Tax Topics: 2017-01

Planning Basics

At noon, on January 20, 2017, Donald J. Trump was sworn in as the nation’s 45th president. Wasting no time, President Trump has already signed some executive orders, one of which freezes federal regulations pending further review (what this means for various tax regulations, including the proposed valuation discount regulations that the IRS issued last August, is currently unclear). In the meantime, the Republican-controlled Congress is starting to tackle Mr. Trump’s ambitious agenda, such as repealing and replacing the Affordable Care Act (also known as “Obamacare”) and tax reform, which may include estate tax repeal (separate estate tax repeal bills, which mirror the Death Tax Repeal Act of 2015, have been reintroduced in the House and Senate).

As we wait to see what develops, we thought this might be a good time to update a prior discussion focusing on planning basics and “good housekeeping,” rather than on taxes per se.

What A Will Does.

A will disposes of a person’s “probate” assets at death. Such assets include individually owned bank and brokerage accounts and real estate, but not retirement accounts or most jointly owned property. (Retirement accounts pass by beneficiary designation, and property such as a “joint tenancy with a right of survivorship” passes automatically, by operation of law, to the surviving owner.) So if Sally dies “intestate,” or without a will, state law determines who gets her probate property, which generally passes to her surviving spouse and children, if any, otherwise to Sally’s parents, then to siblings and various other relatives. In other words, if Sally doesn’t have a will, she can’t benefit friends, significant others or charity; in addition, if she has minor children, she won’t be able to name a guardian for them if something happens to her, nor will she be able to create trusts for those children, who will otherwise receive their inheritance upon reaching majority (generally, 18 or 21, depending on state law). A will is therefore a key planning document.

Revocable Trusts.

Revocable trusts, also known as “living trusts,” are popular planning tools. Although they do not offer potential tax savings, they can help provide for the trust’s “grantor” (or “settlor”) if she becomes incapacitated, and can facilitate the administration of the grantor’s estate once she has died.

To illustrate, widowed Mom creates a revocable trust, to which she transfers most of her assets, including her bank and brokerage accounts, her house and her out-of-state vacation home. Mom is her own trustee; Dee, Mom’s adult daughter, will become trustee on Mom’s incapacity or death. Mom has a stroke and is no longer able to manage her affairs. Dee steps in as trustee, and pays Mom’s bills and sees to her needs. At Mom’s death, Dee is already managing Mom’s estate. Or if Mom doesn’t become incapacitated and Dee becomes trustee at Mom’s death, Dee basically only needs Mom’s death certificate to step into that role (it take about 10 days to receive the certificate). By contrast, if Mom still owned everything in her own name (whether or not she had the revocable trust), Dee (as Mom’s executor) could not act on behalf of Mom’s estate until the local probate court accepted Mom’s will and issued “Letters Testamentary” to Dee, a process that could take up to several months; in addition, Dee would need to file for ancillary probate in the state where Mom’s vacation home is located.

If Mom were a Florida or California resident, she probably would have transferred “all” of her property to her revocable trust – in which case, Dee wouldn’t have to probate Mom’s will at all. Besides facilitating the administration of Mom’s estate, this has the following advantages: 1) the will is a public document, and is accessible to anyone who wants to read it (yes, it’s possible to read the wills of the “rich and famous” at the local surrogate’s court); and 2) if, after her death, Mom created long-term trusts for her descendants under her revocable trust, it is a relatively simple matter for successor trustees to step in; if Mom had created those same trusts under her will, the probate court would need to be involved every time there was a change of trustee. Revocable trusts therefore merit careful consideration.

Make Sure Documents are Current.

It is a good idea to periodically review planning documents, such as wills and revocable trusts (if applicable), to make sure they still work as desired. For example, major life events – such as marriage, death, divorce or the birth of a child – may mean that a will no longer benefits the right people. (Note that those events may also show that the will still works: if Dad, Mom’s primary beneficiary, is now dead, Mom’s back-up disposition to her “surviving issue, per stirpes,” continues to achieve her goals by providing for her children, even those who were born after she wrote her will.)

