Alexander A. Bove Jr. and Melissa Langa
BridgeTower Media Newswires
It is interesting that, with the exception of dieting, the customary New Year's resolutions (which statistically are made by a large majority of the population) are very personal to the ones making the resolutions.
The resolution of a tailor, for instance, may be quite different from that of, say, a dentist, and it seems that whatever the resolution, there is always something that gets in the way of keeping the promise.
It might go like this: While for years this tailor has been meaning to expand his business by offering a new line of torn jeans, on receipt of the new inventory he has been unable to resist the urge to sew them up before offering them for sale, side-tracking his resolution.
And our dentist has wanted to open a second office near the candy factory store that opened nearby, but the dentist decided to wait until her children got a little older.
Of course, we could go on and on with some of the countless examples of good-intentioned resolutions that somehow fell by the wayside, but keeping with the spirit of the tradition and the theme of our Trustworthy Advisor column, here are some hypothetical New Year's resolutions from the viewpoint of a couple of estate planners.
Resolution: This year, we should get our wills updated. We did them years ago, and we want to be sure our children and new grandchildren are "taken care of."
Watch out! This is a great resolution so long as we treat the reference to "wills" as meaning "estate plan." By itself, a will seldom satisfies the modern-day requirements of an estate plan, if for no other reason than passing property by means of a will requires encountering the entire probate process and its accompanying publicity and delays. The typical modern estate plan will include a will, but it will also typically include one or more trusts, durable powers of attorney, and health care proxies.
Resolution: Let's make gifts to our children and grandchildren this year. I understand we can give up to $10,000 to each child without a tax.
Watch out! Gifts are generally a good idea and are also the subject of considerable misconception. For openers, the 2020 annual gift tax exclusion is $15,000 a person per donor, but, in fact, individuals can give millions more ($11.58 million to be exact) over and above the $15,000 without paying a gift tax. (And donees do not have to be related to donors.)
The $11.58 million exemption from gift and estate taxes is a one-time "lifetime" exemption and has other implications, but if not exceeded, it won't result in a gift tax. Generally, gifts over $15,000 to an individual should be reported on a federal gift tax return to be applied against the lifetime exemption, and gifts to grandchildren and significantly younger, unrelated persons can be tricky because of the generation-skipping tax rules.
Generally, if those gifts don't exceed the $15,000 per donor exclusion, there is no reporting and no tax. Larger gifts and gifts to a trust for grandchildren generally require reporting and advisor guidance. If the gift is for education, donors should consider gifting to a 529 Plan for the child (or grandchild). The same gift tax exclusions apply, but the $15,000 annual exclusions can be bunched up for this year and the succeeding four years, totaling $75,000 per donor. (An election must be filed on a gift tax return.) Further, the growth on the gift to the 529 Plan is tax-free if used for qualified tuition expenses for the child or other beneficiary.
Resolution: Our children are grown and have their own homes, so why don't we cash in those insurance policies we have been paying for all these years and take a nice vacation.
Watch out! Before you do that, get some advice to make sure you don't still have a need for the policy. If not, you still should not rush to cash it in.
There is another option that could yield far better results: sell the policy. In earlier times, surrendering the policy to the insurer was the only option. In more recent years, however, a widespread "secondary" market has developed, where groups of investors will pay far more than the cash value of a policy to acquire it. In fact, they will even purchase term policies, which have no cash value.
There are, of course, specific criteria that must be met before the policy is saleable. For one, the insured should be over 70, and it is helpful if he or she is not in the best of health. Note that smokers or past smokers are also welcome (that should tell you something).
If the policy is saleable, you could, as noted, receive more than the cash value, but the excess over your premium payments will be taxable as a capital gain. Note also that policies owned in a trust are just as saleable if the criteria for the insured are met, and the proceeds would pass according to the terms of the trust.
The message? Think through your New Year's resolutions carefully. If they involve an area or subject warranting the opinion of an advisor, take that step and get the best advice. And don't be too hard on yourself if you don't get to carry out all your resolutions. You'll get another chance next year!
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Alexander A. Bove Jr. and Melissa Langa are shareholders at Bove & Langa in Boston, where they concentrate in domestic and international trust and estate law.
Published: Mon, Jan 13, 2020
