Philip Herzberg, CFP®, CTFA, AEP®, is a client adviser for The Lubitz Financial Group in Miami, Fla. He is past president of FPA of Florida, past president of FPA of Miami, and past president of the Estate Planning Council of Greater Miami.
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The coronavirus pandemic (COVID-19) has been a disturbing reminder that life can abruptly change. Reviewing estate planning documents is particularly important during these challenging and unprecedented times.
With mortality at the forefront of their minds, clients who have been holding off on estate planning are now prompted to quickly finalize their estate plans. It is not too late for your clients to update their estate plans, so they and their loved ones will be cared for in the event that illness or death befall them.
As a planner, how can you empower your clients to take control of their affairs? In tandem with the counsel of a qualified estate planning attorney and tax professional, you should speak to your clients about reviewing their estate planning documents and gifting strategies, so they are aligned with their goals and tax law changes.
Essential Estate Planning Documents
Assess the following considerations in guiding your clients to get these integral estate planning documents in place:
Financial Power of Attorney. This document gives an appointed, trusted adult the legal authority to manage your clients’ financial and property matters on their behalf, while they are still living. If your clients are sick in quarantine or are incapacitated in the hospital, this document is especially useful for an agent to pay their bills, write checks, and sign tax returns. Without this vital estate planning document, your clients’ family members will have to request the probate court to name a guardian or conservator to take over these duties. Note that the court process may be expensive and time-consuming, particularly during a pandemic.
Health Care Power of Attorney. Similar to a financial power of attorney, a durable power of attorney for health care designates someone, such as a spouse or trusted friend, who can legally act as an agent and make medical decisions for your clients if they are incompetent. Educate your clients on the importance of having their own set of health care proxy and financial power of attorney documents for college-age children, who are legally adults, so decisions could be made on their behalf if they are incapacitated.
Living Will. An advanced medical directive typically has two parts: the health care proxy and a living will. The living will delineates the type of treatment your clients would want if they became critically ill and it further specifies your clients’ wishes in terms of end-of-life care. Without detailed instructions, your clients’ family members may have to decide whether your clients would want to be kept alive artificially, what level of pain they would be willing to live with, and how to let them die if they had no hope of recovery. Are experimental medical treatments, which may be utilized for COVID-19 survival, permitted under your clients’ health care documents? Think about having your clients modify their living will to expressly permit experimental treatments if they are critical to survival.
Health Insurance Portability and Accountability Act (HIPAA) Waiver. Recommend that your clients have a standalone HIPAA waiver as a backup document. While clients’ advanced health care directive will likely contain language that permits their agents to access their medical records, it is not uncommon for medical facilities to refuse access to medical information without a standalone HIPAA waiver. Nominated agents and family members—with a HIPAA waiver in hand—will have access to your clients’ medical information, so they can speak freely with health care providers in the event of a medical emergency.
If your clients’ health care agents made medical decisions prior to the COVID-19 pandemic, they would have been in the hospital talking to their care providers and signing documents. With COVID-19 being so contagious and many hospitals overwhelmed, this is not practical. Consider having your clients revise their documents to expressly authorize electronic communications of decisions by agents via FaceTime, Zoom, or electronic signature.
Last Will and Testament. This legal document enables your clients to appoint an executor to oversee the distributions of their assets and their property at the time of their death. Without a will, there is no direction as to how these assets will pass upon your clients’ death. Consequently, distribution of your clients’ assets will be handled by the state, and the court will decide on the best person to fulfill the role of overseeing the administration of your clients’ estate.
How do you establish a last will and testament when you are unable to meet in person with an estate planning lawyer? There are websites, such as FreeWill.com, providing self-help resources that let you put together this legal document. Several states also provide a statutory form.
Digital Assets Inventory. Inform your clients to compose instructions for assigned people to access their digital assets, such as their email, social media accounts, and physical devices, in their absence. Do not forget to list usernames, passwords, security question answers, and any other information needed to get into each digital asset. Be sure they store this inventory in a secure location, somewhere other than a desk drawer or email account. Talk to your clients about backing up any digital assets in the cloud to a local computer or storage device on a frequent basis so that designated family members and fiduciaries can easily access them.
Living Trust Considerations
If your clients have children who are not yet adults, there are additional issues to account for when evaluating their estate plan. Discuss with your clients the significance of nominating a guardian for their minor children in their will or as a standalone document. Parents should think about their values and who would best care for their children when selecting a guardian.
Think about having an estate planning attorney create a revocable living trust for your clients if they have minor children, a blended family, own real estate, or have more than just the simplest of assets. Explore whether the appointment of trustees for minor children should be updated. To this effect, a simple trust can be set up to keep assets in trust for the minors and stipulate how and when the children are to receive the assets. Further, your clients can ascertain the assets are protected, both from creditors and in the event their children get divorced.
If your clients become incapacitated or are unable to manage their matters, their living trust also affords your clients with privacy surrounding the details of their estate. They would avoid the need for probate, which is a public process. Appointed successor trustees would subsequently step in to manage their affairs without the involvement of the court, averting the extra hassles associated with probate.
Signing and notarizing estate planning documents, such as wills and revocable living trusts, during the COVID-19 pandemic may be complicated with social distancing guidelines still in place. Understand that state laws vary as far as the requirements for signatures of either witnesses or a notary public, or even both. Any witnesses to your clients’ legal documents must still be disinterested individuals who will not benefit from the documents they are signing, and they must also actually witness your clients signing the documents in person.
Wealth Planning Techniques
The near record-low interest rate environment has provided clients with increased opportunities to shift wealth to their children and other beneficiaries. Lifetime gifts are preferable to testamentary transfers since they allow income and appreciation to grow free of any gift or estate tax for the grantors’ heirs. Your clients are presently permitted to annually give up to $15,000 of assets or noncash property ($30,000 for spouses splitting gifts) without counting toward their indexed lifetime gift tax exemption of $11.7 million.
Talk to your clients about the possibility of structuring a family loan, a tax-free wealth transfer approach that may be useful for passing on an amount greater than the annual gift exclusion. Tell your clients that it is also a favorable time to refinance any existing intra-family loans to a lower rate. An intra-family mortgage loan may be a reasonable alternative to help your clients’ children with poor or no credit history in buying a home. Keep in mind that your lending clients may forgive part of the loans each year—up to the annual gift tax exclusion amount—without gift tax ramifications.
Have your clients think about gifting interests in business, limited liability companies (LLCs), or family limited partnerships (FLPs) while the value of assets is lower, to maximize the assets passed. In conjunction with the assistance of an estate planning attorney, you should assess the grantors’ gifting capacity, donative intent, and future cash flow needs prior to devising gifts for their substantial estates (i.e., larger than the current indexed $11.7 million estate tax exemption). You can also potentially take advantage of current low interest rates by establishing grantor retained annuity trusts (GRATs) to remove large assets that are expected to increase in value, so your grantor clients can transfer appreciated property to their heirs tax-free when the trust ends.
Similar to GRATs, charitable lead annuity trusts (CLATs) offer possible estate and gift tax-free methods of shifting future appreciation to your clients’ descendants. A grantor is entitled to a yearly charitable deduction for the annuity to a designated charity from the CLAT for a number of years. Consider CLATs for high-net-worth clients who have specific philanthropic desires and no need for current income.
Closely monitor your clients’ wealth transfer plans, as future tax laws may determine whether it may make sense for them to reduce estate or accelerate family gifting. The planning that may have been appropriate years ago may not be suitable now.