Estate Planningfall 2018

‘Fiduciary rule’ voidedby judge: What thedecision means for you

The fiduciary rule, a regulation that required financialadvisers to put their clients’ interests ahead of theirown, is now dead.

Enacted in 2016 after five years of development in theDepartment of Labor, the fiduciary rule was slated togo into full effect in 2019. But a federal court ofappeals made a decision that voided the rule, findingthat the Department of Labor overstepped itsauthority.

Fiduciary basicsIn a financial sense, fiduciaries are required to act intheir clients’ best interest. Advisers must alwaysrecommend solutions that are “suitable” to the client.But when weighing such “suitable” options,investment professionals who are not fiduciaries arestill free to recommend products that come withhigher commissions.The fiduciary rule required financial professionals toensure investment advice was accurate and complete,to disclose potential conflicts of interest, to discloseclearly all fees and commissions, and to makeinvestment recommendations that were consistentwith a client’s goals and risk tolerance.

Registered Investment Advisers are already governedby a fiduciary responsibility. But many brokers,insurance professionals, and others in the financialindustry are not. The fiduciary rule would have appliedfiduciary-level standards to the wider body of financialprofessionals.

Industry concernsThe problem, for some, was the added expense andliability created by the fiduciary rule. By someaccounts, the rule would have made it difficult foradvisers to service some small investors whilegenerating sufficient revenue for their work. Othersargued that the rule was poorly defined and put evenethical, well-intentioned advisers at risk of facingcostly litigation.

Some advisers planned to increase their fees to coverthe new expenses and make up for the loss incommissions. Others intended to increase the minimalinvestable assets someone needed in order to becomea client.

Check withholdings to avoidcostly tax surprise

For most taxpayers, the Tax Cuts andJobs Act reduced the overall tax burden. However,even though taxpayers will see an overall reduction intheir taxes, many of them could still end up with anasty tax bill at year end.

Following passage of the TCJA, the IRS releasedupdated withholding tables to reflect the new law. Asa result, many people saw their paychecks increase.But the withholding tables didn’t take into accountthe wide range of individual circumstances affectingexemptions.

By having your employer withhold taxes from yourpaycheck, you spread out your tax liability and avoidunderpayment penalties. You may have withheld theright amount in the past, but TCJA changes may havealtered your situation. The IRS advises that familieswith complex tax situations may have their incometaxes withheld incorrectly and may end up owingmore.

Most families should double checkIt’s generally a good idea to review your withholdingannually or when you have a significant life change.But these families should make a particular effort toreview their withholdings:

People living in high-tax statesTwo-income householdsHouseholds with childrenPeople who itemized deductions in 2017Anyone with a large tax bill or large refundin 2017

The loss of certain exemptions may not be offset bythe higher standard deduction. Some taxpayers couldend up with a larger return than expected whileothers will be saddled with a challenging tax bill.

The sooner you review, the betterThe fix: Use the IRS online withholding calculator toreview your withholding. Better yet, sit down withyour tax adviser to get a clear understanding of yourupcoming liability. With just a few months left in theyear, changing your withholding now may notcompletely correct any discrepancies.

Talking with an adviser can help you figure out if youshould be expecting a large tax burden next spring —and give you extra time to save.

Would-be divorcees face year-end tax deadlineIf you are planning a divorce, talk to an adviser abouthow changes in the Tax Cuts and Jobs Act (TCJA)will affect your taxable income.

Frequent flyer miles inestate plans

Whencelebrity chef and author Anthony Bourdaindied, his will contained a directive leaving hisfrequent flyer miles to his estranged wife to“dispose of in accordance to what she believesto be his wishes.”

Bourdain’s frequent flyer account was almostassuredly large. He built the latter half of hiscareer as a globe trotter, traveling the worldsharing meals and exotic food experiences.Though most people probably don’t have asmany frequent flyer miles as Bourdain, manydo have hundreds of thousands of them.

Each airline has different rules andregulations on the transfer of miles afterdeath. Many airlines, such as Delta, haveclear policies indicating frequent flyer milesare not transferable upon death. However,some of those same policies go on to stipulatethat the airline may transfer miles to certainauthorized persons at their discretion.

The American Airlines policy, for example,states: “Neither accrued mileage, nor awardtickets, nor status, nor upgrades aretransferable by the member upon death.However, American Airlines, in its solediscretion, may credit accrued mileage topersons specifically identified in courtapproved divorce decrees and wills uponreceipt of documentation satisfactory toAmerican Airlines and upon payment of anyapplicable fees.”

In other words, if you include a clause in yourwill bequeathing your frequent flyer miles,the airline may or may not honor it.

