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Chapter 13: estate planning.

Estate Planning: The Basics

Estate planning helps clients to make decisions about the accumulation, preservation, and ultimate distribution of assets as well as other end-of-life decisions, including incapacitation. Through estate planning, clients can dispose of property upon death in a tax-efficient and cost-effective manner while providing for dependents or other interests--all in a manner consistent with individual beliefs and values. Issues related to probate, asset transfers, gifts, estate taxes, settlement costs, and other personal end-of-life decisions are part of a comprehensive estate plan.

Estate planning is an essential part of any well conceived financial plan. Steps taken to analyze a client's situation and the development of estate planning recommendations can serve multiple outcomes. First, an estate planning analysis can identify potential weaknesses in a client's financial situation that can result in increased settlement costs and tax liabilities, thereby reducing assets available for beneficiaries and charitable organizations. Second, estate planning recommendations can maximize a client's financial assets and privacy, ensure that final financial and life wishes are enforced, and add peace of mind to the lives of clients.

The purpose of this chapter is to present the essential steps to conduct an estate planning analysis as illustrated in Figure 13.1. The chapter provides a broad overview of the estate and gift taxes, including how to estimate a client's gross and taxable estate. Common planning strategies are presented including the need for a range of estate planning documents, the use and application of trusts, and the use of charitable and other gift strategies. The chapter concludes with a discussion of how estate planning strategies can be shaped into client-specific recommendations.

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Analyze the Client's Current Situation

There are a number of steps involved in the analysis of a client's current estate planning situation. It is essential that a planner fully know the client. This means understanding both the client situational factors and the quantitative aspects of the client's situation. A client's over-arching financial goals, as well as specific estate planning objectives, need to be reviewed. There must be a thorough exploration of the client's estate distribution desires and wishes. Only after the full range of personal, emotional, and financial factors have been considered should a planner, either individually or in conjunction with an estate attorney, make recommendations.

Estate planning is not just for the wealthy. Complex and sophisticated strategies are typically reserved for high net worth clients; but that does not negate the need for fundamental estate planning preparation for all clients. These efforts may preserve the client's assets, but more importantly make the process of dealing with end-of-life scenarios easier for surviving family members or heirs. Although these holistic goals may be the objective of the financial planner, considerable client education may be needed before these goals can be addressed.

It is also important to acknowledge the tension that surrounds estate planning for both clients and planners. Typical estimates suggest that no more than 40% of all U.S. adults have a will. Advisors would generally agree that many clients are resistant to implementing estate planning recommendations, often postponing a visit to an attorney for preparation of a will from a few months to even years. Planners also must use care in balancing their role as an intermediary, trusted-advisor, or educator between the client and other estate planning professionals, such as an attorney, CPA, insurance professional, custodian, or trust officer. The emotionalism and sensitivity of the client's information and the professional and legal boundaries must be carefully balanced to limit any conflicts of interest and to promote collaboration.

Determine and Quantify Estate Planning Needs

Although a client's values, social position, or culture are influential situational factors in the determination and quantification of planning needs for all core planning content areas, they are particularly ubiquitous in estate planning. Sensitivity to the client's family, cultural and religious beliefs, and attitudes is an important planner consideration. Determination of estate planning needs may run the gamut from bequests for immediate to extended family members or friends to the need to provide care or a trust for a valued household pet. The prevalence of remarriages and other nontraditional family relationships, as well as the need for multi-generational planning, further complicate and, in some situations, challenge traditional property law. These same issues may create unique planning needs to provide for my, your, and our heirs, or conversely to selectively choose or exclude potential heirs or recipients of gifts. The client's need for control over assets, either before or after death, may shape the estate planning needs, including predetermined conditions (e.g., age or the ability to emotionally or financially handle assets) for gifts or distributions from trust.

Privacy may be a primary concern for some clients, either to protect personal interests and distributions or to provide confidentiality for the estate within the larger community. Clients that want to avoid publicity and probate should consider limiting the amount of probate property (through titling or beneficiary designations) or establishing a living trust for some assets. These strategies do not negate the need for a will or other estate planning documentation, but may help the client maintain some personal or financial privacy.

For some clients, wishes for charitable giving may take precedent over family bequests. Others may refuse to consider charitable or family gift strategies, regardless of the logical benefit of reducing the taxable estate. The principal concern for other clients may be the reduction or avoidance of settlement costs and estate taxes, which can be accomplished through a variety of strategies.

Fundamentally, the determination of estate planning needs focuses on three issues: transferring assets, providing for survivors or other financial or charitable needs, and complying with the client's final wishes regarding incapacitation and other end-of-life decisions. Likewise, the quantification of the planning need may, most simply, hinge on the value of the client's taxable estate relative to certain state or federal estate tax thresholds. Reaching these thresholds may trigger planning needs and strategies that otherwise may not have been necessary. For instance, if it is determined that a married client's gross estate currently exceeds or probably will exceed the estate tax unified credit applicable exclusion amount, it may be advisable to explore the use of an A/B Trust arrangement, as well as gift strategies.

Both of these assertions about the determination and quantification of estate planning needs are premised on the client having or putting into place, regardless of any situational factors or estate size, the basic estate planning documents (e.g., will, letter of last instructions, and advance medical directive). The current situation analysis will immediately indicate these needs. For example, if the client's will is out-of-date, one of the first recommendations should be to draft a new will. The current situation analysis will also uncover if a client is lacking other basic documents, and allow the planner to determine the reason. In some cases, the client may have made a conscious decision. In other situations, the client may be misinformed or uninformed about the importance of the document. Reviewing life goals with a client can be an important first step toward establishing estate planning preferences.

