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Estate Planning
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An Alternative for Maximizing the Applicable Exclusion Amount

Overview: One of the most common estate planning strategies for married individuals is for each spouse to leave his or her entire estate to the surviving spouse. Due to the unlimited marital deduction, an entire estate (regardless of size) can pass to the surviving spouse without incurring any federal estate taxes upon the first death. However, such a strategy fails to take advantage of the applicable exclusion amount of $1,500,000 for 2004 (increasing to $3,500,000 by 2009) that each individual can transfer to heirs completely free of gift or estate taxes, potentially subjecting the survivor's estate to higher than necessary future taxes. This undesirable situation occurs because all property remaining in the survivor's estate will otherwise be subject to estate taxation.

One of the popular trust arrangements designed to remedy this problem in advance is the common "A/B" combination, typically set up as revocable trusts that can be modified at any time prior to death. However, there is another option known as a qualified disclaimer, that can provide some flexibility after a spouse has died.

How much do you know about qualified disclaimers?

Take this short quiz now or later!

  1. True or False. This planning technique may be useful in situations where proper arrangements were not established prior to death.
  2. Which of the following is not a requirement for a disclaimer to qualify for federal tax purposes:
    1. The disclaimer must be in writing and must be irrevocable;
    2. The disclaimed interest must pass according to the direction of the person disclaiming the property;
    3. With the exception of a spouse, the person disclaiming the property cannot receive any benefit from the disclaimed property, such as trust income; or
    4. None of the above.
  3. True or False. Any decision to disclaim an inheritance should be carefully reviewed to determine if such a decision is consistent with the overall goals and objectives of the disclaimant.

Read here to learn more about qualified disclaimers.

This post-mortem planning technique may be useful in situations where "A/B" trusts or similar arrangements were not established prior to death. Rather than transfer all property to the surviving spouse using the unlimited marital deduction, thereby wasting the first spouse's applicable exclusion amount, the surviving spouse can disclaim a portion of his or her inherited property. The disclaimed property then passes to other heirs or beneficiaries as if the surviving spouse had predeceased. The estate can then take advantage of the applicable exclusion amount with respect to the disclaimed property.

In order to be effective for federal tax purposes, a disclaimer must meet the following requirements.

  • The disclaimer must be in writing and must be irrevocable;
  • The disclaimed interest must pass without direction by the person disclaiming the property. Consequently, before deciding to disclaim, it is advisable to know who, under the will or applicable state laws, will receive the property instead. Typically, a will can direct the disposition of any disclaimed property;
  • The written refusal must be received by the grantor of the interest (or the grantor's estate) within nine months of the taxable transfer creating the interest (or, where the disclaimant is a minor, within nine months of the disclaimant's 21st birthday);
  • and With the exception of a spouse, the person disclaiming the property cannot receive any benefit from the disclaimed property, such as trust income.

Spouse's Special Exemption

If the surviving spouse wants to take advantage of this planning technique, yet desires a lifetime income from the disclaimed property, a provision in the decedent's will could accomplish this feat by establishing a disclaimer trust. With this alternative, the surviving spouse can effectively establish an "A/B" trust after the death of the first spouse.

Disclaiming an inheritance might prove useful in certain situations. For example, suppose your wealthy uncle, a widower without children, has named you as the beneficiary of his entire estate, but has also stipulated that should you die before him, his estate will be distributed to your children. Sadly, your uncle passes away unexpectedly, and at a time when you are financially comfortable and really don't need the money. Accepting your inheritance will just increase the value of your estate, and, hence, your potential tax bill, when it ultimately passes to your children. A better alternative might be to benefit your children today by disclaiming the inheritance, with no associated gift tax imposed as a result of the transfer assuming all qualified disclaimer requirements are satisfied.

Proceed with Caution

Be aware that there are instances, such as in smaller-sized estates for which a surviving spouse's standard of living will be dependent upon all of his or her assets, where a qualified disclaimer may not be an appropriate planning choice. In addition, if the property in question is of substantial value and is transferred to an individual two or more generations younger than the donor, a disclaimer could trigger generation-skipping transfer taxes (generally levied on property transfers valued above $1,120,000 per individual in 2004, indexed for inflation).

Nevertheless, under the appropriate circumstances, a qualified disclaimer may be an effective tool to assist in reducing the effects of transfer taxes. Remember, however, that any decision to disclaim an inheritance should be carefully reviewed in advance with a qualified legal professional to determine if such a decision is consistent with your overall goals and objectives.

Quiz Answers: 1) True; 2) b; 3) True.


Advance Directives-Essential for All Ages

Estate planning has traditionally focused on minimizing estate taxes and directing the disposition of your assets after death. Yet, in today's modern world, managing your affairs has become even more complicated as issues involving health care and personal finances, which can arise during your lifetime, have become increasingly more important.

Consider what would happen if you were to suffer a catastrophic illness or become incapable of managing your own affairs. This situation could occur either through a long, gradual process, such as a deteriorating medical condition, or through a sudden and unexpected accident or illness. If such an event were to happen, who would make your important legal, financial, and health care decisions? On what authority would this individual act?

Fortunately, there are some estate planning tools called advance directives that can help in dealing with these contingencies.

Legal and Financial Decisions

A durable power of attorney grants authority to another person to make legal and financial decisions on your behalf in the event of mental incapacity. The powers granted can be broad or limited in scope. Some decisions a durable power of attorney can assist you with include your personal finances, insurance policies, government benefits, estate plans, retirement plans, and business interests

Health Care Decisions

In the area of health care decision-making, you may recall the Karen Ann Quinlan case. In 1979, the New Jersey Supreme Court granted permission to her family to disconnect Karen's respirator, which her doctors believed was prolonging her life in a vegetative state. The case led to the enactment by various states of Natural Death Act Declarations (i.e., living wills).

A living will generally allows you to state your preferences prior to incompetency regarding the giving or withholding of life-sustaining medical treatment. In most states, you must have a "terminal condition," be in a "persistent vegetative state," or be "permanently unconscious" before life-support can be withdrawn. The definition of these terms and the medical conditions covered may vary from state to state.

A health care proxy allows you to appoint an agent to make health care decisions on your behalf in the event of incapacity. These medical decisions are not limited to those regarding artificial life-support.

Advance directives by durable power of attorney, living will, or health care proxy are generally inexpensive, easy to implement, and should be considered essential estate planning tools for all individuals, regardless of age. In the absence of such documents, court intervention involving a great deal of time, expense, and possibly stress to your family, may be necessary to carry out your legal, financial, and health care wishes at precisely the moment when timeliness and ease of action are of the greatest importance.


Advance Directives: Part I—Securing Your Quality of Life

Historically, estate planning has focused on the minimization of taxes and the disposition of one's assets at death. However, managing one's affairs in the modern world has become more complicated, and quality of life issues (involving health care, finances, and how critical planning decisions are made) are becoming more important.

Consider what might happen in the event of catastrophic illness or incapacity. How, and by whom, would important financial decisions be made? How, and by whom, would important health care decisions be made? Such an event could be either a long gradual process (e.g., a deteriorating medical condition) or something which happens precipitously (e.g., a serious accident). Estate planning tools that can provide instructions for certain lifetime contingencies are called advance directives.

One mechanism that can provide for financial decision-making is a power of attorney. This agreement, entered into voluntarily, grants authority to another person to make legal decisions on one's behalf. The person to whom the authority is given is called the attorney in fact (generally must be an adult) who can act as the principal's surrogate or agent. The powers granted can be broad or limited in scope, depending on the desires of the principal (the person granting the power), and can include such areas as insurance transactions, estate transactions, investment decisions, government benefits, and retirement plan decisions.

