Many are unsettled by the COVID-19 outbreak and its continued medical, economic, psychological and societal effects. Elders in particular, and those who love them, are thinking critically about what they should be doing to be as prepared and protected as possible in this quickly changing landscape. As elders and their loved ones navigate this challenging time together, it may be helpful to focus on what can be controlled: washing one’s hands, keeping socially distanced and making sure one’s affairs are in order. For some elders, the current period of volatility may also create opportunities.
While elders and their families are spending more time at home, their advisors should recommend that they consider two categories of planning concerns:
The Basics. Make sure basic estate-planning documents are current and executed and that the location of the originals or signed copies of these important documents is known and accessible. Beyond estate planning, address certain related practical concerns heightened by COVID-19.1
The Opportunities. Wealthier elders or elders with wealthy children or grandchildren who’ll potentially be subject to federal and/or state estate tax should consider taking advantage of the estate-planning opportunities that may be afforded by the current high lifetime exemption amounts, market volatility and low interest rates.
The Basics
The following concerns generally apply to any elderly individual, regardless of wealth. All elders appear to be at increased risk for contracting COVID-19, and many have had to shelter at home alone during the spring of 2020. At publication, it appeared that many states would be loosening stay-at-home guidelines by the summer of 2020, with another potential wave of virus infections and lockdowns expected in the upcoming fall and/or winter. With social distancing in mind, suggested solutions to these basic concerns are broken into tasks that could be accomplished remotely from home “During lockdown” and tasks that might be prioritized during a “Restrictions lifted” time when it’s easier for elders to leave their homes.
Who’ll oversee my elderly client’s health care? Now, more than ever, it’s vital for every individual to have a health care directive document in place that evidences his wishes regarding life-sustaining treatment and identifies an individual authorized to make medical decisions on an elder’s behalf in the event he becomes seriously ill with COVID-19 (or any other ailment). In most states, the individual authorized to make these decisions is typically referred to as a health care “proxy” or health care “agent,” and this individual typically can access the principal’s (client’s) medical records. Clients should also confirm that doctor relationships and standing prescriptions are up to date.
During lockdown: Now’s a good time for clients to review health care directives and, if necessary, to contact an attorney regarding any needed revisions or updating. It’s important to make sure that the designated health care proxy/agent remains willing, capable, trusted and, importantly, accessible. (Someone in the middle of a sailing trip around the world or recovering from COVID-19 himself won’t be very useful.) Clients should make sure they have an original or signed copy of their health care directive in their possession, and, it’s a good idea to make sure that a trusted loved one (it could be the individual designated) also has an original or signed copy. It may be helpful to provide both paper and digital versions. Suggest that clients confirm that their health care agents know who the clients’ doctors are and how to contact them and ascertain which hospital they prefer if hospitalization is required. Do clients have a large supply of needed prescription medications that can be delivered at home? If not, this is a good time to set up pharmacy home delivery and consider renewing prescriptions using a telemedicine appointment.
Restrictions lifted: If it couldn’t be done during lockdown, any new or updated health care documents should be executed. Consider where original documents or signed copies are physically located and how they can be accessed. For example, if documents were held in a safe at the attorney’s firm, the client and attorney should discuss how such documents can be accessed during a prolonged closure of professional offices. If documents are stored digitally, how can they be accessed? In-person appointments with doctors should be scheduled, if needed, and clients might discuss with their doctors whether a “Do Not Resuscitate” order is right for them. Clients should consider rescheduling and completing any surgeries or out-patient procedures that were delayed by the lockdown period or interviewing and engaging a new doctor if their prior doctor’s office had to close permanently during lockdown.2
Who’ll pay my elderly clients’ bills and file their taxes? A financial power of attorney (POA) allows a third party (usually an individual called “the agent”) to undertake personal financial or legal decisions on the principal’s behalf, such as paying bills or signing and filing income tax returns, if an elderly client is too ill to perform those tasks himself. The agent generally has power over any assets titled in the client’s name, such as a checking account, but doesn’t have authority over assets titled in the name of other entities, such as a corporation or trust. If an elderly client is hospitalized and/or unable to manage his financial affairs, the POA is a vital tool. Check to see if your elderly clients have POAs in place, and suggest they review them to ensure that the individuals designated as agents are still the appropriate choices.