To better assess these preferences, there are a number of key questions that can be used to determine a client's estate planning needs. Prior to considering these questions, it is important to clarify if the client and, if applicable, the spouse or partner is a U.S. citizen. Specifically, planning needs may differ for a noncitizen or resident alien and can affect asset titling, gifts, estate transfers, and estate taxes. Property owned in the U.S. must be probated in a U.S. court, so similar considerations apply. It is generally important that a noncitizen has U.S. estate planning documents, even if documents were prepared in another country. Because citizenship adds another layer of difficulty to the estate planning process, it is a critical consideration.

Other questions to determine a client's estate planning needs are listed below.

* Does the client wish to avoid probate or reduce probate assets?

* Is avoidance of estate taxes a primary client goal?

* Is reduction in income tax a primary client goal?

* Does the client want to leave some or most of the client's estate to a spouse or partner?

* Are there special needs (e.g., mental or emotional health issues, retardation, physical handicaps, etc.) or other financial management issues that must be considered?

* Does the client want to leave some or most of the client's estate to children?

* Are there minor children or children with special needs, regardless of age (e.g., exceptional gifts or talents, mental or emotional health issues, mental or physical handicaps, etc.)?

* If an estate is to be left to children, will each child share equally?

* If the child should predecease the parent, how will that child's share be distributed?

* Does the client want to leave some or most of the client's estate to other dependents besides spouse, partner, or children?

* Are there special needs (e.g., mental or emotional health issues, mental or physical handicaps, etc.) or other financial management issues that must be considered?

* Does the client wish to leave a charitable bequest?

* If charitable giving is a priority, which organizations are of most importance?

* Does the client have financial or managerial ties to a small business or closely, or privately, held business that must be planned for within or outside of the estate plan?

* Which assets will be used to pay for final expenses and debt reduction?

* Is protection of assets from creditors a concern?

* Is preplanning for medical situations or long term care an important client objective?

* Does the client have any special wishes that should be accounted for in the plan?

Each of these questions can lead to an in-depth discussion between planner and client, and in some cases spouses, partners or other family members, about life goals, legacies, estate planning objectives, and end-of-life issues. Answers to these, and similar questions, can then be used as background for initiating an assessment of a client's estate plan.

Document and Evaluate Current Estate Planning Efforts

Another next step in analyzing a client's current estate planning situation entails documenting and evaluating the client's current planning approach. A client's estate plan may have been thoroughly conceptualized and executed or haphazardly developed. There may be no plan--the result of a total avoidance of planning. The planner must evaluate the strategies, products, or legal techniques a client is currently using to accumulate, preserve, and distribute assets over time. While no one other than an attorney should ever draft a legal document, every planner who performs comprehensive financial planning should assist clients to think through the complex issues associated with planning an estate. As part of the review of what the client has in place, it is imperative that the planner determine if a client (and spouse or partner) has any of the following documents, when they were drafted, and whether the documents are still applicable.

* Will(s)

* Letter(s) of last instruction

* Power of attorney (medical or financial)

* Living will or advance medical directive

* Revocable trust

* Irrevocable trust

Any prepaid, contracted, or even informal arrangements for the funeral, burial, or entombment should be discussed and, if applicable, the location of any contracts determined. It will also be important to document, verify, or review the following to develop a comprehensive profile of the client situation and to confirm the location for use in the future.

* Birth certificate(s)

* Birth certificate(s) of children

* Marriage certificate(s)

* Divorce decree(s)

* Life, health, long term care, and annuity policies and beneficiary designation form(s) for individual and group policies

* Title(s) to property

* Deed(s) to all property, in the state of residence or in other states

* Inventory of any special property such as jewelry, fine art, or a collection (e.g., stamp, coin, wine, firearms, etc.)

* Brokerage account statements or other evidence of security ownership (e.g., stock certificates)

* Documentation for any outstanding unpaid debts or unsettled legal claims

* Business agreements

* Income tax returns for the previous three year

* Location of safety deposit box, inventory of contents, location of key(s), and determination of whether state law requires that the box be sealed until inventoried by a representative of the court

When reviewing a client's current will, the planner should be looking for signs that a change or codicil might be needed. The following list includes a number of indicators that a client's will or estate plan should be reviewed by an attorney.

* The will was drafted over 5 years ago.

* The client has additional beneficiaries that are not listed in the will.

* The client now has fewer beneficiaries than are listed in the will.

* There has been a major change in the beneficiaries' family or financial circumstances.

* The client has indicated verbally that the client wishes to distribute assets differently from what is listed.

* The client's health has diminished since drafting the will.

* The client's marital status has changed since drafting the will (marriage, remarriage, divorce, or death of a spouse).

* The birth or adoption of one or more grandchildren has occurred.

* A significant estate planning law was passed since the date of the will or the date of the last review, if any.

* There has been a significant increase or decrease in the client's wealth or income since the will was drafted.

* The client has purchased additional life insurance.

* The client has started a business.

* A change in the named guardian is needed.

* A change in the executor or contingent executor is needed.

* Property has been purchased in a different state.

* The client has changed the state of residency.