Making the Document Binding

There are two aspects critical to assuring maximum benefit from setting up a power of attorney. First, the principal must have sufficient mental capacity at the time the document is drawn to make it binding in law. This means that the individual must understand the nature and effect of the document, much the same as required for other legally binding documents.

Second, if you want to use a power of attorney in the event of incapacity, the document must be a durable power of attorney. A durable power of attorney will remain in full force even upon subsequent mental incapacity of the principal. While this may seem obvious (the document remaining effective when it is most needed), it was not long ago that a power of attorney terminated upon incapacity. Now, all 50 states have statutes providing for a durable power of attorney. The expressed language must convey the idea that the powers granted in the document will not be affected by the principal`s subsequent disability.

In most states, there is a presumption that a power of attorney is not intended to be durable unless specific "durable" language is included. Additionally, state requirements can vary, making familiarity withindividual state statutes important. For example, Florida restricts who can be the attorney in fact, limiting the designation to a close blood relative. Some states also require that the document be witnessed or notarized. Not all states recognize a springing durable power of attorney (discussed below).

Choosing a Trigger Mechanism

Sometimes, the principal may want to have the power of attorney take effect only if and when mental incapacity occurs. In such a case, a springing durable power of attorney can be used, which becomes effective only upon the occurrence of a specific contingency (e.g., certification by a physician that management of one's financial affairs is no longer possible).

A springing durable power of attorney assures that the principal will not be relinquishing important rights while still able to make independent decisions. In crafting a springing durable power of attorney, the method of determining the triggering event (e.g., defining mental incapacity) should be carefully spelled out. (For example, relying on a court determination of incapacity would defeat one of the benefits of using a power of attorney, namely, avoiding court intervention.)

A durable power of attorney is generally inexpensive, easy to implement, and should be considered an essential estate planning tool for all individuals, regardless of age. In the absence of such a document, court intervention (with the accompanying time and expense) may be necessary to carry out one`s financial desires at precisely the moment when facility and timeliness are paramount.


Advance Directives: Part II—Health Care Issues

Part I of this series looked at the durable power of attorney as an estate planning tool to direct financial quality of life decisions, designating an agent to act on one`s behalf when one is no longer able to do so. However, there are other issues which may be just as important as financial decisions, revolving around what kinds of health care measures will be taken (to alleviate suffering or prolong life) if one is incapacitated. How, and by whom, such health care quality of life decisions will be made can be addressed using additional advance directives: living wills and health care proxies.

First, Some History

In the area of health care decision-making, you may recall the Karen Ann Quinlan case. In 1979, the New Jersey Supreme Court granted permission to the Quinlan family to discontinue Karen's respirator which her doctors believed was prolonging her life in a vegetative state. This case led to the enactment by various states of Natural Death Act Declarations (i.e., living wills).

More recently, in the Nancy Beth Cruzan case (1990), the U.S. Supreme Court affirmed that a person's right to refuse treatment is guaranteed by the Constitution, but held that individual states had the right to determine the criteria for providing or withdrawing life sustaining treatment. (Nancy Cruzan, permanently incapacitated from an accident, had discussed her feelings about prolonging life with family and friends, but had not committed her thoughts to writing. Missouri required clear and convincing evidence--i.e., a written document.) The Quinlan and Cruzan cases suggest that instructions of a formally appointed health care agent must be followed, provided such directives are consistent with individual state guidelines. While definitions vary from state to state, over 40 states now have living will statutes, allowing individuals to provide instructions regarding life sustaining measures in the event of a terminal illness, including (in some states) coma or persistent vegetative state.

Also, in 1991, the Federal Patient Self-Determination Act was passed, requiring all Medicare and Medicaid health care providers to inform recipients of their rights (under various court decisions and state statutes) to accept or refuse medical treatment, and of the right to set up advance health care directives.

Living Wills vs. Health Care Proxies

A living will is a set of instructions for a health care provider, stipulating the extent to which measures should be taken (consistent with state statutes) to maintain one's life, should incapacitation render the person unable to express his or her wishes. A health care proxy (also called a health care power of attorney in some states) appoints an agent to make any and all health care decisions, in effect implementing instructions, on one's behalf in the event of incapacity (a life threatening condition, or where the individual is unconscious and a treatment decision must be made).

Since the health care proxy grants decision-making power to a surrogate, its scope is broader than the living will which simply states a person's wishes in the face of terminal illness. The documents may be drawn separately, or the living will may be incorporated into the health care proxy, depending on state law. Both directives come into play only when the principal is unable to make health care decisions for him or herself.

Up until that point, the individual maintains decision-making authority with respect to health care. Usually, an individual can change or revoke both directives at any time. Some states have also enacted Default Surrogate Decision Making Statutes which define a priority of individuals who are empowered to act on behalf of a person who did not execute advance directives prior to incompetency.

Into the Future

These quality of life issues have become further complicated by the controversy surrounding the physician-assisted death movement and ongoing "Death with Dignity" voter initiatives. (One particularly important unresolved issue which could affect the use of living wills is the definition of "suicide" for insurance purposes.)

Despite such controversies, not only are one's personal wishes at stake, but also the potential emotional and financial burden placed on family members by a medical condition with no hope of recovery. Advance directives can allow an individual to maintain autonomy, while providing specific instructions to assure that his or her wishes are carried out to the fullest extent possible.


Assisted Living: The New Kid On The Block

Over the past ten years, owners of nursing homes have seen a steady decline in the occupancy rates of their facilities. There are a number of reasons for this historic drop. One significant reason is that the number of "home care agencies" has increased, thus allowing the less disabled to remain in their homes. Another reason is that Medicaid waivers have siphoned off long-term care patients in some states by paying for limited home care, thus saving states the higher costs of institutional care. In addition, Medicare also began paying nursing homes more to admit hospital patients for rehabilitation. There is also another explanation for the increase of empty beds in today's nursing homes-assisted living facilities (ALFs).

Assisted Living: The Future of Residential LTC

Assisted living facilities (ALFs) include apartments, usually with small kitchens, coupled with the provisions of personal assistance for some disabilities. It's easy to appreciate the difference between these facilities and traditional nursing homes that normally put two residents into each small, sterile room.

ALFs range in quality for those offering top-end accommodations and amenities to lower priced, but quality, operations.

Formal assisted living must be distinguished from board and care homes. The latter tend to be "mom and pop" operations, often consisting of private residences managed either by either the owner or someone who lives on the premises, and who provides care. The quality of care in ALFs is often considerably better due to the substantially greater privacy, freedom, and amenities than those possible in traditional long-term care settings, or traditional nursing homes.

Assisted Living is Often Less Expensive Than The Nursing Home

While prices for ALFs vary according to quality, services, and amenities, they tend to be less expensive than nursing homes. Some facilities' fees cover personal care, others may not. If you ever consider an ALF for yourself or a relative, be sure to review the contract carefully to find out what is covered, and what is not, before you sign. And remember, it could be a mistake to make a decision purely on your cost. Today's long-term care insurance policies generally cover assisted living. There may be some limitations involved, so it's important to understand the impact of all policy benefits and conditions.

A Word of Caution

ALFs may not be for everyone who needs long-term care. Granted, they are generally the more qualitative alternative to nursing homes, however, they are designed only to care for the lightly to moderately impaired. If a person is seriously impaired, a nursing home is often the best choice. On the other hand, some people who need long-term care neither need, nor prefer, either an ALF or a nursing home. They can receive care at home, both from relatives and friends and from paid, trained home care personnel. How do you know which type of care is best for you or a loved one? Most long-term care policies today provide a care coordinator to assist you in making the right decision regarding the type and place of care best suited to your needs. Again, check your policy or ask your agent if your policy pays for a care coordinator.


