Why You Should View Investing Through a Long-Term Lens

Thanks to the Tax Cuts and Jobs Act of 2017, the vast majority of Americans don’t have to worry about paying estate taxes. This legislation increased the estate tax exemption considerably — the exemption amount is currently $12.06 million per person, or $24.12 million for a married couple filing jointly. This means that for any individual or couple whose estate is worth less than this at the time of their death, no estate tax will be assessed. In recent years, just 0.2% of the estates of Americans who have died have owed estate tax, according to IRS data. Higher Exemptions are Expiring Unfortunately, this could all change drastically in just a few years when the higher gift and estate tax exemptions expire. The exemption amounts are currently scheduled to sunset on December 31, 2025, or in just over three years. When this happens, the gift and estate tax exemption will be cut in half to approximately $6 million per person, or $12 million for a married couple filing jointly. A hypothetical example illustrates the potential impact of this change on an estate. Let’s say that the Smiths, who have an estate worth $30 million, die in 2022. Just under $6 million ($5.88 million to be exact) of their estate will be taxable when you factor in the $24.12 million estate tax exemption. At the highest estate tax rate of 40%, this would result in an estate tax of about $2.35 million. But what if the Smiths live for a few more years and die in 2026 instead of this year? In this case, approximately $18 million of their estate will be taxable. At the highest estate tax rate of 40%, this would result in an estate tax $7.2 million — or nearly $5 million more than if they died before the end of 2025. How to Lower Estate Taxes with an ILIT This upcoming change in estate tax law makes it critical for affluent individuals and families to plan now for ways they can reduce estate taxes in the years ahead. One effective tool for lowering estate taxes is an irrevocable life insurance trust, or an ILIT. The purpose of an ILIT is to reduce the value of your taxable estate by removing life insurance proceeds from your estate, thus shielding them from estate taxes. Proceeds from the policy’s death benefit are deposited into the trust where they’re held on behalf of your beneficiaries. This shields them from taxation. Meanwhile, your beneficiaries will receive the death benefit tax-free upon your death. They can then use this money to pay any estate taxes that may be due (or any other outstanding debts or expenses) without having to sell assets to cover the estate tax bill. The Nuts and Bolts of ILITs There are three parties to an ILIT: the grantor, the trustee and the beneficiaries. The grantor is the person or couple establishing and funding the trust, the trustee is the party managing the trust and the beneficiaries are the recipients of the trust distributions. You can name anyone you want as the trustee, including your spouse, an adult child, a close friend, an attorney or a financial institution. Your trustee may have discretionary authority to control when beneficiaries receive life insurance policy proceeds. For example, proceeds can be paid in full upon your death or when beneficiaries reach a certain age or life milestone such as graduating from college or having a child. As the grantor, you can transfer ownership of an existing life insurance policy to an ILIT after the trust is formed or the trust can purchase the policy directly. When you die, the life insurance policy’s death benefit is deposited into the ILIT and held in trust for your beneficiary or beneficiaries. If your spouse is the beneficiary, he or she will receive regular incremental payments instead of a lump sum that won’t be taxed as part of your spouse’s eventual estate. In addition to potentially reducing estate taxes, an ILIT can also help protect assets from creditors. Any coverage amounts above your state’s creditor limits held in an ILIT are generally protected from the grantor’s or beneficiary’s creditors. The biggest drawback of an ILIT is that, as the name implies, it is irrevocable. This means that no changes can be made once the trust is finalized, nor can you dissolve the trust. Any assets that you as the grantor place in the trust no longer belong to you and you have no control over them. How We Can Help We can help you determine whether an irrevocable life insurance trust might play a helpful role in your estate plan. Give us a call at (803) 791-1111 or send us an email to talk about your situation in more detail. Information is provided by William Amick & Blake Amick and written by Don Sadler, a non-affiliate of Cetera Advisor Networks LLC. This post is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Investment Advisor Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser. 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Within the context of employee retirement plans, a fiduciary is responsible for ensuring the plan is managed with the best interest of participants in mind. ERISA identifies three different types of employee benefit plan fiduciaries and specifies reporting and disclosure requirements for them. Each of these types of fiduciaries serves a unique role in plan management, administration and support. It’s important to understand these roles so you choose the right type of fiduciary for your plan. 3(16) Advisor: Overseeing Plan Administration and Operations The first type of fiduciary is known as a 3(16) advisor, whose main responsibilities are overseeing plan administration and daily operations. This fiduciary’s tasks typically include the following: •Distributing summary plan descriptions, benefit statements and required disclosures to participants •Maintaining and interpreting the plan document •Ensuring timely deposit of participant contributions •Fulfilling reporting requirements •Soliciting and enrolling new members You can hire an outside third-party administrator (TPA) to handle these responsibilities if you prefer. However, this does not relieve you of your fiduciary duties and liabilities. For example, you still must oversee the TPA’s activities and monitor the fees charged to make sure they are reasonable.  Note that TPAs usually will not agree to sign Form 5500 or be named the plan administrator. You will retain this responsibility as the plan sponsor, along with fiduciary liability for administering all other plan duties and monitoring the prudence of the administrator selection. 3(21) Advisor: An Investment Professional The second type of fiduciary is known as a 3(21) advisor who serves as a financial advisor to the plan. This fiduciary role is usually filled by an outside investment professional who charges a fee. 3(21) advisors make recommendations and offer advice about how plan assets are invested, and sometimes help ensure that the plan is complying with ERISA’s investment-related provisions. Importantly, 3(21) advisors do not actually make investment decisions — this responsibility lies with the plan administrator. A 3(21) advisor might present the plan administrator with a list of investment options that meet the plan’s objectives. As a result, the fiduciary responsibility and liability of a 3(21) advisor is limited. 3(38) Advisor: Going a Step Further The third type of fiduciary is known as a 3(38) advisor. This fiduciary goes a step further than a 3(21) advisor by actually making investment decisions and purchasing securities. Banks, insurance companies and Registered Investment Advisors (RIAs) usually serve as 3(38) advisors. A 3(38) advisor has full fiduciary responsibility to manage the retirement plan and make investment decisions that are in the best interests of plan participants while maintaining transparency about these decisions. This includes providing investment performance reports to the plan sponsor. While the 3(38) advisor has the final authority to make investment decisions, the 3(16) fiduciary can replace the 3(38) advisor if performance is deemed unsatisfactory. Choosing the Right Fiduciary As a plan sponsor, it’s critical that you understand the three different types of employee benefit plan fiduciaries and their specific roles so you choose the right one for your particular circumstances. We can answer any questions you have about retirement plan fiduciary support and help you make the right choice for your plan. Give us a call at (803) 791-1111 or send us an email if you’d like to talk about your plan in more detail. Information is provided by William Amick & Blake Amick and written by Don Sadler, a non-affiliate of Cetera Advisor Networks LLC. This post is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.