I recently read an interesting article about so-called “fire-and-forget” guidance systems under which a missile requires no human interaction after launch. You tell it what the target is, and it just goes.
Let me be clear: your estate plan does not work this way.
Anybody who has worked with me in the past knows I advocate for a goal-oriented estate planning process. Tell me what results you want, and I will do my best to design a plan to get you there.
We work hard together on the plan design. We think carefully about your family, your business, your investments. We craft trusts, draft wills, obtain appraisals, organize transfers and file tax reports.
And then I assign homework, to you, to your trustees, to your accountants, to your CFO. Because phase one is called “phase one” for a reason. There is a phase two. Maybe a phase three. Maybe years of tasks to be completed. Why?
Because your estate plan needs care and feeding. This missile may have been fired, but it cannot reach its target unless you continue to guide it.
An example: A number of years ago a client implemented an estate plan under which she transferred ownership of her valuable home to a trust for the benefit of her children. The planning technique was very effective. Millions of dollars’ worth of property was passed to her children, and no gift tax was paid. Even better, she retained the right to live in the property for 10 years after the transfer, with an option to remain thereafter. At the end of those 10 years when title vested in her children, the property was several times more valuable than when the transfer was made and none of that appreciation was ever taxed. And from that point forward, the client continued to live in the house, right up until her death last year, with even more untaxed appreciation accruing to the trust. A huge win.
And then the state tax authority came knocking. An audit. How, the auditor asked, could we claim a gift was made 17 years ago if the decedent lived in the house until her death? Why shouldn’t the significantly appreciated value of the house be included in her estate for tax purposes?
Well, here’s why: this client guided her missile. We advised her all those years ago that if she wanted to remain in the house after the 10-year term, she would have to rent it from the trust for the benefit of her children. And not just some handshake lease, either. She would have to get appraisals every year to determine fair market rent. She would have to have a lease drafted and signed each year, and the rent would have to be paid. She would have to get renter’s insurance, and the trust would have to have insurance appropriate as owner. The trust would have to pay for capital improvements, because that’s a landlord’s obligation.
Our client pulled out the checklist each year, followed it step-by-step and kept good records. In response to the tax examination, we delivered those records to the revenue agent, and the audit was closed the next day.
Direct hit. Target eliminated.
Do not make the mistake of thinking this audit was a fluke. Tax authorities all over the U.S. and around the world are looking beyond the returns filed and checking to see if estate plans are implemented properly and followed through over time.
Our team recently reached out to a leading real estate advisor in central London to ask whether a client there should update his rental appraisal in support of a similar plan implemented there. That advisor related that he has seen multiple HM Revenue & Customs challenges in recent months to intra-family rental arrangements. Those clients who did their homework achieved positive results, and the others did not.
Do your family a favor: check whether the missile you fired is on track to hit its target. Are your leases up to date? Have you been making interest payments on those promissory notes? Are your GRAT annuities paid, with proper valuations done to support them? Have profit distributions been made to all your company’s equity owners and in the proper proportions? Have Crummey notices been sent after those gifts were made to your insurance trust? Have gift tax returns been filed? What else is on your list?
Is your missile on course? If not, let us help you grab the controls now.