Answering clients’ estate planning questions this December

By Lisa R. Featherngill, CPA/PFS, with Dave Strausfeld, J.D.

A friendly, late-middle-aged couple contact you with questions about their estate plan. The hypothetical couple — let's call them "the Ys" — own a successful chain of home insulation businesses and plan to eventually pass it on to their two children, a math teacher and a musician.

Last summer, with the election in mind, the Ys took some preliminary steps toward transferring wealth. Now, however, they are wondering if they ought to put their plans on hold because of the likelihood that Republicans will retain control of the Senate. The Ys have several questions on their minds.

'Should we put the brakes on our wealth transfer plans?'

Since the election, some clients with taxable estates have been asking, does it still make sense to move forward with estate planning steps formulated earlier in the year when they thought there might be an electoral "blue wave," given that Republicans will keep control of the Senate if they win either of two Georgia Senate runoff races being held Jan. 5. In other words, should clients continue with their preelection plans to transfer wealth?

The general answer is, absolutely. If the plan made sense from a wealth planning perspective anyway, there is every reason to proceed with it. For one thing, this will push further appreciation out of the estate. Most clients with wealth transfer plans in progress are well advised not to put on the brakes.

Other high-wealth clients, too, may wish to start thinking of opportunities to take advantage of the current favorable conditions for estate planning moves, which might be called "the trifecta":

  • The temporarily doubled estate and gift tax exemption, which expires at the end of 2025;
  • Low valuations of some assets, such as businesses hurt by COVID-19 and some securities;
  • A low-interest-rate environment, which facilitates wealth transfer strategies that rely on an interest rate to determine the value of a gift.

The Ys, who are both in their late 50s, nod their heads but still are not entirely sure they are ready to move forward with their wealth transfer plans. They wonder what the odds are of major tax legislation in 2021.

'Would it be a bad idea to adopt a wait-and-see attitude?'

Before the election, clients asked many questions like, "Do I need to do something now? Can I just wait?" The answer, at that time, was that if they were not comfortable pulling the trigger yet, they should at least have a plan ready — so that, if the need arose, they could act quickly.

That advice still applies. Having a plan ready, however, means starting preparations now. The steps necessary to decide on a wealth transfer strategy take time. In addition, attorneys are unlikely to be available to draw up trust documents on short notice because they are swamped with work. But that does not mean something cannot be done early next year, and many clients are planning transactions for 2021. (While it is conceivable that new tax legislation could be retroactive to Jan. 1, 2021, this is unlikely to happen even if the Democrats control the Senate, which itself has long odds).

Of course, tax legislation is not the only concern, because a Biden administration Treasury Department could push forward significant regulatory changes that affect estate planning without any need for congressional approval. Thus, for some clients, there may be a little more urgency to act soon. One regulatory proposal to watch for involves valuation discounts.

In the latter part of the Obama administration, Treasury issued proposed regulations (REG-163113-02) that would have significantly curtailed the ability to take valuation discounts on intrafamily transfers of business interests (e.g., discounts for lack of marketability and minority interests). When the Trump administration came into office, these proposed regulations were withdrawn as being difficult to administer. But a Biden Treasury Department could revive these proposed regulations and potentially finalize them sometime in 2021.

Listening attentively to this, the Ys express concern about the valuation discount issue. They have one last question for today.

'Is there anything else we should be thinking about?'

One important thing to remember is that once an estate plan is in place, it is crucial to communicate it. Put another way, an estate plan is not final until it is communicated. Too often, heirs do not understand why certain decisions were made, e.g., "Why did Dad leave that to him and this to me?" or "Why is everything in trust? Didn't Dad trust me?" None of those questions can be answered after the person is gone, so it is important to talk to family members about how things are structured and why. It is a critical part of the estate planning process.

Another point to highlight for high-wealth families is to consider giving the children (or other heirs) an opportunity to start managing the family wealth during the parents' lifetime so they are better able to handle this later. Often, estate plans leave everything to the children equally, and they must manage it together (i.e., the interest is indivisible), yet they have never had a chance to manage things together while the parents were alive. One useful device to help provide this valuable experience is to transfer family wealth into LLCs and have one or more children in the role of managing member.

The Ys, nodding their heads again, say they would like to mull things over. They promise to be in touch next week.

Lisa R. Featherngill, CPA/PFS, is head of legacy and wealth planning at Abbot Downing. Dave Strausfeld, J.D., is a JofA senior editor. To comment on this article, contact David.Strausfeld@aicpa-cima.com.

To prepare for year-end financial planning conversations with clients, listen to recent PFP Section podcasts (available to everyone) and download a customizable client letter (available to PFP Section members).

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