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**************************************************************************************Congratulations to Nicholas Macksood on being chosen for the LVM
2021-22 Financial Planning Internship. Nicholas is pursuing his MBA at Grand Valley State University.
Best Wishes to Samuel Ohland, our 2020-21 Intern, who is graduating from Western Michigan University!
**************************************************************************************
What does a lower federal gift and estate exemption mean
for you and your heirs?
The current unified federal gift and estate tax exemption is $11.7 million for an individual
($23.4 million for a couple). This means a married couple can pass $23.4 million to heirs free
of estate tax. However, the current law sunsets on January 1, 2026 and the exemption will
automatically revert to pre-2018 exemption levels of $5.49 million indexed for inflation, likely
around $6 million. Moreover, President Biden campaigned on lowering the exemption to $3
million with a 45% tax on all assets over that amount. Should that happen, rather than being
able to pass on $23.4 million to heirs tax-free, a married couple could only pass $6 million
with any amounts over that taxed at 45%.
Importantly, the Treasury Department has issued regulations[1] confirming that should the
estate and gift tax exemption revert to pre-2018 levels, taxpayers who take advantage of the
increased exemption amount during the time it is available will not be adversely affected
when the exemption is lowered. In other words, there will be no so-called “claw back” of the
larger exemption amount used during the period of the increased exemption amount should
the exemption amount be lowered. [1]
Thus, 2021 is a critical year for estate planning for couples with assets exceeding $6 million.
One popular transfer tax savings strategy is establishing His and Hers Trusts also known as
Spousal Estate Reduction Trusts (SERTs) or Spousal Lifetime Access Trust (SLATs).
You can discuss with your legal and tax advisors whether using a SERT is appropriate for you.
What Is a SERT?
A SERT is an irrevocable trust created by one spouse (the grantor) for the benefit of the other
spouse, their children, and other descendants. The grantor’s spouse is often a trustee or co-trustee
of the SERT as well as the primary beneficiary. All assets transferred to the SERT are
out of the grantor’s estate and possibly free from the claims of creditors.
There would be no gift tax due upon transfers of property (cash, securities, or real estate) to
the SERT if the transfer amount were less than the applicable exemption of $11.7 million (less
any lifetime gifts already made). In addition, if the SERT is properly drafted, the grantor can
still make his/her annual exclusion gift of $15,000 to the trust. The donor’s spouse can also
qualify as one of the annual exclusion beneficiaries. Traditionally most transfers between
spouses do not qualify for the annual exclusion gift due to the unlimited marital deduction.
This will enable a married couple to further reduce their taxable estate by making annual
exclusion gifts for each other. All future appreciation on the transferred property is also
outside the donor’s estate and thereby not subject to federal estate taxes. If the proper
Generation Skipping Tax (GST) elections are made, there can be additional estate tax savings
by having the assets in the SERT excluded from the estate of the second generation.
If the couple needed income from the assets in the SERT, the trustee (spouse) would have the
power to distribute trust income and even principal to the trust beneficiaries. The
distributions from the trust must be for the health, education, maintenance, and support of
any trust beneficiary. This includes the donor’s spouse who is the trustee and a beneficiary of
the SERT. The flexibility of the SERT results in great part from its ability to distribute income
and principal to the beneficiary spouse, which can be used by the family unit, including the
donor spouse. The ability, albeit indirectly, of the donor spouse to access the funds in the
SERT through the beneficiary spouse will end should the beneficiary spouse die while the
donor spouse is alive.
A SERT is deemed a “grantor trust” for federal income tax purposes. This means all realization
of taxable income in the trust is taxed to the grantor on his/her personal tax return. This is a
significant advantage over a non-grantor trust, which is taxed at the highest tax rate (37% in
2021) after $13,050 taxable income.
Asset management in the SERT should emphasize tax efficient investing and take the grantor’s income tax picture into consideration.
Some married couples, desiring maximum tax benefit, will create two SERTs (His and Hers Trusts),
with each spouse creating a SERT for the other. This allows each spouse to fund a SERT with the
maximum exemption available to the spouse. Critically, when each spouse creates a SERT for the
other, it is important to draft the trusts so that the IRS will not invoke the reciprocal trust doctrine,
which would cause the value of the trust that each spouse created for the other spouse to be subjected to estate tax in the creator spouse’s estate.
If you would like additional information on the Spousal Estate Reduction Trust, please contact LVM
Capital Management. The information contained in this article should not be construed as legal or tax advice. We recommend that you discuss all tax issues with your tax and legal advisors prior to taking action.
[1] Treas. Reg. §20.2010-1(c)
A Financial Wellness Plan Can Help Pave the Road to Retirement
If we've learned any lesson over the past year, it's that no matter how carefully we plan and prepare, we'll likely encounter unexpected hurdles. While a global pandemic has certainly underscored the need to pay close attention to our physical wellness, it has also revealed the need to shore up our financial wellness. According to PwC's 9th Annual Financial Wellness Survey conducted in January 2020, financial matters were the top cause of stress for employees even well before the pandemic hit in earnest. More than one-third of full-time employed millennials,
Gen Xers, and baby boomers had less than $1,000 in emergency savings. Only 29% of women said they would be able to cover their basic necessities if they found themselves out of work for an extended period, compared with 55% of men. And more than half of millennials and Gen Xers and 35% of baby boomers said they would likely use their retirement funds for something other than retirement, with most noting it would be for an unexpected expense or medical bills. *1 Although tapping your retirement savings can help you get through a crisis, it can hinder your ability to afford a comfortable retirement. Having a plan to guard your financial wellness throughout your working years can help you avoid putting your retirement at risk.
What Is Financial Wellness?
The Consumer Financial Protection Bureau (CFPB) defines financial well-being as: *2
Having control over day-to-day and month-to-month finances. In order to achieve this, your expenses need to be lower than your income.
Maintaining the capacity to absorb a financial shock. This typically refers to having adequate emergency savings and insurance.
Being on track to meet financial goals, meaning you have either a formal or informal plan to meet your goals and you are actively pursuing them.
Having the financial freedom to make choices that allow you to enjoy life, such as a splurge vacation.
The CFPB has identified several key factors that contribute to an individual's ability to achieve financial well-being. Among them are:
Having the skills needed to find, process, and use relevant financial information when it's needed; and
Exhibiting day-to-day financial behaviors and saving habits.
The Four Elements of Financial Well-Being
Assistance Is Available
Many employers have begun offering financial wellness benefits over the past decade. These programs have evolved from a focus on basic retirement readiness to those addressing broader financial challenges such as health-care costs, general finance and budgeting, and credit/debt management. *3
If you have access to work-based financial wellness benefits, be sure to take time and explore all that is offered. The education and services can provide valuable information and help you build the skills to make sound decisions in challenging circumstances.
In addition, a financial professional can become a trusted coach throughout your life. A qualified financial professional can provide an objective third-party view during tough times, while helping you anticipate and manage challenges and risks and, most important, stay on course toward a comfortable retirement.
*1) PwC, May 2020
*2) Consumer Financial Protection Bureau, January 2015
*3) Employee Benefit Research Institute, October 2020