Changes in the tax law can also affect documents, particularly those with formula clauses keyed to concepts or definitions that may have evolved from when the document was originally written. For instance, if the will of remarried Dad gives “the maximum amount I can protect from federal estate tax” to the adult children of his first marriage, Dad may be giving away far more than he originally intended, given that this inflation-indexed exclusion amount, which protects transfers from gift and estate tax, is now $5.49 million. (Query what this language means if the estate tax disappears: does it give away all of Dad’s estate, or none of it?)

Finally, keep in mind that if Dad, say, moves to a new jurisdiction, local law could interpret certain provisions of his existing will differently, thereby skewing his intent.

Make Sure Beneficiary Designations are Current.

Beneficiary designations typically govern the disposition of retirement accounts (including IRAs and 401(k)s) and property that passes by contract, such as annuities and life insurance. As with the planning documents mentioned above, beneficiary designations also should be checked periodically to make sure they still name the appropriate parties. This is especially important if there has been a divorce: if the account owner dies with a stale beneficiary designation that still names the (now) exspouse, litigation frequently ensues.

Based on case law, whether this stale beneficiary designation will be given effect typically turns on the asset in question: if it is governed by federal law, which generally applies to retirement accounts, the designation usually wins (probably not what the divorced account owner would have wanted); if the asset is governed by state law, which generally applies to annuities and life insurance, divorce typically (but not always) negates dispositions to named, but now former, spouses.

Note that if there is no designation (or the named beneficiary is dead, and no alternate is named), the asset’s governing document will direct the property to a default taker, which is usually the account owner’s surviving spouse, if any, or the owner’s estate. This may not be what the owner would have wanted, and may not achieve optimal tax results, particularly if the property passes to the owner’s estate.

Other Planning Documents.

Given life’s uncertainties, it may be advisable to have a living will, which sets forth a person’s health care wishes when he or she no longer can, along with a “health care proxy” or “health care surrogate” (a document that appoints an individual to make those same health care decisions when the appointer no longer can). Because the law generally presumes that individuals would want everything done to keep themselves alive, living wills typically (but not always) rebut that presumption, and direct that the individual not be kept in a “persistent vegetative state”; such documents also set forth the individual’s wishes regarding artificial nutrition and hydration.

A “durable” power of attorney may also be a good idea, as it authorizes an “attorney-in-fact” to transact business on behalf of the “principal” who executed the power of attorney; such a durable power survives the principal’s incapacity – which is, of course, when it is most needed; a “springing” power of attorney does not go into effect until a stated event occurs, such as the principal’s incapacity. Any power of attorney dies with the principal, however, and is not a substitute for documents (such as a will) that authorize others to act after the principal’s death.

Check How Assets are Titled.

As mentioned above, wills only govern the disposition of probate property. It is therefore important to check how assets are titled, since there may not be sufficient probate property to implement the will’s provisions. To illustrate, suppose that Mom and Dad have mirror wills that make some generous charitable gifts, and create a trust for the survivor of them that will be protected from state estate tax, and pass tax-free to children at the survivor’s death (in other words, if Dad dies first, a trust is created for Mom; if Mom dies first, a trust is created for Dad). Mom and Dad, however, own all of their property as “joint tenants with right of survivorship” and have various retirement accounts. In other words, they have no probate property that their wills control. To remedy this situation, Mom and Dad could sever some of their jointly owned property (such as their bank and brokerage accounts) so that they now own it as “tenants in common,” a type of joint ownership that is probate property and will pass under their respective wills.

Lifetime Gifts.

“Taxable gifts” typically refer to large gifts that erode a donor’s $5.49 million exclusion amount and often involve sophisticated planning techniques. Yet gifts need not fit this description to have an impact, from both a tax and a human perspective. For example, donors can give away property worth up to $14,000 a year to as many people as they wish ($28,000 if their spouse consents) without eroding any of their exclusion amount; over time, such gifts can not only remove significant dollars from the donor’s estate, but can also provide meaningful contributions to the lucky recipients. In addition to cash and checks, such gifts often include appreciated publicly traded stock, which doesn’t require a qualified appraisal. (Note that gifts of appreciated property also pass along the donor’s built-in capital gains; a gift of depreciated property should be avoided, as both the donor AND the donee lose the loss).

Keep in mind that donors can also pay someone’s tuition, medical expenses and health insurance premiums without reducing their $5.49 million exclusion amount. If the donor doesn’t feel flush enough to make an outright gift, the donor can make a loan, which must carry sufficient interest to avoid inherent gift tax consequences (although interest rates are creeping up – see below – they are still low enough to be attractive for the borrower: the February “safe harbor” rate for a 6-year note, which uses the applicable federal mid-term rate, is 2.10%).

