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5 estate planning tasks your clients should do before 2014

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As we enter into the holiday season, probably the last thing people want to deal with is their estate plan. But the end of the year also provides an opportunity for many clients to revisit and reconsider aspects of their estate planning, since there are many asset-protecting strategies that can be put in place at this time of year. The following five topics are ones you may wish to bring up with your clients before we ring in 2014.

1. Give away tax-free gifts.

The easiest and probably most popular year-end tax planning tactic is making use of a client’s gift tax exemptions. A married couple has the right to donate up to $28,000 apiece ($14,000 for a single person) to as many deserving beneficiaries as they can find, tax-free for the recipients. This also has the side benefit of moving those assets out of the client’s estate.

Of course, that exemption is purely per year, so if the client hasn’t made any gifts yet in 2013, now is the time to consider them. One variation to consider: The gifts don’t have to be directly made to a person. They can go to a trust, or into premiums for an irrevocable life insurance trust. A perfectly practical Christmas gift this year could be a sizable donation to a grandchild’s 529 plan.


2. Begin a business succession.

A structured gifting program can also help the transition of a family business. An owner is entitled to give away equity worth up to that $14,000 each year without incurring any gift taxes. That can help make any long-term succession plan smooth, gradual, and subject to a lot fewer taxable events.

It can also allow the client or the client’s ownership group to maintain control of the business even as they are transferring chunks of equity. A gifting program can be used in combination with a family limited partnership or family limited liability company for a full-service transition plan. Proactive advisors might want to mention the possibility of a gifting plan to start before year end to their business-owning clients if only to plant the seed for future years and a far-off succession plan. 


3. Schedule an annual meeting.

Many wealthy clients have established one of those family limited partnerships or limited liability companies, even if they exist largely in name only for tax purposes. If one of these entities hasn’t held an annual meeting yet this year, December would be a good time to do it. The IRS looks much more kindly on these organizations if the participants treat them like serious business entities.


4. Set up a GRAT.

Another option for clients trying to reduce their tax bills — particularly those with stock options or other assets that they expect to appreciate in the near future — is to establish a Grantor Retained Annuity Trust (GRAT). This is the strategy Facebook founder Mark Zuckerberg used to shave back his tax burden. It transfers the so-called “hot assets” to a family member, but allows the client to retain income from the property and legally avoid any transfer taxes.

The trust guarantees the grantor the right to receive an annuity based on the worth of the asset for a fixed period of time. The appreciation rate for the asset is determined by IRS rules. When the term expires, the beneficiary takes full ownership of the property, free of any taxable obligation.

Zuckerberg had the foresight back in 2008 to transfer $3 million worth of Facebook equity into a GRAT. In 2012, Forbes magazine calculated the value of Zuckerberg’s tax-free transferred asset at $37 million. The clever strategy was not enough, though, to keep Zuckerberg from paying the biggest tax bill in history in 2012, at more than $1 billion.


5. Review your estate plan.

Then there’s the simple matter of reviewing a client’s estate plan to incorporate changes that may have happened over the year. This provides the perfect excuse for advisors to reach out to clients they haven’t heard from during 2013, just to check up on any family changes, financial adjustments, or other life matters that may affect their estate planning. At any rate, it’s something else to say after “Happy Holidays.”

For more from Tom Nawrocki, see:


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