In addition to obtaining copies of a client's documents and studying them, the planner and client should also discuss other professional relationships with attorneys, accountants, stockbrokers, tax preparers, or insurance providers. Obtaining this comprehensive information helps to ensure that all relevant estate planning issues will be addressed in an orderly and systematic manner. For instance, the focus of an estate plan may be significantly different for a client that does not have a will compared to a client that has estate appropriate legal documents.

After reviewing a client's current estate plan, a variety of issues may need to be addressed. These needs will help the planner focus on strategies to form recommendations for the client. The will often needs immediate remedial attention. The checklist shown in Figure 13.2 is designed to help planners assess a client's current will and end-of-life documentation to determine if legal documents should be retained or rewritten.

Estate Planning Tip: Community Property Rules

Ten states provide married couples with an alternative to tenancy by the entirety. Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin each have a form of community property law. Community property refers to all property obtained while a couple is married. Each spouse legally owns one-half of each asset that is purchased as community property.

Community property is unique, however, in that any property owned by a spouse prior to marriage remains the sole property of that spouse unless it is co-mingled with community property assets. Further, if a spouse, while married, receives a gift or inheritance, those assets remain the separate property of the spouse.

One of the biggest advantages associated with community property is that, upon the death of one spouse, all assets receive a 100% step-up in basis. This compares favorably to the 50% step-up in basis for assets held by spouses as joint tenancy with right of survivorship (JTWROS) or as tenancy in the entirety.

Determine and Quantify the Estate Tax Liability

Another step in the process of analyzing a client's current estate planning situation begins by determining if a current or potential estate tax liability exists. The following discussion describes the basic steps necessary to determine a client's tax liability.

The estate tax is a tax on a client's right to transfer property at death. Determination of the tax requires an accounting of everything that a client owned or had certain interests in at the date of death, or (in certain cases) within three years of death. Internal Revenue Service (IRS) Form 706 is used to account for these assets. The fair market value of assets at the client's death or as of an "alternate valuation date" is used. The total of all of owned assets is the client's gross estate. The included property may consist of cash and securities, real estate, insurance, revocable trusts, annuities, business interests, and other assets.

Once assets have been accounted for in the gross estate, certain deductions are made to arrive at a client's taxable estate. These deductions may include mortgages and other debts, estate administration expenses, and property that passes to surviving spouses (i.e., marital deduction assets) and qualified charities.

After the net amount is computed, the value of lifetime taxable gifts made after 1976 is added to this number and the tax is computed. The tax is then reduced by the available unified credit and other credits. In 2008, the amount of this credit is $780,800, which protects $2,000,000 from estate tax.

The estate tax is scheduled to be repealed for one year in 2010. The tax is described in more detail below.

Role of the Unified Credit

The unified credit applies to both the gift tax and the estate tax. The unified credit is subtracted from any gift or estate tax that a client may owe. [Amounts used during a client's lifetime reduce the amount available at death.] For gift tax purposes, the unified credit is equal to $345,800, which protects $1,000,000 from gift tax. For estate tax purposes, the unified credit and the amount protected by the unified credit, the applicable exclusion amount, are shown in the following table.

An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds the applicable exclusion amount.

Gift Tax

The gift tax applies to transfers of property by gift. A gift occurs whenever property (including money), or the use of or income from property, is given without expectations of receiving something of at least equal value in return. If a client sells something at less than its full value, for instance, or if an interest-free or reduced interest loan is made, the IRS will most likely consider this a gift.

The general rule is that any gift is a taxable gift. However, there are certain exceptions to this rule. Generally, the following gifts are not taxable gifts:

* Gifts that are not more than the annual exclusion for the calendar year.

* Tuition or medical expenses a client pays directly for someone else (the educational and medical exclusions).

* Gifts to a client's U.S. citizen spouse.

* Gifts to qualified charities (a deduction is available for these amounts).

A separate annual exclusion applies to each person to whom a client makes a gift. In 2008, the annual exclusion is $12,000. In general, a client can give up to $12,000 each to any number of people in 2008 and none of the gift amount will be taxable. If a client is married, the client and spouse can effectively give up to $24,000 to the same person in 2008 without making a taxable gift.

Generally, clients need not file a gift tax return unless they give someone, other than a spouse, money or property worth more than the annual exclusion of $12,000 in 2008. Although a return may be required, no actual gift tax will become payable until cumulative lifetime taxable giving exceeds the $1,000,000 gift tax unified credit applicable exclusion amount.

Clients who give money or assets to others are primarily responsible for the payment of the gift tax. When discussing gift tax issues with clients, it is important to remind the client that the person who receives the gift generally will not have to pay any federal gift tax.

Generation-Skipping Transfer (GST) Tax

Any gift or property assignment to someone who is two or more generations below the person making the transfer is generally considered to be a generation-skipping transfer. A transfer to a trust, as well as certain transfers within or from a trust, may be subject to the generation-skipping transfer (GST) tax. Transfers subject to the GST tax are taxed at the highest estate tax rate, as shown below. A GST exemption is available equal to the estate tax unified credit applicable exclusion amount.

The Estate Tax Calculation

The estate tax may apply to a client's taxable estate at death. A client's taxable estate is the gross estate less allowable deductions. The gross estate includes the fair market value of all property in which the client had an interest at the time of death. The gross estate may also include the following:

* Life insurance proceeds payable to the estate or, if the client held incidents of ownership in the policy, to the client's heirs.

* The value of certain annuities payable to the estate or heirs.

* The value of certain property transferred within three years before death.

* Trusts or other interests established by the client or others in which the client had certain interests or powers.

A client's taxable estate is determined by subtracting deductions from the gross estate. Allowable deductions used in determining the taxable estate include:

* Funeral expenses paid out of the estate, debts owed at the time of death, taxes, and certain estate losses

* Marital deduction

* Charitable deduction

* State death tax deduction

Planners should exercise caution when determining the amount of deductible debt. Only that part of a client's debt attributable to a listed asset is deductible. For example, married couples holding a principal residence as joint tenants with right of survivorship may list only one-half of the fair market value of the property as an asset. As such, the deceased client may deduct only one-half of the outstanding mortgage.

A marital deduction is available for the value of the property that passes from one spouse to another. A charitable deduction is available for the value of the property that passes to a charity.

Adjusted taxable gifts are added to the taxable estate amount to form a tax base. The tax is then calculated on the tax base. Tax is also calculated on the adjusted taxable gifts, and subtracted from the tax on the tax base.

This tentative tax is then reduced by credits. Available credits include the unified credit, a credit for prior taxes paid, and a foreign death tax credit.

Estate Planning Tip: Income in Respect of the Decedent

Income in respect of the decedent (IRD) generally includes any income that the deceased person was entitled to receive prior to death but which was not actually received until after death. Examples of IRD include salary which was earned but not paid until after the taxpayer's death, retirement accounts, royalties, rents, dividends, interest, and other similar forms of income. IRD items must be included in the decedent's gross estate. The beneficiary of the income is then taxed at the beneficiary's marginal tax rate. The beneficiary may be able to deduct his or her portion of any estate taxes generated by the inclusion of the IRD.

Figure 13.2 shows the estimation of estate tax in the Financial Facilitator.

[FIGURE 13.3 OMITTED]

Estate Planning Tip: Determining Cost of Document Drafting Expenses

The cost of drafting a will, power of attorney, trust and other legal document can vary greatly based on a number of factors. Geographical location and the related cost of living are significant factors. Also, the client's net worth can affect the number of documents and the complexity of the documents, which can result in higher costs. Although the initial costs may dissuade some clients from implementing recommendations, this decision may significantly increase the costs, time, and frustration for the survivors who must implement the estate plan mandated by state or federal laws.

Strategies

Review Prospective Estate Planning Strategies

Two important considerations should be reviewed before identifying estate planning strategies. First, it is always a good idea to begin with basic estate planning strategies. Never assume that a client, regardless of wealth or income, has in place necessary basic documents, such as a will, power-of-attorney, living will, or advance medical directive. This means that while there are certainly opportunities for a financial planner to develop quite complex estate planning strategies, these should generally wait until the fundamental aspects of estate planning have been addressed.

Second, it is important to remember that financial planners who are not attorneys should tread carefully when developing and presenting estate planning recommendations. It is illegal for non-attorneys to draft legal documents. One business approach is to work collaboratively with an attorney on complex estate planning issues. This method of planning may reduce fiduciary liabilities, limit the possibility of being sued by a client who later feels that the strategy was inappropriate, limit exposure to penalties for the unauthorized practice of law, and most importantly, provide a more professional result for the client. Finally, many plans created by other than an attorney include a disclaimer, such as "Prior to implementing these recommendations, confirm these suggestions with your attorney."

Identify Prospective Estate Planning Strategies

The complexity of strategies can range from basic to extremely complex. The intent of this section is to provide examples of common fundamental estate planning strategies. Readers who are interested in developing more complex strategies and recommendations should consider The Tools & Techniques of Estate Planning (National Underwriter Company).

Product Strategy 1: Draft Appropriate Will

Advantage: This estate planning strategy should be the first advice given to a client who does not currently have a will and for those whose will is out-of-date. A will ensures that the client's wishes are appropriately followed, rather than relying on the intestate laws of the client's state of residence.

Disadvantage: It is important that clients recognize that having a valid will does not avoid probate and the associated disadvantages of the probate process. Cost may also be a deterrent; clients can expect to pay between $200 and $750 for a basic attorney drafted will, with the cost increasing with the complexity of the situation. Finally, this strategy is often the most resisted strategy of any considered within a financial plan. Planners must patiently encourage clients to act, rather than postpone preparation of this important estate planning document.

Product Strategy 2: Write a Letter of Last Instructions

Advantage: All clients should write a letter of last instructions. This letter can include special wishes that might not otherwise be included in a will or trust document. For example, a client can specify where the client would like to be buried, the name of the caterer that the client would like to use at the funeral, and other requests.

Disadvantage: Clients who write a letter of last instructions should take care to update the letter whenever they redraft their will or other legal documents. Great confusion can exist if more than one letter is found at the date of death.

Product Strategy 3: Draft Living Will, Power-of-Attorney, and Advanced Medical Directive

Advantage: Several important documents are fundamental to the estate planning process. Because the commonly used terms and legal requirements vary by state, care must be taken when using this strategy.

A living will is a legal document that establishes the medical situations in which a client no longer wants life sustaining or life prolonging treatment. A living will is essentially a document that involves the client and the client's physician, and often includes wishes regarding the use of cardiopulmonary resuscitation (CPR), intravenous therapy (IVs) for nutrition or medication, feeding tubes, and ventilators for artificial breathing. However, it is very important that the family is informed of the individual's wishes. A living will may also be known as a declaration or directive to physicians or, in some states, as an advance medical directive. Typically, a living will is only relevant in situations of terminal illness or injury when the individual is incapable of making care decisions.

An alternative to a living will is a durable power of attorney for health care, also called a medical power of attorney. This legal document appoints another person, called an agent, attorney-in-fact, or proxy, to make health care decisions for the client when the client is unable to do so as a result of physical or mental incapacitation. The addition of the term durable makes this or other power of attorney remain in effect or take effect in the event of mental incompetence. The agent can make decisions for non-terminal situations or, if a living will is available, help insure compliance with the individual's wishes.

Generally, a medical directive or advance medical directive combines the protection of a living will in terminal situations with the broader powers of a durable power of attorney for health care into one document. A proxy or attorney-in-fact is appointed, as well as a contingent individual, or successor agent, should the primary person be unavailable to serve. Neither the medical power of attorney nor the medical directive obligates the agent or proxy with financial responsibility for the costs of medical care.

A power of attorney appoints a person or organization to handle a client's affairs. A durable power of attorney remains in effect or takes effect in the event of subsequent disability or incapacity. A power of attorney may be general, giving broad powers for most, if not all, financial affairs, or limited to a specific list of responsibilities. With an extremely broad general power of attorney, a client might, in effect, give a third party "all legal powers that I have myself." A powerholder with an unlimited power of attorney may or may not be able to make gifts to him or her self or family members; however, this will depend on state law and the prior history of the client. Powers of attorney are relatively inexpensive to establish, simple, private, and flexible. Courts also universally recognize powers of attorney.

When planning for incapacitation and overall health care issues, clients should be encouraged to have a living will and a medical power of attorney, as well as a power of attorney for financial affairs. In this way, the client's care and death decisions can be made confidentially using state-specific documents, while the client's financial affairs can be managed with a power of attorney.

Disadvantage: The greatest disadvantage associated with this strategy is psychological, not fiscal. Planners may face resistance among clients when this strategy is presented. Some clients may find the thought of planning for their own incapacity and the sharing of decision making authority to be difficult and uncomfortable. As a result, some clients may resist implementing this strategy, but the planner must patiently encourage client consideration.

The use of a springing power of attorney (powers are available only after a specific event, such as an illness or disability, and, perhaps, validation by a physician) may be one alternative. Clients should also be assured that the power of attorney can be revoked at any time.

Depending on individual state law, an attorney or witnesses may or may not be required, so minimal costs may be involved. Clients that own property or live for periods of time in different states each year should exercise particular caution with these documents, as state reciprocity may not apply.

Product Strategy 4: Avoid Probate with Use of a Living Trust

Advantage: Two reasons to consider establishing a living trust are probate and the publicity surrounding public documentation of a family's financial situation at a client's death. Other advantages include continuation of income and distributions to heirs from assets held in the trust after the death of the client, the ability of a trustee to manage assets, the appropriate distribution of assets to heirs at the client's death, reducing the possibility of someone claiming assets transfers were against the decedent's wishes, and the reduction in legal costs for those with property in more than one state.

Disadvantage: A significant disadvantage associated with this strategy is that clients sometime confuse avoiding probate with avoiding estate taxation. Assets held in a revocable living trust are included in the client's gross estate for estate tax purposes. Also, income that is taxable to the trust, rather than to the grantor or the beneficiaries, is taxed in the trust's compressed income tax brackets. Further, although living trusts are effective in helping a client avoid probate, unless all titled assets are re-titled or originally titled in the name of the trust, this goal may not be achieved.

Product Strategy 5: Establish an A-B Trust Arrangement for Clients with a High Net Worth

Advantage: An A-B trust arrangement is another name for a strategy using a credit shelter bypass trust with a marital deduction trust. This technique can save a high net worth family substantial amounts of estate tax if properly implemented. In effect, this strategy guarantees that both spouses will maximize use of their estate tax unified credit applicable exclusion amount, which is $2 million each (in 2008). This strategy may also be an effective way to guarantee that a surviving spouse receives annual income, but avoids some of the pitfalls of asset ownership; with the remaining assets going to ultimate beneficiaries upon the death of the surviving spouse.

In this arrangement, the marital trust--the A Trust--is established at the same time as the bypass trust--the B Trust--is created. The marital trust is typically funded with all of the assets in excess of the estate tax unified credit applicable exclusion amount using the unlimited marital deduction. The marital trust is usely either a power of appointment or a QTIP trust. In either of these types of trust, the surviving spouse must be given an income interest in the trust. In the power of appointment trust, the sposue must also be given a general power of appointment over the trust assets. As a result, marital trust assets are generally included in the surviving spouse's gross estate. For this reason, a bypass trust is also established that is funded with assets protected by the unified credit of the first spouse to die. The bypass trust assures that the first spouse does not lose use of his or her estate tax unified credit; but the trust bypasses the surviving spouse's estate.

Disadvantage: This strategy has some disadvantages. First, establishing the trust agreements requires that all other estate planning documents be revised, including the "evening-out" of assets through re-titling. (Remember: jointly held assets pass via property laws.) Re-titling could result in a sizeable upfront cost in both time and money for clients. This makes the strategy less attractive for clients whose combined assets are not, or will not be, greater than the estate tax unified credit applicable exclusion amount in the future. Second, the irrevocable nature of the bypass trust means that the surviving spouse, generally, can only access income generated from assets, which may limit the spouse's level of living if the assets fail to generate adequate income in the future.

Product Strategy 6: Decrease Estate Tax Liability and Generate Income through Use of a CRAT, CRUT, or Pooled Income Fund

Advantage: This estate planning process is designed to benefit charity, while enhancing a client's financial situation. If proper gift planning is conducted and ultimately implemented, it may be possible to accomplish several distinct goals simultaneously. First, income tax liability can be reduced. The amount of the income tax charitable deduction is affected by the type and use of the asset given. Second, gift and estate taxes can be reduced. Third, benefits can be provided to charitable organizations. Fourth, giving can provide a feeling of good will to the donor.

Charitable giving involves providing gifts of money, income, and assets to charitable organizations. In order to qualify for a charitable donation, a client must give assets to a recognized charity in the U.S., a U.S. territory, or a political subdivision. Nonprofit organizations include most religious, scientific, and charitable organizations, some fraternal societies and associations, and certain veterans' associations and organizations. To receive a tax deduction and to exclude assets from an estate, the client should consider outright gifts, as well as using one or more of the following trust arrangements: a Charitable Remainder Annuity Trust, a Charitable Remainder Unitrust, a Pooled Income Fund, or a Charitable Lead Trust.

When a client contributes to a Charitable Remainder Annuity Trust (CRAT), the noncharitable beneficiary generally receives each year a fixed annuity payment equal to or greater than five percent, but not more than 50 percent, of the initial net fair market value of the trust. The benefit may be structured as an annuity for life or a term certain. Once established, no additional contributions can be made to the CRAT. At the end of the term, the remainder goes to charity.

A Charitable Remainder Unitrust Trust (CRUT) is similar to a CRAT, but fundamentally different in the way in which payments are made to the beneficiary. The noncharitable beneficiary generally receives each year a payment equal to a fixed percentage, between 5 percent and 50 percent, of the assets held in the trust as revalued on an annual basis. The benefit may be structured as a unitrust for life or a term certain. In some instances, payments are set at the lower of the unitrust amount or trust income, with or without a make-up provision. This means that distributions can be limited to earnings, and there is no requirement to use principal to pay beneficiaries. Further, additional donations are allowed into a CRUT. At the end of the term, the remainder goes to charity.

A Pooled Income Fund (PIF) is a charitable device created and maintained by a charity. The donor makes an irrevocable gift that is pooled with similar gifts from other donors. The co-mingled assets are managed by the charity, and payments based on the income earned by the account are made to beneficiaries on a pro-rata basis for life. At the end of the term, the remainder goes to charity.

Disadvantage: Gifts made to charitable organizations are irrevocable. There is also the possibility that payments from these trusts will not keep pace with inflation over time. Since a unitrust is a variable annuity, a CRUT may provide a hedge against this.

Product Strategy 7: Establish a Donor Advised Charitable Fund

Advantage: A donor advised fund is an irrevocable account established by a custodian to accept, manage, and distribute donations to a client's selected charities. The donor, while losing access to the assets for personal use, controls which charity receives a donation, when the donation will be made, how often the donation will be granted, and how much will be distributed. While distributions cannot be used for pledges, private benefit, or political contributions, any legitimate charitable activity can receive benefits from a donor advised fund.

The primary advantage associated with establishing a donor advised charitable fund is that while contributions are irrevocable, the client retains control over the timing and amount of annual distributions to a charity. Furthermore, the client can generally determine which charity will receive distributions. This choice can change yearly, so that if a charitable organization sways from the client's objectives for giving, a different charity can be chosen in future years.

There are tax advantages as well. Just like a regular charitable contribution, assets transferred to a donor advised fund reduce a client's gross estate. Gifts of appreciated stock offer the added benefit to the donor of avoiding the capital gains on the appreciation. A portion of contributions may also be used to reduce federal income tax liability through an itemized deduction.

Disadvantage: Several disadvantages are associated with this strategy. First, the number of donor advised charitable fund providers is relatively limited, although financial services providers like Charles Schwab, Fidelity, and Vanguard offer them. Second, the costs associated with funds can be quite high--2% to 5% in fees annually, but more reasonable than establishing a private foundation. Third, unlike with CRATs, CRUTs, and PIFs, the donor cannot retain the right to receive payments.

Product Strategy 8: Decrease the Gross Estate by Contributing to a 529 Plan

Advantage: This strategy works well when a client's objective is to concurrently help save for a child or grandchild's education, while reducing his or her own estate tax liability. A single client can contribute up to five year's worth of annual exclusion gifts to a 529 Plan for a beneficiary in any given year (once every five years) gift tax free. Making five year's worth of contributions in one year, a married couple can contribute $120,000 on a tax-free basis (2 x 5 x $12,000 gift tax annual exclusion) per child in 2008.

Disadvantage: Clients who use this strategy need to remember that if they elect to contribute the maximum amount allowable in a given year, they generally cannot make another tax-free contribution for five years. Further, the client will be required to file a gift-tax return at the time of the contribution to account for the gift.

Product Strategy 9: Establish Qualified Personal Residence Trust (QPRT) or Grantor Retained Annuity Trust (GRAT) to Reduce Estate Liability

Advantage: A Qualified Personal Residence Trust (QPRT) is designed to hold a client's home for later transfer to an heir. QPRTs are used by clients who would like to reduce the value of their gross estate in the future but still retain the right to live in their house, which may be their single greatest asset. If the client outlives the term of the trust, the property is transferred to the beneficiary. At that point, the client can generally continue to live in the property by agreeing to pay rent (based on an independent appraiser's fair market value rental) to the new property owner. If the client should die prior to termination of the trust, the full value of the home's value will be included in the client's gross estate.

A Grantor Retained Annuity Trust (GRAT) is similar to a QPRT, but instead of holding a personal residence, the trust holds other assets, such as stocks, bonds, mutual funds, and income producing real estate. The trust makes annuity payments to the grantor for a certain number of years. At the trust's termination, the assets are transferred to the trust's beneficiaries.

QPRTs and GRATs can be effective tools for reducing a client's gross estate while providing the client with immediate access to housing or an annuity stream. Implementing this strategy allows a client to potentially remove a rapidly appreciating personal residence or other assets from the client's estate, if the client can outlive the term of the trust.

Disadvantage: There are several disadvantages associated with this strategy. The trust is generally includable in the grantor's gross estate if if the grantor dies during the trust term. Although the value of the property can be excluded from the gross estate if the grantor survives the trust term, the client may owe a gift tax on the present value of the remainder in the QPRT or GRAT. The shorter the term of the trust, the higher the potential gift tax will be. However, the longer the term, the more likely that the client may not outlive the trust term, which would defeat the purpose of the strategy.

Even though the client's personal residence is owned by a QPRT, it is the client's responsibility to pay all expenses related to upkeep, insurance, and taxes on the property. Also, if the client should outlive the duration of a QPRT, the client would need to negotiate with the owners of the property to continue living in the house.

Product Strategy 10: Establish Family Limited Partnership

Advantage: A Family Limited Partnership (FLP) is a tool that can be used by high net worth business owner clients to reduce estate tax liability, decrease income tax liability, and transfer ownership of a business to relatives over time. In its most simple form, a client establishes a limited partnership, keeping the general partnership interest in it, as well as some limited partnership interests. This allows the client to retain control over the day-to-day activities of the business. Initially, some limited partnership interests may be given or sold to family members. Over time, the client gives interests in the limited partnership to children, grandchildren, and other family member.

As income is generated in the business, the limited partners report their share of earnings. This may help the client reduce current tax liabilities. However, unearned income of a child under age 19 (24 if a full-time student) is generally taxable to the child at the parent's marginal tax rate.

Over time, however, the real advantage to this technique is that it may be possible to transfer ownership of a privately held firm from one generation to another on a tax-free basis, using a combination of the gift tax annual exclusion and the unified credit. Furthermore, valuation discounts are often available for transfers of minority interests and for lack of marketability.

Disadvantage: There are some key disadvantages associated with this strategy. First, even though a partnership can be established with relatively little up front costs, the actual partnership document needs to be thorough and the parties need to continually follow partnership formalities in order to obtain tax benefits. Second, ongoing costs can become high due to accounting issues. Third, by establishing a partnership, the client may be taking on general liability for family members that the client might not otherwise want. Fourth, a gift tax may apply if future partnership gifts exceed the annual exclusion. Finally, implementing this strategy may result in a higher probability of being audited.

Product Strategy 11: Use an Irrevocable Life Insurance Trust to Reduce Gross Estate

Advantage: In many respects, an Irrevocable Life Insurance Trust (ILIT) strategy can be one of the best ways to remove a high value asset from a client's gross estate. Using this strategy, a client would transfer an existing life insurance policy to the trust. Premiums could then be funded using the gift tax annual exclusion. Assuming the grantor-insured lives for more than three years after the gift, this has the advantage of removing the life insurance policy and allowing further estate reduction by using annual gifts to fund premium payments. Of course, if the trustee purchases the policy on the client's life using trust assets, the insured never has an incident of ownership and there is much greater assurance the policy proceeds will be estate tax excludable.

Disadvantage: A significant disadvantage associated with this strategy is that the transfer of ownership in a life insurance policy is considered a gift. If the value of the gift exceeds or for some reason does not qualify for the gift tax annual exclusion, the client may have to use up some or all of his or her unified credit and, perhaps, owe gift tax. Another disadvantage is that the cost of establishing and maintaining an ILIT will to some extent offset the tax benefits gained.

Product Strategy 12: Establish a QTIP Trust When Applicable

Advantage: A QTIP Trust is often used to obtain a marital deduction for Qualified Terminable Interest Property (QTIP). These types of trusts are useful in cases of divorced individuals with children entering a remarriage, or when a wealthy spouse wants to ensure adequate income for the surviving spouse but wishes to be sure that, at the spouse's death, assets remaining in the trust will pass to the wealthy spouse's children. Several rules apply to the use of QTIP trusts:

1. The surviving spouse must be given the right to all income from the trust (paid at least annually).

2. No one can be given the right to direct that the property will go to anyone else as long as the surviving spouse is alive.

If these rules are met, the assets passing to the trust become eligible for the marital deduction. Property that remains in the trust after the surviving spouse's death then goes to the beneficiary originally named by the donor or decedent.

Disadvantage: Like any marital deduction trust, a QTIP trust is subject to estate tax at the surviving spouse's death.

Procedural Strategy 1: Use Annual Gifts to Reduce Gross Estate

Advantage: One of the most effective ways to decrease a client's gross estate involves taking full advantage of the $12,000 (in 2008) gift tax annual exclusion per donee. Using this strategy, a client can give up to $12,000 per year gift tax free to as many individuals (related or not) as the client desires. Married couples can double that and give up to $24,000 per year to each donee gift tax free. It is possible to reduce an estate substantially over time simply by systematically making gifts to one or more persons.

Disadvantage: The primary disadvantage associated with this strategy is that, once the gift has been made, the transfer is irrevocable. Further, gifts to others cannot be used to generate income for the donor. Gifts over $12,000 (in 2008) may use up unified credit or subject the donor to gift taxation.