During lockdown: Encourage elderly clients to review their financial POAs and determine whether they need to be updated. It’s a good idea for them to create lists of assets, bills and passwords and make sure their agent has a general knowledge of their financial affairs and how to pay their bills. Do they need help paying bills? If so, now might be the time to encourage them to start training a family member agent or to hire an outside bookkeeper or bill-pay service to help. Have they fallen behind on filing income tax returns? This is a good time for them to gather documents, contact their CPA and catch up with tax filings. Updated tax filings will in many cases also increase an elderly client’s chances of receiving any future stimulus payments.
If an elderly client is on a budget, have you already confirmed with her whether she’s eligible for needs-based benefits such as affordable housing, Medicaid or Social Security income? Even if an individual was denied benefits earlier, her eligibility may have changed due to diminished income or relaxed restrictions. If a client is hitting a milestone birthday, you might help her to enroll in Social Security, Medicare and/or begin taking required minimum distributions (RMDs) from retirement accounts, all remotely.
Restrictions lifted: Clients should execute a new or updated POA document, if needed, if they weren’t able to do so during lockdown. Consider advising an elderly client to visit her bank in person when it’s safe to do so, ideally with her agent designated under the POA, to make sure the agent’s authority is properly added to the client’s bank accounts and that her bank will honor that authority if the time comes. Many banks transition authority more easily when their in-house forms have been executed in person. An in-person visit may be especially important for an elderly account holder, as bankers are trained to assess in person whether an elder is competent to add an agent to her account or whether she may be the subject of financial elder abuse. Elderly clients might consider providing their CPAs with a copy of their POA document, in case it’s needed to help file their income taxes later.
Happy homes. Sheltering in place at home during the spring of 2020 forced us all to evaluate how well-suited our homes are to our everyday living needs. Some elders may have suffered from loneliness or the inconvenience of being stuck in a home that’s become difficult to navigate or is no longer the right fit. For elders living in assisted living or nursing homes, the spring of 2020 allowed them to experience how their residence dealt with the logistical demands of the coronavirus, as well as the inability to have visitors. Now’s the time for elders to critically evaluate that experience with their families and advisors.
During lockdown: Elders should consider whether they’ll want to stay in their current home setting if another lockdown period occurs. For those still in their own homes, have they been able to get supplies, and do they have a system in place for someone to check on their welfare at least every 24 hours? Does the home need any changes or repairs that they could make themselves? If not, consider using the time to remotely gather information about contractors and bids on home improvements. If an elder is considering a move, encourage her to use the time at home to discuss this possibility with family and advisors and remotely consult with realtors or assisted living communities. For those already living in facilities, was the facility’s handling of the first coronavirus wave satisfactory, or should the elder be looking to move facilities before a potential second wave?
Restrictions lifted: Is this the time to allow contractors inside an elder’s home to perform needed repairs or remodeling? If an elder is considering selling her home, should she now allow a realtor to visit the home in person to prepare it for listing? This may be the time to visit and tour an assisted living community that might be a better fit for the elder or to look at a more desirable unit within the community that’s become available.
Retirement accounts. Many people, including elders, are wondering how the recent decline in the stock market will affect the value of their retirement savings and how current low interest rates may impact those planning to use bond portfolios as a part of their income in retirement. This concern may be heightened for older clients who are nearing retirement or already relying on distributions from their retirement accounts to supplement their living expenses. And, for those still in the workforce, an economy in recession may have them concerned about job security.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed into law on Dec. 20, 2019, changed the age when retirement account holders must start taking required minimum distributions (RMDs) from 70½ to 72 (for those who turned 70½ on Jan. 1, 2020 or later).3 Account owners under age 72 may now want to consider delaying starting distributions until age 72 to allow their accounts more time to recover and grow. The SECURE Act also introduced a new provision that allows for retirement account owners who are old enough to be taking RMDs to continue contributing to their retirement accounts at the same time, if they continue to have earned income. Such continuing contributions, when possible, may be more important in today’s environment. Finally, encourage elders to meet with their financial advisors to determine whether their current lifestyles and budgets are sustainable and whether their retirement investments should take on incremental increases in equity exposure with the aim of allowing for more growth and recovery in their account values.
