Charity Babington Falls, Mark Luzan and Megan F. Nogle Give Insights on Wealth Management & Estate Planning

The Wealth Management & Estate Planning Guide is produced by the L.A. Times B2B Publishing team in conjunction with Citrin Cooperman; Greenberg Glusker LLP; and The Private Bank at Union Bank.

Recent developments in the fintech market have helped to open up new private wealth management products and services to a broader array of people and families. This, along with the current post-pandemic realization by many that they want to better manage their finances and make plans for their estates should they be faced with a new work stoppage or crisis, is an indicator of just how important the wealth management process has become.

To take a closer look at the latest trends, best practices and concerns across the wealth management and estate planning landscape, we turned to some of the region’s leading experts - in private banking, accounting, and law. Each has graciously weighed in for an enlightening discussion and shared their insights on the state of wealth management in 2022.

Q: What are some wealth management strategies that many investors don’t know about but should?

Mark Luzan, CFP, Citrin Cooperman: The last decade provided a period of sustained growth in the market, as well as the emergence of crypto investing. For those who benefitted, this could spell large tax liabilities on recognized gains. Enter Opportunity Zones; this program allows investors a tax deferral of their original short- or long-term gains until December 31, 2026, making this especially attractive for the short-term crypto gains that are subject to higher tax rates. You can think of this deferral as a four-year interest-free loan. In addition, if you hold your investment for a 10-year period, the gains will be free of federal taxes (unfortunately, CA will still tax these gains). Despite the expiration of a third benefit in 2021, Opportunity Zones are still a great option for investors who are looking to rebalance their portfolio, receive amazing tax benefits and are financially stable to make a long-term investment.

Q: What do individuals often overlook when thinking about their estate plan?

Megan F. Nogle, Counsel, Private Client Services, Greenberg Glusker LLP: An individual should ensure that any digital assets are properly incorporated into his or her estate plan. Digital assets consist of domain names, Facebook status updates, photos living in the cloud, Dropbox files, access to an iPhone, cryptocurrency, and other digital data. Individuals should inventory their online accounts, compile login information (or, in the case of cryptocurrency, the private key) in a secure place, and consider who will have authority to access or manage their digital assets after death. Certain online providers offer online tools that allow you to appoint a digital asset fiduciary and make other decisions that will govern an account after death. If no such tool is available, an individual may designate a digital asset fiduciary in his or her estate plan.

Q: When should individuals make updates to an estate plan?

Charity Babington Falls, CFP, Head of Wealth Planning, The Private Bank at Union Bank: A person should revise her estate plan whenever the plan no longer accomplishes her goals. Because family dynamics and tax laws are in constant flux, it is important to review your estate plan regularly, at least every five years or sooner if your family makeup changes - due to births, deaths, marriage, and divorce - or when tax laws change. Ensure those you name as beneficiaries are those you want to benefit from your estate. Ensure the selection of trustees and agents named in powers of attorney are in line with your wishes. And don’t solely review your estate planning documents. Many death benefits, such as benefits under retirement plans, life insurance policies and bank accounts, are distributed to the beneficiary named in the plan documents regardless of what your will or trust directs.

Nogle: Estate plans should evolve over time - just like we do. When certain events occur, such as a significant change in net worth, a change in marital status, the birth or adoption of a child, a beneficiary’s death, or a move to another state, an individual should consider the impact on his or her estate plan and determine whether modifications may be appropriate. Relationships with the fiduciaries named in an estate plan might change and those individuals may no longer be the right fit for carrying out the estate plan. An estate plan is also affected by hundreds of provisions of state and federal law, some of which are changed every year. Accordingly, it is recommended that an individual review his or her estate plan every three to five years to confirm it continues to reflect his or her wishes and comports with current law.

Luzan: Estate plans are ever-evolving documents. Families should revisit their plans when major life events occur, such as the addition or loss of family members, significant changes in net worth, physical relocation, or changes in one’s health. In the case of terminal health news, you’ll definitely want to review your medical directives, DNR (Do Not Resuscitate), and power of attorney. In addition, it is prudent to review your estate plan every three to five years to confirm it is still consistent with your wishes and goals. Relationships among beneficiaries, executors, and trustees can change over time as well as the federal and state laws surrounding estate and gift tax transfer.

Q: How can individuals best prepare their heirs to receive an inheritance?

