Trust planning is an area where the work of attorneys and financial advisors interfaces. It can be a powerful and effective tool in helping both disciplines to grow their practices.
In this issue of The Wealth Counselor, we will look at how
estate planning is changing after TRUIRJCA 2010, what clients want in
estate planning, and how incorporating trust planning will benefit
clients, their families and the professional advisors who serve them.
Is There a Crisis in Estate Planning?
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010 (TRUIRJCA 2010), which the President signed on December 17,
2010, has had a major impact on estate planning.
TRUIRJCA 2010 increased the applicable exclusion amount to $5 million,
made it portable for the first time, adjusts it for inflation starting
after 2011, set the maximum estate tax rate at 35%, and restored the
gift tax exemption at $5 million - but all only through 2012.
The result is that most families don't have an estate tax problem, at
least not for now. Few families have net estates of more than $5
million; even fewer married couples have combined net estates of more
than $10 million. This is causing a crisis for professionals who have
promoted estate tax avoidance as the primary reason to do estate
planning. Insurance advisors who for years have sold policies to fund
estate tax liabilities are now finding fewer buyers for their products.
Lawyers who have always sold planning as a way to pass wealth on instead
of paying it to Uncle Sam are floundering.
The Danger and Opportunity Before Us
The danger is real. Prospective clients may think there is no need for
them to plan because they are exempt from the estate tax, at least for
now. They may be lulled into a false confidence that the estate tax does
not affect them, when in reality it may in the near future. They may be
forgetting that the current tax law is only a two-year deal that
Congress made, and the law will change in 2013, or possibly sooner. Or
they may be foolishly using "waiting to see what the Congress will do"
as an excuse to postpone their planning.
The opportunity is real, too. As estate planners, we need to give up the
"addiction" of relying on the estate tax as a primary business driver.
We need to re-think our approach and remember why we became estate
planners in the first place.
While some may view the new tax law as an end to estate planning as we
know it, we can also see it as an opportunity to finally focus on what
our clients really want.
What Clients Really Want
Essentially, clients want the same things we all want:
For Themselves -- Protection and Control.
They want control over their assets and health care decisions. They want
financial security. They want to be protected from the risks of life,
which include lawsuits, disability and the cost of long-term care. Most
have some philanthropic goals.
For Their Surviving Spouse -- Financial Security.
They want to know that their hard-earned assets will not pass to a new
spouse. And they want the surviving spouse protected from taxes,
primarily from income tax.
For Their Children and Grandchildren -- An Education and Financial Security, including Asset Protection from Immaturity, Divorce and Lawsuits.
A big motivator for planning can be protecting assets from gift,
estate and income taxes for as long as possible, even for several
generations. They want their family members to live successful lives
that include a work ethic, integrity, faith, and appreciation and
respect for family members. Above all, they want their family members to
love each other, spend time together and avoid conflict. They do not
want them to be harmed by the wealth that is left to them. This is often
far more important than tax planning.
For Their Business or Farm -- Attract and keep quality talent and have protection from frivolous lawsuits.
They want their business or farm to pass to family members who desire
to own and operate it, while treating non-participating family members
fairly, or they want to sell it to employees or outsiders.
What We Can Provide
These client needs are timeless. No Congress can ever legislate these
needs away. Our solutions are also timeless. We need to build our
practices around these needs and solutions, instead of having estate tax
avoidance be the main need and motivator.
Think about why you do what you do. People don't buy what you sell;
they buy why you sell it. If you sell a product, they can always find
someone who will sell it for less. If your "why" is protecting your
clients, their families, their farm or business, etc., they will see
that you are putting these needs first.
Five Ideas that Will Get Results...for You and Your Client
The following planning suggestions will work now for most of your
clients, and can help you get on the right track in your practice.
Idea #1: Teamwork Produces Better Work
Use a two- to four-meeting process involving other professionals. This
will allow you to provide more thoughtful solutions to your client's
needs. It will also allow time for the team of advisors to meet without
the client, discuss the situation and possible solutions, and make sure
all advisors are on board so that the client hears a consistent message
from each advisor. Also, having a team approach over time allows the
client to see that recommended financial products (life insurance,
annuities, trusts, long-term care insurance, etc.) are part of the total
planning solution and not a sales pitch.
Ask for the name of any other persons the client will consult (friend,
CPA, etc.) in making a decision, and get permission to talk with them
before making recommendations to the client. Then have those talks and
assure all will endorse the plan ahead of time. It will take more time
on the front end, but will keep things from being sabotaged by someone
you were not even aware of.
