefully. The people you name need to be trustworthy, good with finances, organized and have no prior felonies. They will need to be able to maintain good records and receipts and be available and responsive, if the SSA requests an audit or an in-person visit.

When should you do this? How about now? Like having a will and an estate plan, this is not something that you should put off. And as you are likely at home, there’s no reason not to!

Reference: The Dallas Morning News (April 19, 2020) “Social Security and you: New Advance Designation for Representative Payee”

 

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How Low Interest Rates Create Estate Planning Opportunities

One result of the global health crisis is that interest rates are lower now than they have been in many, many years. The April 2020 AFRs (Applicable Federal Rates), which are used to determine the least amount of interest that has to be charged for below-market loans and are often used for intrafamily lending, have decreased to 0.91 percent for loans less than 36 months, 0.99 percent for loans of 36 months or more and less than nine years, and 1.44 percent for loans of nine years or longer.

The article, titled “Estate Planning in a Low Interest Rate Environment,” from The National Law Review Journal, explains that for families where intrafamily lending has already occurred, these low interest rates provide a chance to amend the terms of current promissory notes to obtain these rates.

There are two opportunities presented:

  • The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
  • If a parent has already lent money to a child who will eventually inherit assets from the parent, this lower interest rate will help to facilitate wealth transfer. The parent will receive lower payments under the note, minimizing the assets that are added back to the lender’s taxable estate.

Here are a few situations where these loans are typically used:

  • Parents extend a loan to adult child, who is going through a challenging financial period.
  • Parent lends money to a child with the understanding that the child will invest the money at a higher rate of return than the interest charged under the note, thus allowing growth to occur in the child’s estate rather than in the parent’s estate.
  • Complex estate planning, where a sale is made to an intentionally defective trust, where the seller’s goal is to freeze the value of the estate for a price at which the asset was sold on an installment basis. This allows future growth to take place outside of the seller’s taxable estate.

These intrafamily loans are usually part of sophisticated estate planning. Other methods include Grantor Retained Annuity Trusts (GRATs), or Charitable Lead Trusts (CLTs), which also become more attractive in a low interest rates environment.

With a GRAT, there is a transfer of assets to a trust, in which the settlor retains an annuity payment for a certain number of years. At the end of the term, the remaining assets pass to the trust beneficiaries with no estate tax implication. The CLT operates in a similar way, except that the payment for a specified number of years is made to a charity.

Speak with an experienced estate planning attorney about how your estate could benefit from the current low interest rates environment.

Reference: The National Law Review (April 13, 2020) “Estate Planning in a Low Interest Rate Environment”

 

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Why Gifting during Volatile Markets Makes Sense

Gifting assets to a trust for children or grandchildren is often an important part of an estate plan. The recent article “Is Now a Good Time to Make a Gift?” from The National Law Review takes a close look into the strategy of placing non-cash assets into a trust, without exceeding the annual gift tax exclusion amount or the Federal Gift Tax Exemption. If those assets increase in value later, the increases will further enhance the gift for beneficiaries.

Taxes on gifts made to a trust to benefit children and grandchildren are based primarily on the value of the gift. Annual exclusion gifts, that is, transfers of assets or cash that do not exceed the annual gift tax exclusion, are currently set at $15,000 per recipient per year. A married couple may give up to $30,000 per person in any calendar year. Many annual exclusion gifts do not require a Federal Gift Tax Return (Form 709), although it would be wise to speak with an estate planning attorney to make sure that this applies to you, since every situation is different.

Annual exclusion gifts are one way to reduce the overall value of the estate, but they do not reduce the Federal Estate Tax Exemption of the person making the gift.

Gifts in excess of the annual exclusion amount may still avoid gift taxes, if the person making the gift applies their gift tax exemption by filing IRS Form 709. The gift tax exemption is unified with the estate tax exemption, at $11.58 million per person in 2020. Gifts that are bigger than the annual exclusion of $15,000 per year, reduce the $11.58 million exemption for purposes of both the gift tax and the estate tax.

For example, if a person were to make taxable gifts of $1.0 million to a child in 2020, their lifetime gift tax and estate tax exemption will be reduced to $10.58 million. If that person were to die in 2020 when the applicable estate tax exemption is $10.58 million, then only estate assets in excess of the exemption will be subject to estate tax.

Given the uncertainly of the gift and estate tax exemptions, management and timing of these gifts is particularly important. If no legislative action occurs, these generous estate and gift tax exemptions will sunset at the end of 2025. They will return to the 2010 level of $5.0 million, indexed for inflation.

The exemptions need to be carefully used and budgeted, because federal estate tax starts at 18% and rises to 40% on all amounts over the exemption. Like the exemption, these rate rates may be changed by future elections and/or tax law changes.

If you are concerned about an estate becoming taxable, the current decline in asset values makes this a good opportunity to transfer more of the estate into trust for beneficiaries. The transfers can decrease the impact of a reduction in the exemption amount, as well as any changes to the tax rates. The currently reduced value of stocks and many other investments may also present an opportunity to reduce future taxes.

The best way forward would be to have a conversation with an estate planning attorney to review your overall estate plan and how moving assets into trusts during a time of lowered value could benefit the estate and its beneficiaries.

Reference: The National Law Review (April 10, 2020) “Is Now a Good Time to Make a Gift?”

Suggested Key Terms: Estate Planning, Assets, Trust, Gift Tax Exclusion Amount, Federal Gift Tax Exemptions

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