Nogle: While a trust may contain a family mission statement or incentivizing provisions to encourage beneficiaries to lead productive lives, nothing replaces consistent, transparent communication and education. It is important for individuals to have open discussions with their heirs or beneficiaries about the nature and value of their estates, their hopes and desires, and the family values they wish to preserve as wealth transfers from generation to generation. Parents should consider educating their children about financial planning and wealth responsibility, providing their children with hands-on opportunities to manage a bank or investment account, and introducing their children to trusted advisers.

Q: How has innovative technology affected consumers’ ability to manage wealth?

Luzan: Technology has brought information that was once difficult for consumers to access directly to their fingertips through data aggregation and consolidation of real-time transactions. Some see this accessibility as a negative, as it can create too much ease of access for the amateur investor. However, with these resources available to the general public, what I’ve seen with our clientele is an increased understanding and appreciation for what we do. I believe the clients that best utilize our services are the ones who are most engaged with their finances. Newer clientele who have been actively handling their own finances are now coming to us with a better understanding from using services like mint.com or low-cost trading platforms, which empowers them to get the most out of their advisors.

Q: What techniques can be used to create more efficient strategies to pass wealth from one generation to the next?

Falls: Advice depends on how a person defines efficiency. Some wealth transfer techniques, such as estate freezes, entail more complexity in the initial setup and ongoing maintenance than simply solving for a liquidity need using life insurance. For clients who define efficiency to mean simplicity, annual gifting using the gift tax exclusion and securing life insurance for taxable estates may be the best approach, assuming the client’s cash flow needs are otherwise met. Other clients define efficient as meaning tax efficiency and may be amenable to implementing more complex wealth transfer strategies to minimize gift, estate, and collective income tax liabilities. Such wealth transfer techniques may include gifts and sales to defective grantor trusts, family limited partnerships and family limited liability companies, philanthropic planning with charitable lead trusts, transfers of volatile stock using rolling grantor retained annuity trusts, and qualified personal residence trusts, or some combination of strategies. In other words, advice should be uniquely tailored to each person’s specific goals, and understanding how efficiency is defined for each person is critical before providing advice.

Luzan: The most effective strategy of wealth transfer occurs when highly appreciating assets are transferred to the next generation at a low value. This can be done through the use of an irrevocable trust. By transferring property to the trust, the client relinquishes future ownership and potentially the income streams generated by the asset, but retains control over the asset during their lifetime. Many variations can be applied to an irrevocable trust, so if full relinquishment of the asset or income streams is not feasible, the trust can be adjusted to accomplish this. However, the overall benefit of transferring the assets would be discounted to account for these adjustments. Another strategy is to take advantage of the annual gift exclusion. In 2022, the annual exclusion is $16,000, meaning a client and their spouse could transfer a total of $32,000 per child per year, free of tax.

Q: What are the pros and cons of a living trust?

Falls: Living trusts serve many important purposes. Most significant is removing impersonal court personnel from decisions related to you and your assets during incapacity and at death. A living trust names a trustee to act when you are no longer able to act. That trustee steps into your shoes to manage assets and make distributions to you or other beneficiaries strictly according to the trust’s terms. Your attorney can also draft special needs provisions into the trust, so that if a beneficiary is or becomes disabled, the trust will supplement disability benefits and not disqualify the beneficiary from those benefits. A living trust avoids probate at death, which has the added benefit of maintaining privacy. Assets passing by will are disclosed to the court and that disclosure becomes part of the public record. Some do not execute a living trust due to the upfront costs to set it up, because they cannot decide whom to name as trustee or how to divide assets upon passing. The costs are justified, however, to prevent other costs. Probate is expensive and family harmony is priceless.

Luzan: For the most part, I would always recommend the creation of a living trust to a client, with the management of assets being the primary benefit. An 18-year-old who newly acquired a large chunk of money most likely wouldn’t be making the best decisions on what to do with it. However, if those assets were in a trust, then the owner of the assets could direct the management of those assets. Receiving assets in a trust also offers creditor protection for the beneficiaries and makes it easy to create split interests in assets (i.e., siblings owning a home 50/50). Trusts also avoid probate court, which can be timely, expensive, public, and puts one at the mercy of the judicial system. Similarly, trusts do have costs of setup and administrative work to properly transfer assets into the trust, but the control of this remains in the client’s hands and not the courts.

