Several recent posts have explained the functions of various estate planning tools that are known by their acronyms, such as QTIP and ILIT. This last posting in our series will cover the term ”springing”. A springing power is given to an attorney-in-fact or a trustee when a certain specific event occurs. Springing powers are most commonly found in the estate planning documents that are drawn up to prepare for possible incapacity or mental incompetence. Good examples are durable powers of attorney for financial affairs and/or medical affairs. These instruments appoint someone to handle the financial or medical affairs of another individual. However, the attorney-in-fact who is named in these documents does not receive the power immediately. Rather, the authority and power to make the financial or medical decision “springs” into being when the principal (who executed the document) is declared incompetent or unable to make such decisions for themselves.

The estate planning process has a great deal of complexity and legal jargon. Likewise, there are many acronyms and abbreviations. One of the acronyms we would like to cover is the ILIT. ILIT stands for “irrevocable life insurance trust” and it can be a very useful tool for dealing with estate taxes. Let’s suppose an individual has founded a successful business which he/she would like to pass on to the children. Like many entrepreneurs, the patriarch/matriarch of this family business has reinvested nearly all of their extra cash into the business and its value has grown to millions of dollars. Even with the currently high estate tax exemption amounts ($11.7 million per person, indexed for inflation), it is easy to see how a very successful family business or farm could easily reach a value exceeding these thresholds. If the founder/owner of this business suddenly passed away, transferring its value to the next generation could be problematic because estate taxes are typically due nine months after the date of death. Where would the next generation come up with the cash to pay the estate transfer taxes that would become due? Since most excess cash has been redeployed back into the business for years, how could they quickly extract the funds needed to satisfy the bill to the IRS? Will they be forced to sell a portion or all of the business at a “fire sale” price in order to come up with the cash needed?

Believe it or not, some people may not desire to receive an inheritance. Reasons for this could be many. Perhaps an inheritor is doing very well financially but wants to benefit a less wealthy sibling that may need the assistance. Or, the inheritor may already be in a very high income tax bracket and the required distributions from an inherited IRA will simply amplify their existing tax bill. This later situation may become more commonplace due to the Secure Act’s (see blog posting dated January 20, 2021) elimination of the “stretch IRA strategy” for non-spousal beneficiaries. Beneficiaries could have been designated decades ago and never updated. Yet, the passage of time can certainly affect the financial circumstances of these heirs.

Previous recent posts have emphasized the need for us all to develop and implement an estate plan. One of the necessary steps in doing so is to name an executor for your will and estate. Your executor will act on your behalf when you are deceased and can perform all of the legal tasks you used to do. Some can be mundane, such as paying bills, canceling credit cards, etc., while others can involve more complexity like selling a residence, distributing assets, and filing income tax returns. A good article by Daniel A. Timins, Esq., CFP® in the August 8, 2017 edition of Kiplinger magazine discusses what traits make for a good executor.