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USA ALABAMA: An Introduction to Private Wealth Law

Private Wealth Planning Trends 

Inevitably, the collateral effects of COVID-19, eroding investor confidence and imperilling some businesses, have impacted current private wealth planning strategies. An additional factor for 2020 is the upcoming Presidential election, which could bring a potential sea change in tax policy and an accompanying surge of possible legislation. A combination of these factors is expected to result in a busy and eventful third and fourth quarter of 2020 and beyond. The combination of depressed valuations (in some cases), low interest rates and potential tax legislation that could curtail certain planning techniques have clients working proactively with their private wealth planning advisors.

Political Environment 

Politics has always been a driver in stimulating private wealth planning. The everchanging estate, gift, and generation-skipping tax laws require private wealth planning advisors to monitor the changing laws and advise clients of planning options based on expiring laws, new laws, and potential changes in tax policy with each election. In many instances, transfer tax legislation includes a so-called sunset or self-initiating expiration; for example, the scheduled 2025 expiration of the Tax Cuts and Jobs Act’s doubling of the estate, gift and generation-skipping exemption. The results of the 2020 elections could significantly impact future planning opportunities. If the Democratic party gains control of the White House or Congress, a new tax policy could be implemented that favours decreased exemptions for estate, gift and generation-skipping transfers, which could take effect sooner than the planned expiration of the exemptions in 2025. It could also include limits on leveraged transfers including grantor retained annuity trusts, and potential increases in wealth transfer tax rates. Some proposals include eliminating valuation discounts for non-business assets in an entity that is not actively traded (such as family limited liability companies and family partnerships).

On the other hand, if the Republican party remains in power, there could be a push to repeal the expiration of the exemptions so they remain at the current USD11.58 million and even higher amounts, as well as potentially lowering wealth transfer tax rates, with more legislation to facilitate the transfer of assets from one generation to the next at reduced wealth transfer tax cost. Further, there is still discussion of possible repeal of the transfer tax system – although that has not gained much ground in the last four years. Moreover, the burden that the COVID-related stimulus spending has placed on the government's finances perhaps decreases the likelihood that significant tax reductions would be enacted in the near future.

The uncertainty of new wealth transfer tax policy for 2021 (as a result of the election) is motivating many high net worth clients to take action now. Many individuals are moving forward with transactions that take advantage of the current USD11.58 million exemption to avoid any risk of exemption reductions stemming from the upcoming elections. Common transactions range from simple outright gifts to family members to more complex transactions involving trusts which stay intact for multiple generations – thereby keeping the assets out of the wealth transfer tax system for future generations as well. However, because of the uncertainty in the economic forecast, other individuals are seeking strategies that allow them to retain access to the assets if needed, such as spousal limited access trusts.

Closely-held businesses comprise a significant portion of the Alabama economy. An important focus of planning is creating a structure to transition a family business to the second and third generations. COVID-19 has been a stark reminder that crisis can hit with little warning and having a succession plan in place can be critical to the continued success of the business.

The Economy and Private Wealth Planning 

Regardless of politics and the outcome of upcoming elections, the current state of public health and economic affairs has driven interest rates and valuations down.

Many closely held business owners have developed a “retain cash strategy” as they manage through 2020, and plan for the future of 2021. Even with help from government loan programs, many closely held businesses will find themselves with reduced revenue and profits in 2020 and perhaps 2021. While the balance sheets for businesses may appear somewhat negative, it presents a positive opportunity for private wealth planning. The year 2020 is an excellent time to transition ownership and perhaps control and management of the business to the next generation through planning techniques that perform well on the brink of future appreciation. Grantor retained annuity trusts (“GRATs”) and sales to defective grantor trusts will be used for the next few years to help transition wealth during this depressed economic state of affairs, producing significant results when the assets begin to appreciate. Timing is everything in terms of transferring assets at the right time, and the second and third quarter of 2020 – along with 2021 - will see many assets transferred as part of these leveraged trust transactions.

In addition, interest rates have reached an all-time low. Intrafamily loans, refinancing of existing loans and closely held business debt, and maximising arbitrage through favourable interest rates within the family will be a significant part of private wealth planning. Charitable planning with charitable lead annuity trusts is also seeing renewed attention because of the low interest rates.

While the current economic downturn could be temporary, a long-term and sustainable recovery of investment values and closely held business profits may take time. Relatively speaking – even modest appreciation in 2020 and 2021 still leaves opportunity for leveraged transfers until values return to and maintain pre-COVID status.

Trends In Planning For Disability 

Families at all levels of income and wealth can have members with disabilities. Congress and States have enacted legislation in the last few years that greatly affects planning opportunities for persons with disabilities, whose future depends on how wealth for them should be administered and managed. Some of these beneficiaries may need to retain the option to qualify for government benefits available only to those who meet strict financial limits, while others may not. Regardless of the type of benefits needed, most beneficiaries require a plan that protects funds from being mishandled and promotes the best life options.

While professionals in wealth management stay current on trends and the latest planning techniques involving estate, gift and income tax minimisation, their knowledge of how to best protect a person from his or her future incapacity or a family member is often limited or misinformed. Adding a special needs planning attorney to the team of estate planning advisors is well-advised to navigate these tricky waters. While COVID-19 has caused a recent interest in planning, the near epidemic levels of autism spectrum disorder, affecting as many as 1 in 40 children, and other sudden onset or lifetime disabilities is just as relevant.

One new development occurred in December 2014 when Congress passed the Achieving a Better Life Experience (ABLE) Act, which authorises tax-free savings accounts that do not count against a resource limit for individuals with disabilities. The account is very useful for a person on SSI who is trying to establish more independence. A special needs planning attorney can implement this in family documents. Similarly, the recent SECURE Act contains provisions for continuing a lifetime payout for beneficiaries with disabilities. Today's special needs trusts should be carefully crafted to ensure the future of the beneficiary in the best way. Parents often prepare Letters of Intent regarding their children for the Trustee to follow. In recent years, the Social Security Administration has modified its rules and policies to increase benefits for individuals with disabilities, a trend that will hopefully continue.