Why bother with gifts if the estate tax goes away? Because state estate tax still might be a consideration, and the donor might want to help the donee now, instead of waiting until the donor dies. Whatever the motivation, however, the donor should be able to comfortably do without the property that he or she gave away.

Life Insurance.

Life insurance has routinely been used to help pay federal estate tax (the typical structure involves an irrevocable trust that owns the insurance so that it won’t be taxable in the insured’s estate, but still benefits the insured’s heirs). If the estate tax goes away, does insurance still play a role? The short answer is yes. As noted above, there still might be state estate tax considerations; and if the federal estate tax is replaced with a capital gains tax at death on a decedent’s appreciated property (Mr. Trump suggested this late in his campaign, for appreciation in excess of $10 million), insurance will help replenish the dollars used to pay this tax. Insurance also helps protect a family against the premature death of the primary breadwinner and provides liquidity for an otherwise illiquid estate. Although many insureds may not like paying insurance premiums, they generally do like what insurance can do for them and their heirs – including leaving those heirs as much as possible.


Trusts are often tax-driven, and can keep property out of a beneficiary’s estate. Yet if the estate tax goes away, do trusts still matter? The short answer is again yes. Some of the non-tax reasons for trusts include saving a beneficiary from himself (or herself!), protecting the beneficiary from creditors (and predators), providing a solid asset management structure, and ensuring that property passes according to the trust creator’s wishes. Irrespective of taxes, for example, Dad may want a trust for Mom after his death because he’s concerned that she may not be able to say “no” to importuning relatives; similarly, Mom may want a trust for Dad because she’s concerned that after her death, he might remarry and direct their children’s inheritance elsewhere. And so on. Finally, if state estate taxes are an issue, a trust for the surviving spouse (and children) that equals the state exclusion amount can protect property from state estate tax and pass tax-free in both spouse’s estates.

Digital Lives and Legacies.

It goes without saying that more and more of our lives are lived online, and that electronic statements and payments continue to eclipse paper statements and bill paying via check and snail mail. Yet without some kind of paper trail, how are heirs – let alone someone’s executor – supposed to know what the decedent owned? In addition, how will heirs access online accounts, electronically stored photos and contacts, etc., etc.? Although state laws are trying to catch up, the question of access to a decedent’s digital property is an evolving area.

Consider this scenario:

Alice is single, thirty-something, and a successful professional. She receives electronic statements from her bank and brokerage house, and pays her bills electronically. Alice files her taxes electronically, and doesn’t keep hard copies of the returns, although she does store them online. She has many social media accounts, and stores all of her contacts in her fingerprint-protected smartphone. She dies unexpectedly, leaving a will that names her brother Bob as executor (yes, the will is the only hard copy document she has). How does Bob unravel Alice’s life, assets and contacts?

If Alice had left a list of her assets and contacts – including account names and numbers, user IDs and passwords, email addresses and phone numbers – that would be helpful. Such a list won’t necessarily solve Bob’s dilemma, however, as he could be violating a service provider’s agreement and possibly some laws if he accesses Alice’s online accounts using this information, even if that’s what she would have wanted. Is there a solution? As mentioned above, the law is trying to catch up with this new reality, but a paper trail is a good idea.

January and February 7520 rates

The January 2017 7520 rate is 2.4%, a 0.60% (60 basis points) increase from the December 2016 7520 rate of 1.8%. The February 2017 7520 rate continues that climb, and is 2.6%. The January mid-term applicable federal rates (AFRs) are: 1.97% (annual), 1.96% (semiannual and quarterly) and 1.95% (monthly); the February mid-term AFRs are: 2.10% (annual), 2.09% (semiannual) and 2.08% (quarterly and monthly). By contrast, the December mid-term rates were: 1.47% (annual) and 1.46% (semiannual, quarterly and monthly). The upward movement in these rates reflects the Federal Reserve’s 0.25% (25 basis points) increase in a key interest rate this past December.


**This article was posted with the permission of Blanch Lark Christerson.

Blanche Lark Christerson is a managing director at Deutsche Bank Wealth Management in New York City, and can be reached at

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