The Coronavirus Aid, Relief, and Economic Security Act, broad federal legislation signed on March 27, 2020 and designed to respond to the pandemic, suspended the requirement to take RMDs in 2020 for almost all retirement owners and beneficiaries.4 For elders who can afford not to take their 2020 RMDs, taking advantage of this provision may be wise, so that they’re not withdrawing from their retirement accounts at a time when most accounts’ investments are at depressed values.
Opportunities
Pull the trigger on gifting. If an elderly client has been mulling whether to make gifts to loved ones, now may be the time to move forward. The value of a gift is generally measured by its fair market value on the date of transfer. If an elder makes a gift when asset values are depressed, any appreciation the asset may experience as its value recovers, as well as the initial value of the gift itself, is removed from her taxable estate and passes to the recipient without gift and estate tax consequences.
In short, there may be no time like the present to give a present. Elders who make yearly annual exclusion gifts to family members or other loved ones (that is, gifts of up to $15,000 per donor to each recipient that don’t eat into the lifetime exemption amount) should consider making such annual gifts for investment now instead of waiting until year-end.
It’s also a very attractive time to use annual exclusion gifts to contribute to Internal Revenue Code Section 529 plans and allow a potential recovery to help fund children’s or grandchildren’s educations. Beyond annual exclusion gifts, remember that the lifetime exemption amounts remain (temporarily) at an all-time high. Currently, individuals can transfer up to $11.58 million or couples can transfer more than $23.16 million, during life or at death, without triggering federal gift or estate tax consequences. However, after December 2025 (unless new laws are passed earlier), the exemption is scheduled to drop to $5.49 million or $10.98 million for couples, indexed for inflation. These currently high exemption amounts, coupled with currently depressed asset values, afford individuals with the financial capacity to make large gifts an incredible opportunity to reduce the size of their taxable estates.5
Don’t miss out on interest rate-sensitive strategies while rates are historically low. Many sophisticated wealth transfer strategies are most attractive in a low interest rate environment, meaning that the success of the strategy depends on whether the gifted asset appreciates at a rate greater than the monthly interest rate set by the Internal Revenue Service, commonly referred to as the “hurdle rate” (0.6% for certain gifts in June 2020).6 When the hurdle rate is low, many planning techniques available to clients are especially attractive, including:
Grantor retained annuity trusts (GRATs). This is a type of irrevocable gift trust that can allow the grantor to transfer the appreciation on assets that exceeds the hurdle rate out of her estate and to loved ones without any gift or estate tax. Creating a GRAT in today’s environment can allow for the recovery of an equity portfolio to occur outside of the grantor’s taxable estate and can be a highly effective strategy for those with concentrated stock holdings.
Intrafamily loans. Loans can be made to family members or loved ones at today’s historically low interest rates and can be used for something as straightforward as helping an adult child purchase a home or start an investment account. Further, if the loan is made to a grantor trust created for the benefit of a family member, the interest payments received back needn’t be included in the lender’s taxable income.
Sales to grantor trusts. Like a GRAT, this technique can allow the grantor to transfer appreciation on assets out of his estate to the extent that such appreciation beats the hurdle rate. This strategy may be more appropriate for less liquid, income-producing assets that are hard to value, such as real estate or a private business.
Charitable lead trusts (CLTs). If a client has both charitable and wealth transfer objectives, a CLT is a type of irrevocable gift trust that provides an income stream to a charity for a certain period; after that period expires, the remainder left in the trust passes to a noncharitable beneficiary, such as a child. Depending on the structure, when the client creates a CLT, she may receive either a gift or income tax deduction based on the present value of the charitable income stream. The lower the interest rates, the higher the deduction, making this an ideal time to consider such a vehicle.