Idea #2: Use the $5 Million Gift Tax Exemption Now
We may only have this for a couple of years, but it could disappear even
sooner than 2013 as Congress begins to focus on how to raise revenue
and cut spending. Discounts may also go away. You can legitimately
create a sense of urgency to use this exemption to start moving
appreciation out of a potentially taxable estate.
Use the $5 million gift tax exemption to fund a large life insurance
policy in an irrevocable life insurance trust (ILIT) that can build up
cash value for a supplemental retirement fund or provide an alternative
financial investment. A second-to-die policy to pre-fund estate taxes
could also be purchased. The $5 million exemption can also be used to
fund a GRAT or seed an IDGT sale using LP, LLC or C- or S-corp stock.
There are two relatively easy ways to give clients access to insurance
owned by an ILIT. First, set up the ILIT so that the trustee can make
withdrawals or loans from the cash value of the policy and lend the
proceeds to the grantor/insured. It can be an interest-only loan during
the grantor's lifetime, with no additional income tax due; at the
grantor's death, the loan can become a debt of the estate. (It must be a
credible loan, fully documented, and the grantor must have the means to
make the interest payments.) Alternatively, the distributions can be
made to the insured's spouse, on the assumption that they will stay
married and the spouse will "share" the proceeds with the insured.
Remember that both GRATs and IDGT sales need insurance protection, and
insurance is easier to fund with a $5 million gift exemption ($10
million if married). You may even be able to avoid Crummey gifts altogether.
Idea #3: Encourage Clients to Leave Assets in Trust
This is good for your clients, and for your clients' children and
grandchildren. Assets kept in a trust are protected from predators
(including the surviving spouse's next spouse), irresponsible spending,
creditors, divorce, etc. Ask your client: "If you could protect the
assets, why would you not?"
This is also good for you and for your team of advisors, as it keeps the
assets under professional management and establishes a relationship
with the next generation. This is an excellent way to protect the
financial advisors' book of business against a very real threat.
Idea #4: Think Differently about Your Client's IRA and Other Tax Qualified Plans
Most clients want to maximize the stretch out on an IRA, but don't know
how to do it. There's a way to maximize stretch out, provide long-term
divorce and lawsuit protection, and create a large life insurance sale.
And it will apply to many families with "average" sized estates and
Step 1: Leave the IRA to a stand-alone IRA trust for younger generation
family members (children or grandchildren). This will provide the
maximum stretch out and protection from divorce and/or
creditors. An outside trustee can prevent an early cash out and protect
the intended stretch out.
Step 2: Use the required minimum distributions to purchase life
insurance on the IRA account holder in an ILIT for the benefit of the
surviving spouse. When the account holder dies, the surviving spouse
will have lifetime access to the proceeds in the ILIT, tax-free. This
can be a much better deal for the surviving spouse than becoming the
successor to the IRA. The ILIT design provides for successor
beneficiaries if the spouse dies first.
To make the benefits clear for your client, run projections with the
spouse as beneficiary of the IRA and a child/grandchild as the
beneficiary. Remind your client that distributions from the IRA will be
taxable, while the proceeds from the life insurance in the ILIT will be
For those who are charitably inclined, make a charity or church the
beneficiary of the IRA; it will receive the proceeds tax-free. Again,
use the required minimum distributions to purchase life insurance on the
IRA account holder in an ILIT for the benefit of the surviving spouse.
Idea #5: Use Trusts to Help Clients Create a Non-Financial Legacy
Creating a non-financial legacy helps your clients become more connected
to the estate planning process and empowers them. Have them write their
motivations for the planning and explain discretionary guidelines. If
there is heirloom property that is sentimental or historical, they can
provide a handwritten note with a story or significance of the item(s).
Arrange for family meetings after the trust has been signed. You can
have them in person for those who live in the area and/or via Skype for
out-of-towners. Talk about the planning that has been done and why. This
is good for the beneficiaries, as it brings them into the process and
helps them understand the motivations, the planning, and the intended
results. It also gives the advisors opportunities to meet and become
familiar with the next generation.
While TRUIRJCA 2010 has provided us with challenges and has forced us to
re-think our approach to estate planning, it has also freed us to be
able to do the estate planning that our clients really want without
regard to the need for estate tax avoidance. Trust planning remains an
integral and valuable part of estate planning, and is beneficial for the
client and the professional team of advisors.