Not Too Rich, Not Too Poor

At the 57th Annual Heckerling Institute on Estate Planning, Turney P. Berry of Wyatt, Tarrant & Combs, LLP led a session titled focused on providing guidance for handling ‘middle-rich’ clients. 99% of the time we can rely on common sense/well understood planning ideas to accomplish their goals. Just who are the middle-rich?  We will say that this represents individuals who can eliminate their estate tax by using the lifetime exemption (currently $12.92 million in 2023).

The first issue to address as an estate planner is: “Who do you represent?” People are living a lot longer. As a long-term planner for the family, you may now be representing several generations, not just the senior family member. In many situations, it can be the younger generations now seeking to take care of the senior members. Can you avoid conflict issues when dealing with multiple generations? Updated engagement letters are very important so there is transparency with respect to for whom you are working. Many times, what is good for the grantor is not the same as what is good for the beneficiaries, so it is important that the entire family is comfortable working with the same planner. Knowing the ownership of all family assets and the type of entity holding the assets is very important to proper estate planning. Also be sure you have conversations – ask questions -- that is the best way to really understand family dynamics in a way that that no questionnaire will tell you. 

Another important question to ask is: “Do you think the next generation of beneficiaries can be in charge?” If the answer is yes, planning can be much easier. If the answer is no and other people need to be appointed and the wrong people step in, the family is potentially facing years of conflict, lawsuits, and distress.

Getting a client’s estate plan started is sometimes the hardest part. Mr. Berry provided the following guidance with respect to how to make clients more comfortable. He suggests that the approach with clients should be to create flexible grantor trusts so they are comfortable making gifts to the trust while accomplishing the two main goals:

1. Retaining control – in most cases, the client needs to feel that they are maintaining some control over assets. Perhaps the entity to be transferred has both voting and non-voting interests. The grantor can retain the voting interest and give away the non-voting interest. Maybe the spouse has some control or perhaps the client controls investments but not distributions (to avoid IRC Sec. 2036 issues). Control is the number one reason most clients never complete their estate planning, so our job is to;
   1. Get them comfortable making a gift to trust,
   2. Establish the level of control they will have,
   3. Figure out how to permit this control for the grantor’s life, and
   4. Then figure out how to pry that control out of the grantor’s hands ideally at least three years before his death!
2. Providing Income Stream – Many clients are willing to give away as much as possible if they know they will have a sufficient income stream. The ability to swap out assets in a trust is very helpful in assisting with this income goal. It also helps deplete the grantor’s estate along the way. Perhaps the trust can be created with non-income producing assets while the grantor retains the income producing assets. Life insurance and raw land are two examples of non-income producing assets that can be placed in trust, but remember that most non-income producing assets have expenses associated with them. Land has property taxes, insurance, maintenance. You have to be sure the trust has the liquidity to pay these expenses. Other suggestions for retaining an income stream include the following:
   1. The grantor can sell assets to the trust for an installment note; the note payments that will be paid annually will provide an income stream to the grantor.
   2. Include the grantor’s spouse as a trust beneficiary (SLAT).
   3. Set up a GRAT (grantor retained annuity trust) for heirs. With a GRAT, the heirs may not receive as much as they would with a sale; but a GRAT is less risky in part because it can be set up without incurring gift tax. GRATS are most attractive when the market is down and interest rates are low. The grantor sets up a trust to which they transfer property and in exchange, they receive an annuity for a term of years. Because the present value of the annuity is equal to the value of the property transferred to the trust, the value of the gift is essentially zeroed out. The beneficiaries receive the property’s appreciation gift-tax free.