Caring for Elders from Afar

Life in America today commonly finds families scattered across the country. With family members often separated by hundreds or thousands of miles, it may be extremely difficult to manage the care of an older parent or relative living far away. To help facilitate the best care possible for your loved one, and to alleviate the stress long distance caretaking could cause, you may want to take steps now to be prepared, should the need arise.

Down to Basics

As a first step, look into what services are available in your family member’s local community. Most areas have government or nonprofit agencies to provide assistance and referrals.

Once appropriate providers have been identified, consider making use of services that can assist with the desired needs, such as managing finances, drafting or amending a will, or preparing advance directives (e.g., durable power of attorney, health care proxy, and living will).

When properly prepared, the following legal documents can provide essential protection and, therefore, should be prepared without delay:

  • A will provides instructions for distributing assets and providing for the needs of heirs, while aiming to reduce probate expenses.
  • A durable power of attorney authorizes a third party to manage the financial and legal affairs of a person who is no longer capable of doing so.
  • For making decisions concerning health care, a living will is a set of instructions for health care providers that stipulates the extent to which measures should be taken (consistent with state statutes) to sustain the patient’s life should the person be unable to express his or her wishes. In some states, the patient’s condition must be considered “terminal” under state laws before a living will becomes effective.
  • A health care proxy allows an individual to designate a person to make critical medical decisions in the event the individual is incapable of directing his or her own health care. Unlike a living will, it is not limited to decisions regarding artificial life-support.

Get Organized

Once you know where to turn for assistance, it will be helpful to gather and organize the following information about your loved one:

  • General Assessment and Support—Keep notes on the current mental and physical condition of the individual and compare your observations with those of other family members. Identify neighbors or friends who could keep an eye out for your loved one and who would be willing and able to help in a pinch. List agencies located near your relative that provide specific services and support he or she may need in an emergency.
  • Medical Information—Identify all pertinent doctors, hospitals, and other medical providers. In addition, keep track of all medications and health insurance policy numbers.
  • Financial and Legal Information—Obtain copies of all financial and legal documents, including wills, advance directives, insurance policies, bank accounts, and other financial statements. Record all relevant account and Social Security numbers.

Take Action now

A variety of resources are available to assist in the care of older parents and relatives. Begin planning now to make the best use of them. When it comes to preparing advance directives and handling other estate planning matters, it is generally prudent to consult a qualified legal professional. Your efforts now can help ease future stress for family caregivers and help provide the most comfortable life for your loved one.


Doing Well by Doing Good

A charitable remainder trust (CRT) can be a highly effective, financial and estate planning tool through which one can: avoid capital gains taxes on highly appreciated assets; receive a stream of income based on the full, fair market value of those assets; receive an immediate charitable deduction; and ultimately benefit the charity(ies) of one’s choice.

Some individuals may be reluctant to transfer significant assets to a CRT because they would rather see their children be the ultimate recipients of the property. However, transferring property to a CRT doesn’t necessarily mean your children cannot benefit as well.

Under the appropriate circumstances, donors can apply the savings available from their charitable deduction, along with a portion of the CRT’s income stream if necessary, to purchase a life insurance policy inside an irrevocable life insurance trust (ILIT). After the death of the last income beneficiary, the charity receives the remaining assets in the CRT, while your children receive the proceeds of the life insurance policy, income and estate tax free, upon the death of the insured in accordance with the terms of the ILIT. In some instances, policy proceeds may be equal to, or even exceed, the value of the transferred property.

General Guidelines

A CRT starts with a contribution of assets, preferably highly appreciated assets, into an irrevocable trust. Once the trust is funded, the trustee pays named beneficiaries (selected by the donor upon establishment) an income each year for their lives, a term of years, or a combination of the two. If a term of years is involved, the maximum term is 20 years. Income beneficiaries must receive a minimum percentage payout each year equal to at least 5 percent of the trust’s assets, not to exceed 50 percent. When the trust terminates, the remaining assets that pass to charity must be equal to at least 10 percent of the original assets in the trust. Within these broad guidelines, donors can select a number of flexible payment options designed to meet their specific financial, estate, and charitable giving objectives.

Additional Benefits

Because a CRT is tax exempt, the trustee can sell highly appreciated assets on a tax-free basis and reinvest the full proceeds in other assets most likely to meet the growth and income objectives of the trust. Assets donated to the trust are removed from the donor’s taxable estate, potentially avoiding significant future estate taxation and likely reducing future probate costs. Donated assets are also protected from the claims of creditors, which may be particularly attractive to business owners concerned about their personal liability or perhaps those who are sensitive to issues related to the division of assets in a divorce.

The charitable deduction available to a donor may be limited by the type of property donated, the kind of organization(s) ultimately receiving the gift, the donor’s overall tax status, the age(s) of the income beneficiary(ies), and the trust’s income payout provisions. If a deduction is limited on the current year’s tax return, Internal Revenue Service (IRS) rules allow unused amounts to carry forward for up to five additional, consecutive tax years.

Moreover, since donations of appreciated property are no longer preference items for the alternative minimum tax (AMT), donating such property may now be much more advantageous. (Under prior law, the AMT could, in many cases, have significantly trimmed the potential income tax deduction available for donations of appreciated property.)

The Choice is Yours

While most people may be resigned to the inevitability of taxation, one way or another, many may be unaware that they have a choice with respect to the form in which their contribution to society is fulfilled. When viewed from the perspective of a choice to channel your funds directly to select charities rather than through the government, charitable giving takes on a new meaning. The CRT may then become a valuable tool to facilitate your choice. As with all complex financial transactions, the assistance and counsel of qualified professionals is highly recommended in order to ensure your wishes are properly met.


Estate Strategies and Your Family Business

Liquidating the family business in order to pay estate taxes is often a grim reality for families of individuals who die without wills or estate plans.

If you own a family business, you need to take steps now to help ensure that one of your most valuable assets will still be around for your children, grandchildren, and beyond.









The facts on family-owned businesses.

The terms "family business" or "small business" can be misleading, especially when you consider the impact these businesses have on the U.S. economy. Of all small companies in the U.S. employing fewer than 500 people, 88% are owned by families. According to an estimate by the National Family Business Council (NFBC), 12.9 million family-owned U.S. businesses generate 60% of the gross national product and employ 40 to 50 million people.

It's natural to assume that many business owners would like to keep this kind of influence in the family. However, in reality, the situation is much different: only a fraction of business owners who want their family business to remain in the family actually take steps to plan a formal succession, according to the Boston-based Family Firm Institute.

Why do so many business owners fail to act on their intentions? Because business continuation is often a difficult subject for family business owners to confront. In many cases, the subject of succession is avoided rather than planned for. It is often a taboo topic.

Business owners may be reluctant to hand over something they spent much of their lives building. They may be forced to confront and resolve sibling rivalry and other unpleasant family disagreements. Sometimes an owner will have greater difficulty grooming a family member for succession because of the overlap of family and business boundaries. Additionally, if the owners plan to rely on the family business for retirement income, they may worry about the business's success under new owners.

But the costs of not planning for the continuation of family businesses may be enormous. Often, companies without formal succession plans are courting disaster. NFBC statistics show:

  • Only 4 in 10 family businesses survive into the second generation.
  • Only 1.5 in 10 survive into the third generation.

Survival planning for your family business

How can you make sure that your business avoids becoming one of these statistics? A sound solution is to establish an estate plan. Simply put, you need to:

  • Develop a formal management succession strategy and ensure that your business stays in the family after your death.
  • Equalize your estate so that if you have children, you can make alternative bequests to those who do not want to be involved with the family business. At the same time, you can leave the business to the children who do.
  • Guarantee that the business continues in an orderly manner after your death.
  • Create a buy-sell agreement for family and non-family members who may own stock in your business


As you can see, ensuring that your business lives on is a complicated issue that engenders many concerns, and care must be taken to ensure that all issues will receive open and honest discussion. With the right estate planning team and the right succession plan in place, you can go against the statistics to maintain your company's success and ensure your family's ownership for future generations.


Financial Care for Special Needs Children

Overview: Parents of a special needs child have never ending concerns about their child’s care. For instance, where will the child live should something happen to his or her parents? Who will care for the child, and where will the money come from?

How much do you know about financial planning for a special needs child?
Take this short quiz now or later.

  1. True or False. The plan that is often most helpful for families needing to make provisions for a child with special needs is a grantor retained annuity trust. This device allows a trustee, typically a family member familiar with the child's needs, to use funds placed in a trust by the child’s parents for the necessary care.
  2. True or False. A charitable remainder trust can be a favorable planning mechanism for the parents of a special needs child.
  3. True or False. If a charitable remainder trust is used and a minor child is the income beneficiary, any income tax deduction could be drastically reduced because of life expectancy differences.

Read here to learn more about financial planning for a special needs child

Fortunately, help is available, with local, state, and federal programs easing some of the monetary demands on the family. In addition, there are private groups that can help with long-term care. However, if you wish to provide the highest level of care, you will need to plan for the best possible use of your funds.

Meeting Needs

The plan that is often most helpful for families needing to make provisions for a child with special needs is a special needs trust. This device allows a trustee, typically a family member familiar with the child's needs, to use funds placed in a trust by the child’s parents for the necessary care. It offers sufficient flexibility to handle almost any situation, while providing privacy for the details of the arrangements made by parents, grandparents, or others who wish to make a gift to a special needs child.

Many people may assume that trusts are only for the very wealthy, however, a special needs family’s financial situation demands prudent planning to prevent loss of agency funding after the parents are gone. For example, assets received as an inheritance might disqualify an adult child from receiving public funding for housing, medical care, and other government programs. Assets placed in a trust, however, and directed to uses other than those available through government sponsorship remain available for the individualized care a parent might want to provide.

While the special needs trust can establish a mechanism for maintaining financial care for a special needs child, some families have utilized the charitable remainder trust (CRT) as an additional mechanism to help secure future income for a special needs child. As its name implies, a CRT benefits a charity as well as an individual. Here’s how it works:

A couple starts by transferring liquid, highly appreciated assets, such as mutual funds or publicly traded stocks, into their CRT. The couple receives an annual income from the trust for a term of years or their joint life expectancies. The IRS allows the couple to take a current income tax deduction for the present value of the property that ultimately passes to the charity they selected-- generally one involved with the special needs of the child--when the CRT terminates. [Note: In the case where a minor child is the income beneficiary, this tax deduction could be drastically reduced because of life expectancy differences.] Any property put into the trust is out of the parents' estates, and when the trust terminates, a sizable legacy will be left to the charity of their choice. In addition, there is no capital gains taxes due for transfers of highly appreciated property to the CRT.

The use of a CRT to benefit a special needs child may be advantageous in many ways. The income stream is used for the benefit of the child, with either the child or the parents as the named income beneficiaries. If the child is the income beneficiary, the trust can pay income for the child's life, and the parents, as financial guardians, will oversee the use of the income. Should the child outlive the parents, a guardian will step into the parents' role.

A Parting Thought

Certainly, planning for a special needs child is emotionally challenging and financially demanding. However, with a solid plan in place, you can help ensure the best possible care for your child, both now and in the future.

Quiz Answers: 1) False; 2) True; and 3) True


Important Steps in Preserving Your Estate

If you are like most people, wills, trusts, life and disability income insurance, and advance directives are topics you would just as soon avoid. Yet, timely planning is necessary to preserve the assets you have worked so hard to build and to protect those you love. Here are some important steps you can take now to ease your family’s emotional and financial burden in the event of your death:

  1. Prepare a will. This document specifies how you want your assets to be distributed after your death. If you die without a will (intestate), your estate will be distributed through the probate court according to the intestacy laws of your state. Intestacy laws essentially function as a “one-size-fits-all” will. Without a will, your assets may or may not be transferred to those you would have chosen. In some cases, you must have a will, such as if you wish to designate an executor for your estate, name guardians for minor children, or appoint other fiduciaries.
  2. Consider a living trust. Also called an inter vivos trust, a living trust is established and in effect during your lifetime. It provides a mechanism to safekeep, manage, and distribute your assets. These trusts are revocable in the sense that you retain complete control of your assets and may alter the trust at any time. Most people establish living trusts to avoid probate. Avoiding probate may make sense for those who are concerned about privacy, since probated assets are a matter of public record. It may also benefit those who own property outside their state of domicile, since their estates might otherwise be subject to multiple probate proceedings. Once a trust is established, assets must be transferred into it or they may be subject to probate.

    Keep in mind that a trust’s usefulness depends on the type of property involved (e.g., real estate, life insurance, bank accounts, investments, business interests, and personal property), where it is located, and how it is currently titled. In addition, a living trust generally does not eliminate the need for a will.
  3. Title property for ease of transfer. A simple and inexpensive estate planning technique is to own property as joint tenants. Many couples do this, for instance, with their personal residence. With jointly-owned property, when one partner dies, the property automatically passes to the surviving partner without going through probate. However, it is important to note that community property states have their own laws governing the disposition of assets.
  4. Purchase life and disability income insurance. For a relatively low cost, life insurance can help provide a source of replacement income for your family. The death benefit may also be used to help pay estate taxes or other immediate financial obligations. According to the Insurance Information Institute (III, 2002), a working American, at the age of 40, has a 21% chance of becoming disabled for 90 days or more before age 65. Disability income insurance can help protect the integrity of your family’s finances.
  5. Establish advance directives. It is essential to have a living will, durable power of attorney, and health care proxy in place in case of a physical or mental incapacity. A living will allows you to express your preferences regarding the giving or withholding of life-sustaining medical treatment. A durable power of attorney and health care proxy allow you to designate someone to handle your legal and financial affairs and make your medical decisions if you are unable to do so. It is also important to inform those closest to you of your arrangements and the whereabouts of the related documents.

Consider taking these initiatives now, while they are fresh on your mind. The key to successful estate preservation is planning!


Life Insurance—An Estate Tax Solution

If you’re like most individuals, you probably want to ensure your assets pass to your heirs in full at the time of your death. However, if you have a large estate, one of the greatest financial challenges potentially facing your heirs may be the payment of estate taxes. Have you given much consideration to how your estate taxes will be paid?

Generally, there are three methods that can be used to raise money to pay estate taxes:

  1. you can sell assets;
  2. you can take out a loan; or
  3. you can use life insurance. Here’s a closer look at each option.

Selling assets.

Some liquid assets, (e.g., bank accounts, publicly traded stocks, and bonds) may be used to pay the estate tax. However, sale of these assets generally reduces the size of the estate by the size of the estate tax, dollar for dollar.

Sometimes the tax may be too large for payment using only liquid assets. In these cases, houses, real estate, rental property, collectibles, and other illiquid assets may have to be sold to pay the tax. Assets, including undervalued, publicly traded securities, sold quickly during a forced sale or at an auction, usually sell well below potential fair market values. Consequently, your beneficiaries may potentially receive an even smaller inheritance than you may have initially planned. Thus, selling assets may not be the most appealing choice.

Borrowing the money.

Quite often, an executor may be forced to borrow from a lending institution in order to avoid the forced liquidation of assets. The repayment of a loan with interest from assets of the estate will likely result in beneficiaries also receiving a smaller inheritance.

If you own a closely-held business, estate taxes may be paid on an installment method with low rates from the government—but, it’s still a loan.

Discounted dollars.

Individuals often arrange for life insurance to pay estate taxes. Theoretically, each annualized premium may be only a small fraction of the potential death benefit proceeds. Therefore, it’s often described as using "discounted dollars" to pay the taxes because it is anticipated the life insurance policy proceeds will be greater than the total premium outlay over the life of the policy. In addition, policy ownership can be arranged so the policy proceeds will not be included in the insured’s estate.

As a result, when compared to the alternatives, life insurance is often regarded as one of the most cost-effective methods for funding the payment of estate taxes. A consultation with a qualified insurance professional can help you assess your current insurance needs and help you determine how life insurance can fit into your overall financial picture.


Offset the Effects of Inherited Wealth with Incentives

For many affluent individuals, estate planning extends well beyond mere tax planning and involves very personal decisions regarding the distribution of future wealth. In more traditional estate plans, the so-called spendthrift trust is used as a mechanism for distributing trust income, while limiting immediate access to trust principal.

A spendthrift trust can provide financial security and stability for minor children, as well as protect adult heirs from some creditors and personal failures in judgment. However, such trusts provide heirs with little incentive to expand their own professional, academic, or philanthropic horizons. Thus, affluent individuals who are particularly sensitive to the potential ramifications of “handing over” considerable wealth to heirs may find comfort in adopting an incentive-based estate plan.

One of the cornerstones of an incentive-based estate plan is the Family Incentive TrustTM (FIT). Like typical trusts associated with estate planning, a “FIT” serves as an outline that guides trustees in the implementation of an affluent grantor’s expectations regarding the future uses of his or her estate. Similarly, a FIT can help ensure proper care and financial support if an heir falls on hard times or has special needs. However, a FIT is somewhat unique in that the general distribution of trust income is rooted in a series of pre-determined “incentives.

What is “The Incentive”?

The incentives outlined in a FIT are virtually up to the imagination of the grantor. Each incentive provides the grantor with the ability to encourage specific, future behavior. For instance, the trust could have provisions that pay each heir $10,000 upon the receipt of a bachelors degree, $25,000 for a masters degree, and $50,000 for a doctorate.

A FIT can also be an ideal mechanism to reward family members who pursue and/or distinguish themselves in a favored career path of the grantor’s choosing, such as the family business, music, the arts, research, or teaching. Or, a FIT can reward younger heirs for academic success or community involvement. In addition, the trust could match certain levels of income for heirs who are less than a specified age (e.g., 35). A FIT also can be an excellent education-funding vehicle. Unlike a custodial account, which generally becomes the property of the child once he or she attains the age of 18, a FIT can dictate that some trust assets be utilized to fund education costs. Thus, the trust, rather than a young, inexperienced adult, can maintain control of monies earmarked for education.

Another interesting use of a FIT is one that allows trust principal to act as a “family bank.” The FIT can offer low interest rate loans for start-up business ventures or the purchase of a primary residence. A lending process similar to that of a traditional lending institution can be required to ensure minimal risk to the trust.

Philanthropy creates another intriguing possibility for an incentive-based estate plan. Certainly, many affluent individuals consider philanthropic pursuits very important endeavors. A FIT can be used to match the charitable contributions of a beneficiary. If so desired, the FIT’s matching contribution can be arranged as a distribution to the beneficiary, which is then contributed to the charity. Thus, the beneficiary can reap the benefits of a charitable deduction on both their own contribution, as well as the FIT’s matching contribution. Similarly, any remaining trust income that has not been distributed through incentives may make for an ideal contribution to a family foundation or charity. Such contributions also can be arranged so they are made on behalf of trust beneficiaries.

Instilling Family Culture

Sometimes, the effects of inherited wealth can have a negative impact on the motivation of heirs. For instance, when some heirs receive a substantial inheritance, they may be content with a lifestyle of leisure. Thus, the reasoning behind incentive-based estate planning is fairly straightforward. Assets and income are distributed to assist heirs who are realizing career or academic goals, and/or whose actions are consistent with the expectations of an affluent grantor. By adopting some of the principles of incentive-based estate planning, the affluent grantor can create an environment that promotes a family culture of excellence and productivity for generations to come.


Pros and Cons of Probate

It is the duty of the probate court to determine that a will is valid and administer the estate to ensure faithful execution of all instructions found therein. Although most states have exemptions for smaller estates, the assets in your will ultimately fall under the jurisdiction of the probate court.

A trust, similar to a will, is a written document dealing with the transfer of assets and responsibilities, but assets in certain types of trusts can avoid the probate process.

Testamentary trusts are created at death by a will; such trusts must be presented for probate because they are found within the will itself. For assets in a trust to avoid probate, the trust must be a “living” or inter vivos trust, apart from a will.

The probate process has advantages and disadvantages. Analyze both to determine how probate could affect your estate plan. Some points to consider:

Advantages of Probate

  1. Protection from creditors. When an estate has been probated and its assets distributed, no creditor can make a claim on the assets.
  2. Fair analysis of estate value. If heirs believe property has been overvalued in probate, thus increasing the potential estate tax, the lawyer or executor can bring in an independent appraiser. The judge may approve the new appraisal or take a position between the independent appraiser and the court-appointed one.
  3. Protection from some taxation. An estate is a separate taxable entity and may provide opportunities to reduce taxes by shifting income to an heir, or--if the estate's tax bracket is lower than the heir's--keeping it in the estate longer. 4. Lower cost of legal counsel. It may cost more for legal counsel to draft a living trust than to draft a will.

Disadvantages of Probate

  1. Higher costs to the estate. Probate can be costly; fees may be set by law in some states, but they are generally for ordinary services. If the attorney does extraordinary work, the fees may be greater. The executor may also charge fees and, if the executor does not waive his or her fee, the actual cost to the estate may double. The fees may be based on gross, not net, values.
  2. Delay in transfer of assets. Estate settlement in probate can take up to one or two years, and assets in probate often suffer from lack of (or overly conservative), management during the settlement process. In some states it can take a month or more to receive court permission to sell an asset, which means that an executor may be unable to respond to a sudden change in market conditions. Also, executors tend to be very conservative during probate because of their financial liability if they are judged to be less than prudent.
  3. Public knowledge of the estate. Probate is a public process. For the process to work, the will must be a matter of public record.

It’s important to recognize that probate laws vary from state to state. By using these pros and cons as a guide, you can meet with your advisors to determine whether to use or avoid the probate process while planning your estate.


Reduce Future Uncertainty with Advance Directives

Conventionally, estate planning has focused on how to minimize estate taxes and “who gets what” when you die. However, managing your affairs in the modern world has become more complicated and quality of life issues involving health care, personal finances, and how critical decisions are to be made are becoming increasingly more important.

Consider what might happen to your financial affairs in the event of catastrophic illness or incapacity. How, and by whom, would important financial decisions be made? How, and by whom, would important health care decisions be made? Such an event could be either a long, gradual process (e.g., a deteriorating medical condition) or something that happens precipitously (e.g., a serious accident). Fortunately, there are some estate planning tools that can provide instructions for dealing with certain lifetime contingencies-they are called advance directives.

Financial Considerations

One mechanism that can provide for financial decision-making is a durable power of attorney. This agreement grants authority to another person to make legal decisions on one’s behalf in the event of mental incapacity. The powers granted can be broad or limited in scope and can include provisions pertaining to personal finances including such concerns as insurance coverage, tax planning and reporting, government benefits, and savings and retirement plan decisions.

Health Care Considerations

In the area of health care decision-making, a living will is a set of instructions for a health care provider that stipulates the extent to which measures should be taken (consistent with state statutes) to maintain the patient’s life should the person be unable to express his or her wishes. You may recall the Karen Ann Quinlan case from 1979 in which the New Jersey Supreme Court granted the Quinlans permission to discontinue Karen’s respirator, which her doctors believed was prolonging her life in a vegetative state. The case led to the enactment by various states of Natural Death Act Declarations (i.e., living wills). In some states, the patient’s condition must be considered “terminal” under the state statutes before the living will becomes effective.

A health care proxy appoints an agent to make those health care decisions and, unlike a living will, is not limited to decisions regarding artificial life-support. A health care proxy comes into play only when a person is unable to make his or her own health care decisions.

Plan Ahead

Advance arrangements by living will or health care proxy are relatively inexpensive, easy to implement, and should be considered essential estate planning tools for all individuals, regardless of age. In the absence of such documents, court intervention (with the accompanying time, expense, and possible stress a family may endure) may be necessary to carry out one’s financial and health care desires at precisely the moment when facility and timeliness are paramount.


Select Trustees with Care

If you are thinking about establishing a living trust, you will also need to give considerable thought to selecting a trustee. Perhaps you are considering naming a family member. Or, you may be wondering whether it would be wiser to designate your attorney or another trusted professional. In addition, you may also be aware that a bank trust department can act as a trustee. As the grantor, you should choose a trustee with care. Here is some information on the role of a trustee, and the benefits and tradeoffs of the different choices available to you.

A trustee is a person or an institution selected to administer a trust. A trustee's role is to comply with the terms of the trust and fulfill its objectives. In selecting a trustee, you must weigh many personal, family, investment, and business concerns. For instance, an important consideration is the size and complexity of the trust. Corporate and professional trustees possess the accounting, tax planning, and investment experience necessary to manage large, complicated trusts. Bank trust departments offer the benefits of greater portfolio diversification, although they may tend to invest more conservatively, which may or may not appeal to you. On the other hand, small trusts generally do not warrant professional management.

Duration is another significant concern. A trustee's responsibilities often span one or more generations. Corporate fiduciaries have the advantage of perpetual life (although the individuals administering the trust may change over the years). This longevity also allows them to better fulfill the record keeping and reporting requirements of federal and state governments and the supervising court. If you have decided to appoint only individual trustees, consider designating co-trustees or successor trustees to address longevity concerns.

Advantages of Professional Trustees

Corporate trustees have other advantages, as well. Since they are more likely to remain in the same location, they may be more likely to stay in close proximity to beneficiaries. They may also be more impartial in considering beneficiaries' needs than family members, who may face conflicts of interest. Also, corporate and professional trustees are held to a higher standard of professional conduct than nonprofessionals. Of course, professional service comes with a price. Many grantors of small trusts choose nonprofessional trustees to avoid high corporate fees.

Benefits of Family Members

When a personal touch is needed, family members or other nonprofessionals, who know the family, offer special advantages as trustees. They generally have the greater sensitivity and flexibility required to support the special needs of a beneficiary, such as a handicapped child, which may be the primary purpose of a trust. A family member or business associate may also be the preferred choice if you are leaving a business in trust. Corporate trustees generally do not run businesses; they sell them and invest the proceeds.

Best of Both Worlds

Often, a combination of professional and nonprofessional trustees may work best. Corporate or professional trustees provide trust management expertise, while family members or other nonprofessionals may be better able to understand and respond to the changing needs and circumstances of beneficiaries.

It is best to consult a qualified legal professional when selecting a trustee, especially since an inappropriate choice of trustee could invalidate a trust or have serious tax consequences.


Steps to Help Achieve Estate Success

For many people, more time and attention may be devoted to building an estate than in planning for its ultimate disposition. Understandably, enjoying the fruit of your labors is generally far more interesting than planning for what might happen when you are no longer around.

Unfortunately, the Internal Revenue Service (IRS) is very interested in your estate, and has made certain that lack of (or improper) estate planning could (at the very least) create headaches for your heirs, and, more importantly, could cost the estate money in terms of unnecessary estate taxes. Here are six basic estate planning strategies that can help you gain control and avoid some unnecessary pitfalls:

  1. Keep Good Records. When you die, the first thing your heirs will have to do is sort out your financial affairs. You can help them by maintaining good records and letting them know where to find your will, insurance policies, bank statements, and other important documents.
  2. Have an Up-to-Date Will. A will is perhaps the most basic legal estate planning document, specifying how your property is to be distributed at your death and naming guardians for minor children. In addition, it appoints an executor who will coordinate (usually with an attorney) the process of probate, the preparing and filing of final income and estate tax returns, and the distribution of assets. Without a will, the state will determine the distribution of assets according to state inheritance laws.
  3. Beyond Your Will. A will deals with your estate after you die. However, incapacity during your lifetime may affect your ability to make financial and health care decisions. A durable power of attorney designates someone to make financial decisions on your behalf in the event of incapacity. A living will spells out your wishes for the use of life-sustaining measures if you are incapacitated. A health care proxy (also known as a medical power of attorney) gives someone else the right to make important health care decisions on your behalf under specified conditions. A complete estate plan encompasses both lifetime and post-mortem planning.

  4. Take Advantage of the Applicable Exclusion Amount. In 2004, each taxpayer has a $1,500,000 combined gift and estate tax applicable exclusion amount (scheduled to rise gradually to $3.5 million by 2009 based on the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)) that can be applied to exempt from transfer taxation assets given away during lifetime or passed on to heirs at death. Individuals with large estates who leave everything to their spouse forfeit the use of their exemption and run the risk of having some assets unnecessarily taxed at the second death (assuming the survivor’s estate is not consumed and continues to grow), because the surviving spouse can only use his or her own exemption. The use of trusts can help minimize this problem for large estates. (Note: all gift -----not gift tax-- and estate taxes are scheduled for full repeal in 2010 under the new law; however, due to obscure budgetary rules, all provisions contained in EGTRRA will “sunset,” or automatically expire, in 2011, thus effectively reinstating the current transfer tax levies absent additional action by Congress in the interim.)
  5. Use the Annual Gift Tax Exclusion. Everyone can give away up to $11,000 per year ($22,000 in the case of joint gifts made by husband and wife) to an unlimited number of recipients tax free. For individuals with large estates, a planned giving strategy using this exclusion may be an attractive way to remove assets that are appreciating in value from the estate, which would otherwise have the potential to increase estate taxes if left in the estate.
  6. Make Proper Life Insurance Beneficiary Arrangements. Life insurance kept in an estate owned by the decedent or in which the decedent has incidents of ownership is includable in the gross estate for purposes of calculating estate taxes when properly structured. An irrevocable life insurance trust removes the insurance proceeds from potential estate tax exposure.

By planning in advance, your wishes for property distribution can be executed. However, it is essential that you consult with a qualified financial professional to ensure that your planning is consistent with your goals and objectives.


The Building Blocks of Estate Planning

The process of estate planning is often misunderstood. In the minds of many people, the term assumes wealth and heirs. Single people of modest means may mistakenly believe they don’t “need” estate planning. However, planning for the disposition of one’s assets upon death offers everyone significant benefits.

The greatest benefit may lie in knowing that your wishes will be respected. Naming your heirs—and relieving them of unnecessary costs and stress by carefully designating which assets they will receive—is far preferable to having a court make such decisions.

The estate planning process not only includes designating your heirs, but also, possibly, establishing vehicles, such as trusts, to protect your assets. This will help ensure your assets go to the people you care about rather than to the government. And, in the event of mental or physical incapacity, an estate plan can enable other people to help care for you and your property through a durable power of attorney and a health care proxy. You may also want to include a living will among your estate planning documents, so your physician knows your wishes regarding life-saving measures in dire situations.

Writing It Down

A will is the basis of any estate plan, whether it is simple or complicated. In drawing up your will, consider using the services of a qualified attorney. Although you may think you know your own mind and can do it yourself, an estate planning professional will ask you tough questions you may not have considered. Would your elderly parents be able to manage an inheritance if they were to survive you? Do you want your children’s spouses included in your estate? If your estate were affected by a divorce or the death of a child, how might these painful situations affect the distribution of your assets?\

Naming Names

The first name to settle on is that of your executor. Next will be the beneficiary(ies) of your insurance policies. Beneficiaries, and contingent beneficiaries, of assets in retirement accounts, such as pensions, 401(k) plans, and Individual Retirement Accounts (IRAs), are kept on record with the retirement plan administrator, and these nominations take precedence over your will. Retirement assets pass directly to the beneficiaries, bypassing probate court.

Time for a Trust?

If your estate totals more than the applicable exclusion amount of $1,500,000 in 2004 (rising gradually to $3.5 million in 2009 based on the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)), it may be time for a trust. Although trusts are created for many reasons—for example, to pay for a disabled child’s care without risking the loss of Social Security benefits—the fact that estate taxes may be reduced by putting assets in trust motivates many people to set up a trust.

In particular, an irrevocable living trust (ILIT), which means it cannot be modified or cancelled by the creator, is often used to help reduce estate taxes. At its most basic, such a trust may allow the asset transfers to beneficiaries to be treated as gifts, thereby possibly avoiding probate court, which could cost your heirs time and money.

Regardless of your net worth, there are a number of reasons why you should consider an estate plan. Take steps now to ensure your wishes will be followed and that provisions will be made for your dependents and loved ones.


Trusts—Not Only for the Rich and Famous

Providing for the distribution of assets after death is not a task eagerly approached by anyone. It is, however, a task we must all face. And, that’s where trusts enter the estate planning arena. A trust is simply an arrangement whereby one person holds legal title to an asset and manages it for the benefit of another. In one form or another it may be used in personal financial planning.

The ability of the trust to bridge the gap between life and death is one of its most remarkable characteristics. Through a trust, the person establishing it may rule from the grave, not forever, but to the extent the law allows. Generally a trust may be established to last for many generations ending 21 years after the death of the last named beneficiary.

Often, an individual will establish a trust for his own benefit, not necessarily for tax purposes, but for many other reasons. He may want investment management or he may want to invest in a new business venture with strong potential but high risk. He could then use the trust to assure himself of an income in the event of failure. He may set up a family trust with the primary purpose of observing its operation and then eliminate any deficiencies that might appear in actual operation. He may feel that while he presently is capable of managing his affairs, he is not sure about the future. In that case, a "standby trust" may serve a useful purpose.

On the other hand, trusts can be established for the benefit of others, such as a spouse, children, parents, or grandchildren. In addition, an individual may want to provide for beneficiaries with what may be regarded as missing elements in their abilities, experience or training.

This is clearly the case where minors, or others deemed legally incompetent, are the intended recipients. But trusts may be created for the benefit of responsible, competent adults too, for the same reasons the person establishing the trust may want to set up a trust for himself. These include freedom from management burdens, expert administration, mobility, and other practical reasons, the most important being cash savings.

While avoiding probate may be a consideration, the estate and gift tax savings made possible by the use of trusts is more important in many cases. Use of the trust device can often permit a donor to transfer assets for the benefit of a beneficiary, while at the same time shielding such assets from the reach of creditors. The laws of most states permit the creation of so-called "spendthrift trusts."

Use of such trusts may permit the person establishing the trust to place both trust income and principal beyond the reach of the beneficiary`s creditors.

The laws of most states permit the creation of so-called "spendthrift trusts." Use of such trusts may permit the person establishing the trust to place both trust income and principal beyond the reach of the beneficiary`s creditors. For the most part, these laws prevent the beneficiary from assigning any part of the interest in the income or principal of the trust since most creditors look to property that could freely be assigned by the beneficiary. Their attempts to reach assets can be thwarted or at least made more difficult. The person establishing the trust is generally permitted to make free use of his own assets, even if the result is to prevent a beneficiary from dealing with the trust`s assets at will. Care should be taken before trusts are established. In addition, be sure to seek the advice of a qualified legal professional before final decisions are made.


Wealth-Transfer Taxes Hit Small Firms

Jim and Lisa Miller became wealthy the old-fashioned way. They worked hard for it. Then, in a sudden traffic accident, they lost their lives, never having an opportunity to enjoy much of what they had accumulated. The Millers’ two sons, Peter and Dave, were devastated when they heard the news about their parents. Peter and Dave Miller both worked in key positions at the electronics equipment distributorship their dad, Jim, helped build from scratch some thirty years ago. With their dad now gone, their business troubles had just begun.

Before the dust had even settled, and as if to add insult to injury, the executor of the Miller estate came to a grim conclusion. The business had to be put up for sale to pay estate taxes due! The topic of business succession had come up when the family got together every so often, but Jim never seemed to find the time from his hectic work schedule to get down to some serious estate planning. Unfortunately, there was none in place when the accident happened.

Potential Safeguards

One of several possible steps Jim Miller could have taken would have been to relinquish part of his ownership and to have transferred it to his two sons, using certain gifting or sale techniques. Handing over control, and becoming a minor stockholder in the business he had built and run so successfully, may not have been an easy thing to do. But, it might have helped shrink his assets and reduce the crippling tax bite. Additionally, he could have set up appropriate trusts to ensure the net estate passed on without hindrance to his heirs, as well as to help pay for taxes that came due.

In the year 2004, the applicable exclusion amount is $1,500,000. Estates exceeding this amount are liable for gift taxes if assets are transferred while the owner is alive (and the gifts exceed the annual gift tax exclusion of $11,000 per donee, and $22,000 for gifts made by married couples), and for estate taxes after the owner’s death. Estate taxes are due within nine months, and a six-month filing extension is available, but the Internal Revenue Service (IRS) allows qualifying farms or closely-held businesses to defer taxes and then pay by installments (with interest) over as long as 10 years. However, according to IRS records, very few businesses choose to defer estate tax payments. Family-held businesses need to take estate planning steps to avoid a likely drain on valuable assets and the possibility of a closely-held ownership coming to an abrupt end.

Team Work

You’ll need to hire an attorney and accountant in order to devise an effective strategy to move assets out of your taxable estate. This is an ongoing process that might involve the setting up and administration of trusts and other instruments. While there are obvious costs involved in implementing an estate plan, there is no doubt that it is well worth the effort.

One effective tool estate planners often use to help fund estate tax payments is the irrevocable life insurance trust (ILIT). The ILIT purchases and owns a life insurance policy on your life (the donor). The policy premiums are funded by annual gifts you make to the ILIT. You could use your annual gift tax exclusion to fund the ILIT. (Note: The gift tax exclusion is adjusted each year for inflation in increments of $1,000.) In more advanced uses, the ILIT can be strategically employed to help ensure continuity in a closely-held business.