Consider upstream gifting. Elders who aren’t wealthy enough to have taxable estates themselves but who have children or grandchildren with larger taxable estates may have a unique opportunity to explore a multigenerational planning strategy. Upstream gifting refers to a child or grandchild making a gift of assets to an older beneficiary, such as a parent or grandparent. The gifted asset typically has an extremely low basis with market value that’s since greatly appreciated—for example, early-issue stock of a now wildly successful tech company.
The donor may use some of the currently high lifetime exemption amount while it’s still available to make a simple outright gift to the older donee and/or may use some of the more complex transfer strategies described above. The transfer must constitute a completed gift, fully removing the gifted asset from the donor’s taxable estate. The older donee can benefit from having more assets to live on for her remaining lifetime. In the case of an income-producing asset, the donee may choose to supplement her living expenses with the income while never touching the principal asset. Such income might make a significant difference in the older donee’s quality of life, in enabling the older donee to be able to live in a desirable assisted living facility, for example.
On the older donee’s death, the asset can be gifted back to the younger donor as a part of the donee’s estate plan. This returns the principal asset back to the donor, but with a newly stepped-up basis as of the donee’s date of death. Ideally the gifted asset isn’t large enough to catapult the older donee into having a taxable estate at death, but with shifting lifetime exemption amounts, the estate tax outcome for the older donee may be hard to guarantee. For this reason, the older donee’s estate plan may want to include a provision that any estate tax due not be spread pro rata among all estate assets, but rather be borne by the gifted asset.
An upstream gifting strategy has other potential pitfalls. For the strategy to make sense, the gifted asset must be an appropriate candidate with low basis and high current value, but the family dynamics are just as important. To avoid any appearance of a step transaction, there can be no legal requirement or obligation for the older donee to leave the gifted asset back to the younger donor. Making a death-time gift of the asset back to the donor must be entirely the donee’s free choice. So, potential pitfalls include the older donee’s testamentary or contractual capacity to make such a death-time gift, the older donee’s ability to follow through with doing the necessary estate planning and living long enough to complete that planning, the risk that the older donee spends more of the gifted asset during life than the younger donor anticipated or loses it to creditors and the possibility that the newly wealthier older donee will become the target of financial elder abuse or other family drama. Still, many of these concerns may be mitigated with careful planning for a trust to hold the gifted asset. For the right situation, upstream gifting should be considered.
Roth conversions. For elders who are wealthy enough not to need to spend down their retirement accounts during retirement and who are looking to pass their retirement assets to loved ones, the Roth IRA often remains the best strategy. When converting a traditional retirement account to a Roth, the account owner will pay income taxes today on the value of the IRA on conversion (ideally paid for with assets outside the IRA), but the beneficiaries won’t owe any income tax when they receive a distribution from the Roth account later. Converting to a Roth when asset values are depressed reduces the up-front income tax on the amounts converted. Once converted, assets in a Roth IRA grow income tax free and don’t have any lifetime RMDs, possibly leaving more of wealth growing tax free for longer than a traditional IRA would.
—This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
Endnotes
1. For more information on helping clients marshal basic estate-planning documents, seewww.wealthmanagement.com/high-net-worth/encourage-clients-compile-their-legal-vault.
2. For more information about helping clients formulate health care directives, seewww.wealthmanagement.com/estate-planning/eight-steps-updating-health-care-documents.
3. Setting Every Community Up for Retirement Enhancement Act of 2019, Pub. L. 116-94 (2019),www.govtrack.us/congress/bills/116/hr1865/text or Internal Revenue Code Section 401(a)(9)(H).
4. Coronavirus Aid, Relief and Economic Security Act, Pub. L. 116-136 (2020), www.govtrack.us/congress/bills/116/hr748/text.
5. For more information on helping clients consider the dollar value of different gifting strategies, see Gregory D. Singer and Gordon P. Stone III, “A Taxing Dilemma,” Trusts & Estates (July 2019).
6. Internal Revenue Code Section 7520; see alsowww.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates.