10/04/99

More on Estate Planning

Last month I wrote a piece that broadly discussed aspects of financial and estate planning. In this article, I want to address several techniques that one might use in an estate plan. My motivation for this article stems from the times I have been asked for a source that would simply list many different estate planning concepts.

While this article does not explore each concept in any detail nor does it address all of the various items one might consider in developing a plan, I believe this article will give you a good overview of numerous options you have and how they might be used to meet your objectives. In future articles, I will attempt to explain several of these methods in detail.

What is estate planning and when do I need it?

The definition of estate planning as adopted by the National Network of Estate Planning Attorneys is as follows: I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.

Estate planning is an essential aspect of all financial planning for individual and couples of all ages, because the decisions you make today can have a decided impact on future estate transfer proceedings, and an immediate impact if you or spouse were to become disabled or die prematurely.

Methods of Estate Planning -- the following is a list of several items that will or could have a significant impact on how your estate is transferred.

1. Ownership of Assets -- Many of us do not think about such issues when purchasing an investment or other item, but how the ownership of the asset is held will have an impact on how your estate is handled. For example, accounts held as "joint tenants with right of survivorship" avoid probate, as do beneficiary accounts such as retirement plans, and Transfer on Death (TOD) accounts.

2. Will -- As you know, a will can be an effective tool for articulating how your estate should be allocated, who should manage the process, determining who has guardianship of minor children, etc. However, when assets are disposed of via a will they are then probated, which can be a long and costly process.

3. Gifts - If you are faced with the potential prospect of paying estate taxes and/or losing your assets to long term care costs, you may want to start giving away assets during your lifetime. You can give up to $10,000 per year per donee without incurring a gift tax. If you are married you can double that amount.

4. Beneficiary Designations -- Accounts and contracts that have beneficiary designations, such as life insurance, annuities, IRA's, etc. are not governed by a will. Assets go directly to the beneficiary so make sure you have updated your accounts and know who will be receiving these assets. Furthermore, one can preserve the income tax deferral advantage of retirement accounts, such as IRA's, with the strategic use of the beneficiary designation.

5. )Living Will -- Not to be confused with a living trust, a living will empowers your physician to discontinue life support if you become terminally ill or permanently unconscious. Such a document protects family members from having to make the judgment about sustaining life support over a protracted period of time.

6. Power of Attorney/Medical Power of Attorney -- If you or a loved one where to reach a point in which handling financial or medical decisions was no longer possible , these documents give that authority to someone you trust. They become a surrogate attorney or attorney-in-fact with the authority to make decisions for you.

7. Revocable Living Trust -- A revocable living trust is an effective tool for by-passing probate, however, it does not remove assets from your estate. A living trust is a contract between you -- the maker -- and the trustee. Most often, the individual or couple making the trust also appoints themselves as trustee(s). The trust document articulates how the "makers" assets are to be handled upon disability or death.

8. By-Pass Trust -- The power of this trust arrangement is the ability to take full advantage of each spouse's applicable estate credit amount. Without this type of trust, a couple might only end up using one of their credits which exempts $650,000 in 1999 (and rising up to $1 million in 2006 and after.) Using this trust enables a couple to take advantage of both credits enabling the transfer of $2 million of assets estate tax free after the year 2006.

9. )Qualified Personal Residence Trust (QPRT) -- if you gift your home or vacation home to your heirs, you would be using up an substantial portion of your applicable estate credit. An alternative strategy is to use a QPRT. You could give the home to a QPRT and retain the right to use it for a term of years. In so doing you might preserve a large portion of your credit amount and transfer the asset at a reduced estate value saving estate taxes.

10. Life Insurance/Irrevocable Life Insurance Trust (ILIT) -- One of the best ways to pay estate taxes is to have an insurance company pay them for you. For younger people with large assets or who will accrue such during their life time, a good permanent life policy, instead of term insurance, can fit nicely into an estate plan. For many couples, buying a survivorship life insurance policy, (which pays out at the second death), is an excellent way to have an insurance co. pay future estate taxes. Even more advantageous is to place your life policy in an irrevocable life insurance trust know as an ILIT, so the insurance death benefit passes to heirs estate tax free. In addition to properly drafting the trust, there must be no incidence of ownership in the insurance policy by the insured.

11. Asset Protection Planning -- A good estate plan will also address issues of asset protection. There are a variety of ways to better protect your assets. In summary, these strategies can give you some protection from creditors, help you avoid probate and estate taxes, qualify you for Medicaid sooner, and more.

12. Family Limited Partnership (FLP) -- This is a limited partnership arrangement in which the partners are family members or entities established by them. The benefits of an FLP are: 1) maintaining control of assets, 2) transferring assets and income to the limited partners (often children or grandchildren), 3) reducing liability, and 4) reducing the value of the estate thereby reducing estate taxes.

13. Charitable Remainder Trust -- Giving money away through a trust can actually prove to be beneficial during your lifetime and for your heirs. For example, if you gift away a highly appreciated, non-producing asset to a charitable trust, you have the potential to avoid capital gains, get an immediate income tax deduction, increase your income and significantly reduce estate taxes. You will also help the charity(s) of our choice.

14. Viatical Settlements -- This arrangement is a way to receive a percentage of the death benefit of a certain life insurance contract before you die. If the insured has been given a terminally ill diagnosis, a viatical settlement can be an effective way to use the proceeds for needed medical bills and other items, while the insured is still alive.

Once again, let me say that I have only touched on each concept lightly. Each of these items has more complexities in themselves and as integral part of an comprehensive estate plan. So, before pursuing any of these strategies, talk with a professional. Furthermore, I have not mentioned other estate planing arrangements such as generation skipping trusts, grantor trusts, and much more.

Please send questions or comments to dcoffin46333@wradvisors.com.