You’ve worked hard to build your business and will want to avoid finding yourself in the situation the Millers faced, although actual estate planning experiences will vary. Since the future operations and/or growth of a family-owned business could be severely affected by its estate tax obligations, it is important to set up and implement an estate plan before it’s too late. Call on your financial professionals to help you put together a suitable plan that works for you, your business, and your family.


Why Is a Will So Important?

Are you one of the many people who have postponed writing a will? Or has it been a long time since your will has been reviewed?

A will is a formal legal document detailing the settlement of your estate. It is crucial to the success of an estate plan that your will be properly written by a qualified, experienced legal professional and witnessed in accordance with state law. The laws governing the drawing up of wills vary considerably from state to state.

For example, holographic wills (those written in a person`s own hand) are considered legal in certain states but illegal in others. Some states, such as California, have recognized the average person`s need for simplified universal wills, which are prepared forms written by the legislature that can be used in lieu of a formal will. In most cases, however, these do-it-yourself wills have been considered an unacceptable substitute for a formal will.

What if I Die without a Will?

If you die without a will, you automatically forfeit the chance to direct the dealings of your estate. This may result in needless legal disputes, damage to personal relationships, and sometimes, financial tragedy. A will is an opportunity for you to designate your own executor, guardians for minor children, and other fiduciaries, rather than relying on the probate court to appoint them for you. Trustees for minor children or other beneficiaries of your estate can be designated in a will, and their powers can be tailored to the anticipated needs of those beneficiaries.

For those who have neither a spouse nor children and who would rather their estate go to personal friends or charity, a will is the primary means of fulfilling your wishes. The courts are unlikely to award portions of an estate to non-relatives or charities when blood relations (no matter how distant) can be found. This point is especially important to those people who at one point were adopted into a family unrelated to their natural family; in such a case, dying without a will (intestate) can result in needlessly complex legal work and expenses to clarify disputes between adopted and blood relations. It is also important to those who have made personal and emotional commitments to each other without being married.

If I Have a Trust, Do I Still Need a Will?

Even those who have shifted the majority of their assets into trusts designed to bypass the probate process, or who use joint ownership, should draw up a will. Most property owners inevitably leave behind an estate simply because the estate planning tools are not designed to shift all assets away from the probate process. Many properties and assets should still be held in the sole control of their owner for convenience and management reasons. In addition, there is no guarantee that the designated heir(s) will actually survive, so a will is needed to designate secondary beneficiaries.

It is important to meet with your legal advisor to draft or review your will as soon as possible. Estate planning is more than just tax planning, it is planning for the future of your heirs and beneficiaries.


You Cannot Take It With You

As it has often been said, two things in life are certain: death and taxes. Estate planning is the art of ensuring that one doesn't cause the other. You may already know that some estates, those with a total value of $1,500,000 or less, escape federal estate tax altogether. People often seriously underestimate the size of their estates and end up with an unanticipated estate tax bill.

If you are a business owner or professional, for instance, there is a good chance that the value of your estate already tops $1,500,000, or will soon. Even if you don't have substantial personal wealth, hidden assets such as pension or profit sharing benefits as well as life insurance may cause your taxable estate to exceed the $1,500,000 threshold. (Under current tax law, the $1,500,000 threshold applies to 2004 and then gradually increases to $3.5 million in 2009 and sunsets in 2010)

Add it up, add it all up.

At death, Uncle Sam imposes the federal estate tax. In most cases your taxable estate, the amount that is subject to tax, is less than its gross value. That is why one of the first and most important elements in estate planning is calculating this taxable amount. Fortunately, the basic task isn't that difficult. How to get a rough estimate follows.

Prepare a net worth financial statement listing all of your assets and any interests of ownership reduced by any and all liabilities. The total is your net worth. Be certain that you do not overlook hidden assets. Also, when subtracting your liabilities, include estimated funeral and burial expenses (generally upwards of $4,000) and the estimated costs of administering your estate (2 percent to 5 percent of the gross value of the estate is average). Now subtract your charitable and spousal bequests and the marital deduction. If applicable, a provision in the tax code allows you to leave your entire estate, no matter its size, to your spouse tax-free. This deduction, however, does not mean that Uncle Sam won't collect estate taxes. The IRS will get what is coming to it, but only after the death of the second spouse.

Remember: while there may be some very helpful tax provisions in the Internal Revenue Code, you must still take the time to plan your estate carefully and wisely, to minimize taxes. The better you plan now, the better you will be able to provide for your family's future.


Your Estate & Life Insurance: It All Adds Up

It’s easy to underestimate your net worth. After all, without a crystal ball, the future value of your home and savings is hypothetical. What’s not hypothetical, however, is the fixed amount of the death benefit provided by your life insurance policy. Adding this often significant sum to your asset pool could expose your estate to the federal estate tax that can run as high as 48% in 2004. Fortunately, there are trusts that can exclude life insurance from an estate.

Many people assume that because death benefit proceeds from a life insurance policy are generally not considered taxable income to the beneficiary, a life insurance policy is out of the reach of the Internal Revenue Service (IRS). However, when the policy’s death benefits are added to the appreciated value of your home and savings, it may come as a shock to find that the value of your estate may exceed the $1,500,000 applicable exclusion amount for 2004 (scheduled to rise gradually to $3.5 million by 2009 based on the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)).

Taxpayers should be aware that that the entire estate tax is then scheduled for full repeal in 2010; however, due to obscure budgetary rules, the new law contains a “sunset” provision, whereby all changes contained in EGTRRA automatically expire in 2011, effectively reinstating the current estate tax levies absent additional action by Congress in the interim.

Although the unlimited marital deduction allows spouses to transfer assets between them without assessment of estate taxes, non-spousal heirs face the possibility of seeing a life insurance policy inflate an estate’s value past the scheduled exemption amount in the year of death.

One Solution: A Credit-Shelter Trust

One way to get the life insurance policy out of your estate is to use a credit-shelter trust, a type of bypass trust, that can be created through a living trust. Essentially, a trust is a contract between a named donor, a managing trustee, and a beneficiary—all roles often assumed by the donor him or herself. After the donor’s death, the living trust can convert to a credit-shelter trust, if the will so directs.

Either way, such a trust could be set up so that an amount equal to the scheduled per person exclusion amount of a married person’s estate passes to the trust at death to benefit the surviving spouse, with the remainder of the assets passing outright to the spouse. Then, at the death of the surviving spouse, the proceeds from the death benefit and the remaining assets in the credit-shelter trust could be paid to the couple’s children, without being subject to federal estate tax. Any assets outside the trust upon the surviving spouse’s death, and therefore potentially subject to estate tax, could be further sheltered by the second spouse’s applicable exclusion amount for that year.

Another Approach: An Irrevocable Trust

When children are the beneficiaries of a life insurance policy, and the owner wants to exempt the policy from the estate’s total worth, an irrevocable life insurance trust (ILIT) is another approach. Keep in mind, however, the term “irrevocable” means beneficiaries may not be changed and that loans may not be paid out from the policy once it is put into the trust. Putting a hefty life insurance policy into such a trust could help beneficiaries finance the purchase of a family business or pay estate taxes. However, funding an ILIT may result in gift taxes due.

Park Your Policy in the Right Spot

Depending on the type of trust—and the number of possibilities is growing at a fast pace—a trust can help reduce or defer taxes on high-value assets like a life insurance policy. More broadly, a trust can be the means to ensure the policy’s benefits go directly to the correct beneficiary. With the flexibility of trusts, however, comes complexity. It is always best to consult with an estate lawyer who is also experienced in tax matters before proceeding.