Q: What are the primary reasons for creating an irrevocable trust?

Nogle: Irrevocable trusts can be used to accomplish a variety of estate planning goals, and often the goal of gift and estate tax savings is at the forefront. Executed properly, a gift or sale of assets to an irrevocable trust can remove an appreciating asset and excess cash flow from an individual’s estate. An irrevocable trust may also protect trust assets from a beneficiary’s creditors to the greatest extent possible. Before establishing an irrevocable trust, however, the individual should consider the gift tax cost of the transfers to an irrevocable trust and the fact that he or she will be giving up control over the transferred assets and the ability to receive income from those assets.

Luzan: Irrevocable trusts are great at achieving estate and gift tax planning objectives. In general, when assets are transferred into them, the original owner gives up ownership of those assets, thus removing them from their gross estate and reducing the potential estate tax liability. In addition to reducing the estate tax, the types of irrevocable trusts vary and serve different purposes, such as the purpose of charitable funding, business succession, multigenerational benefits for the family, and estate tax liability planning. Irrevocable trusts also offer a form of privacy, by transferring assets into the trust’s name as well as a degree of creditor protection, litigation protection, and the assurance of one’s wishes being fulfilled after death.

Falls: Irrevocable trusts serve many important purposes. A well-drafted irrevocable trust can protect assets from frivolous spending by an immature or less financially astute beneficiary by naming a more capable person to manage the assets for the beneficiary. An irrevocable trust can provide some element of protection from a beneficiary’s creditors, including divorcing spouses. An irrevocable trust can supplement a disabled beneficiary’s state and local disability benefits without jeopardizing the beneficiary’s right to receive those benefits. An irrevocable trust can be the vehicle through which a person satisfies their philanthropic vision in a tax-efficient, thoughtful manner. Lastly, irrevocable trusts can provide estate tax benefits to the person funding the trust and to the beneficiaries of the trust.

Q: Is there an advantage in using a trust instead of a will?

Luzan: The primary advantage of a trust is the ability to avoid your state’s probate process, which can become costly and create significant delays in heirs gaining access to the assets. In contrast, a will merely directs where the deceased’s assets go after death and is supervised by the judicial process. Because of the involvement of courts, it is extremely important to create a trust for the transfer of assets in non-traditional relationships (unmarried couples, same-sex marriages, etc.). History has shown family members contesting the validity of wills and courts deeming them invalid, thus neglecting the wishes of the deceased. A trust, however, is considered a legal, living entity and continues to live after the death of the grantor, thus ensuring the decedent’s wishes. In addition, trusts offer you privacy, as the probate process is public. Trusts also offer creditor protection for the heirs. It should be noted that a will and a trust shouldn’t be used independently; instead, they should complement one another in the estate planning process.

Nogle: In California, if the total combined value of the assets in an individual’s name at his or her death exceeds $184,500 (for deaths occurring after April 1, 2022), a public, court-supervised probate proceeding may be necessary to transfer those assets to an individual’s heirs or beneficiaries at death. With certain exceptions (e.g., property held with a right of survivorship, a pay-on-death account, or a life insurance policy or retirement plan with a beneficiary designation), only property held in a trust will avoid a probate administration on an individual’s death. Thus, a properly funded trust may maintain a degree of privacy, as well as provide for centralized, continuous management of property both in the event of incapacity and following an individual’s death. Conversely, a will does not avoid a probate and only becomes effective upon an individual’s death.

Falls: A trust avoids probate, and a will does not. A will directs where assets owned by the deceased at death go after payment of the deceased person’s creditors. To ensure the will is valid, it must go through the costly judicial process called probate to prove its validity. Because trusts do not die but continue to exist as a legal entity after a person dies, assets owned by trusts do not have to undergo the probate process. Most people in California have a will in addition to a trust. Wills in California act as a catch-all and direct that any estate assets not titled in the trust at a person’s death pour from the estate into the trust and distribute according to the trust’s terms. Wills also serve as the document in which parents of minor children will nominate a guardian in the event of an untimely death.

Disclosure note: Wills, trusts, foundations, and wealth planning strategies have legal, tax, accounting and other implications. Clients should consult a legal or tax advisor. Union Bank does not create estate plans. Estate plans should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in a client’s state.