Improve the odds of transferTalk with your estate planning professionalfor help deciphering airline policies andtaking the necessary steps to transfer yourmiles. To help ensure your miles will transfer,include a provision in your will that makesyour wishes clear. That will provideimportant documentation if the airlinerequests proof of your intent.

You will also want to provide your accountnumber and login information to yourexecutor along with written instructionsabout who can access your account.

Your airline miles may be a way to leave alegacy to someone after your death. Of

Vetting your advisersThe fiduciary rule is now dead, but its legacy lives on.

In part, the fiduciary rule helped bring adviserresponsibilities and compensation models to theforefront of discussion. Such conversations havehelped individual investors realize there are adviserswho serve as fiduciaries and others who do not. Thefiduciary rule also opened broader conversationsregarding fees and business models.

Many advisers who are not fiduciaries operate on acommission basis. There are plenty of ethical advisers,and commissions are not necessarily a bad thing.Investors should feel empowered to ask the toughquestions such as, “What fees am I paying? Are theyappropriate? How do these fees affect my retirementplan? Are there lower cost options available to me,outside your services?”

Ask your adviser if he or she is a fiduciary, and if not,why not. You may find that your adviser is doing agood job for you, even without the strict fiduciaryparameters.

Consider how much financial advice you want and ifthe associated fees are worth it to you. Just the factthat an adviser you’re working with is a fiduciarydoesn’t mean that adviser is the best fit for you.

What’s next?Some firms have already made significant investmentsto adhere to the fiduciary rule and they’re goingforward with those plans, even though they don’t haveto. This means they may be channeling more of theirclients’ money into fee-based accounts rather thancommission-based products.

In the meantime, the Securities and ExchangeCommission is working on an alternate rule that wouldcall for a standard of conduct that exceeds “suitable”yet falls short of “fiduciary” requirements. Legislationhas been enacted, or is pending, in several states toimpose best-interest or other standards on financialinstitutions and their personnel.

Under the new law, for divorce agreements executedafter Dec. 31, 2018, payers no longer receive adeduction for alimony payments and recipients nolonger have to include them in taxable income.

Arguably, if you will be making sizable alimonypayments, you have an incentive to finalize youragreement before the end of the year in order to getthe tax benefits. If you stand to receive alimony, youmay want to delay in order to receive payments taxfree.

Eliminating the divorce subsidyAssuming the payer is in a higher tax bracket and therecipient is in a lower tax bracket, there are taxsavings to be generated by passing the tax burden tothe person in the lower bracket — assuming you fileby year-end 2018.Reportedly, the House Ways and Means Committeedescribed the alimony deduction as a “divorcesubsidy” because a divorced couple might pay less intheir combined taxes than a married couple might.Repealing the deduction will add about $7 billion innew tax revenues over 10 years.

Impact on negotiationsThe tax implications of an alimony payment shouldbe factored into calculations and negotiations. Talk toyour attorneys about each partner’s tax bracket andthe net tax impact.

Some lawyers suggest that eliminating the taxdeduction limits their ability to help clients findcommon ground by maximizing each party’s post-divorce financial situation.

Filing before year-end may provide you and yourpartner more options in settlement negotiations.Consult a financial professional with experience indivorce tax issues to understand your personalimplications.

We welcome your referralsWe value all our clients. And while we’re a busy firm,we welcome all referrals. If you refer someone to us,we promise to answer their questions and providethem with first-rate, attentive service. And if you’vealready referred someone to our firm, thank you!

course, frequent flyer policies may change atany time. You might be better off using ordonating your miles now, while you can,rather than risk losing them after you die.

Survey: Family dramacauses estate issuesFamilies face a variety of estate planningchallenges, and family drama may be chiefamong them. In fact, 44 percent of planningprofessionals say family conflict is the biggestthreat to estate planning this year, followedby tax reform (25 percent) and marketvolatility (12 percent), according to a surveyby TD Wealth.

Though conflict may make planning achallenge, a careful estate plan can reducefuture family feuds. Take these steps tominimize tension after you’re gone:

Use an experienced estate plannerto ensure you have the properplanning documents in place tooutline your intentions and appointa fiduciary.Hold frank conversations soeveryone knows what to expect inthe event of your death. Fewersurprises mean less discord.If you are giving unequal gifts, tellyour heirs why and document yourrationale in an estate planningletter.

Also, tax law changes in the Tax Cuts andJobs Act could significantly impact yourestate plans. For the sake of your legacy andfuture family harmony, families need toengage in cross-generational dialogue andfinancial planning.

This newsletter is designed to keep you up-to-date with changes in the law. For help with these or any other legal issues, please call today. The information inthis newsletter is intended solely for your information. It does not constitute legal advice, and it should not be relied on without a discussion of your specificsituation with an attorney.