Procedural Strategy 2: Increase Charitable Giving to Reduce Estate Tax

Advantage: Lifetime charitable giving provides clients with three primary advantages. First, gifts typically can be deducted, at least in part, as an itemized deduction for federal income tax purposes. Second, the full value of gifts made to qualified charities reduces a client's gross estate, which can reduce tax liability. Third, if established through a CRAT, CRUT, or PIF, charitable gifts can also provide lifetime payments to, for example, the donor and the donor's spouse.

Disadvantage: Like all giving strategies, donating assets to charities results in the loss of use of the assets.

Procedural Strategy 3: Make Gifts to Custodial Accounts (UGMA/UTMA)

Advantage: State laws for custodian accounts are titled either as a Uniform Gifts to Minors Act (UGMA) or a Uniform Transfers to Minors Act (UTMA). If UGMA/UTMA is used, an adult must be named as the custodian for the account. When the child reaches the age of majority, which is typically age 18 or 21 depending on the state of the child's residence, the assets become the full property of the young person.

There are certain tax advantages associated with using UGMA/UTMA. First, the donor's gross estate can generally be reduced through the use of annual gifts. Second, income-producing assets can be shifted to children and grandchildren in a way that possibly reduces the total amount of income taxes paid. Gifts to custodial accounts qualify for the annual exclusion for both gift tax and generation-skipping transfer tax purposes.

Disadvantage: Several disadvantages are associated with this strategy. To begin with, all gifts to custodial accounts are irrevocable, and upon the child's age of majority--typically age 18 or 21--the assets become the sole property of the child. Unearned income of a child under age 19 (24 if a full-time student) is generally taxable to the child at the parent's marginal tax rate. The loss of property use and the inability to guarantee that assets will be used for a specific purpose make this strategy problematic for some clients.

Procedural Strategy 4: Make Gifts to Section 2503(b) or 2503(c) Trusts for Minor Child

Advantage: Certain trusts can be used to transfer assets to minor children and grandchildren using the gift tax annual exclusion.

A Section 2503(b) trust generally requires the income from assets held in the trust be distributed for the child's benefit on at least an annual basis. However, the principal does not need to be distributed at the age of majority.

A Section 2503(c) trust allows all income to grow within the trust, but distribution of trust assets must generally occur at the child's age of majority. A Section 2503(c) trust is similar to UGMA/UTMA in this respect, but different in that a clause can be inserted into the trust document giving the child a right to demand distribution from the trust for a limited period of time upon reaching the age of majority. If the distribution is not requested within this time period, the trust can continue into later years. Unlike a gift under UGMA/UTMA, the property can remain within the trust beyond the child's age of majority.

Disadvantage: The donor no longer has the asset or the income from the asset available. If a Section 2503(b) trust is used, income generated within the trust must be distributed on at least an annul basis to the child.

Procedural Strategy 5: Adding Co-Owners to Accounts

Advantage: Many times clients feel an emotional obligation to add family members to accounts. If it is desired to have the account pass automatically at death, clients should consider using a payable on death (POD) or transfer on death (TOD) account. A POD is used for bank accounts, while a TOD is used for security titling. Clients are sometimes tempted to use forms of co-ownership as a way to avoid probate.

Disadvantage: While adding a spouse, child, or other person as a co-owner to property may sound like an attractive strategy initially, the long-term ramifications of this strategy may be quite negative. For example, co-owning all assets with a spouse almost guarantees that assets will transfer directly to the spouse through the unlimited marital deduction. This may have the impact of overqualifying the spouse's estate for the marital deduction, resulting in more federal estate tax due at the surviving spouse's death than might otherwise have been the case. Adding a co-owner other than a spouse to property may result in gift tax. Further, co-owners may lose the ability to receive a full step-up in basis on co-owned property.

Procedural Strategy 6: Make Complete and Appropriate Use of Property Transfer Law by Using Beneficiary Designations

Advantage: One of the simplest ways to reduce probate fees and retain client privacy is to ensure that all financial assets have designated beneficiaries and contingent beneficiaries, and that these designations are kept up-to-date. Changes precipitated by a death, divorce, or other personal situation should not be overlooked.

Disadvantage: Like many other estate planning issues, beneficiary designations require clients to face their mortality and make choices. Too often, no designation is made or "payable to the estate" is chosen by default.

Procedural Strategy 7: Make Sure Everyone is Informed

Advantage: The client can choose a guardian for children or the executor for a will. Clients are well-served by advisors who help them to carefully consider the potential family conflicts, conflicts of interest, or qualifications required for these appointments. Individuals chosen must fully understand and accept the responsibilities inherent in these roles. Sometimes, clients avoid drafting a will because it requires that these decisions be made. An additional benefit of this strategy is to facilitate communication between spouses and partners about the financial affairs and plans for the estate.

Informing everyone also extends to medical providers and other family or household members who should be fully informed of a client's end-of-life preferences and decisions. For example, copies of the living will, advanced medical directive, or medical power of attorney should be distributed with medical, financial and legal professionals, as well as the spouse, partner, or family.

Disadvantage: Emotional distress and perhaps a loss of privacy are the primary disadvantages of this strategy. Although these family discussions may be uncomfortable, it is critical that guardians and executors are informed of the choice and are willing to serve. Furthermore, it will be important for them to understand the financial obligations of these appointments. Certainly any preliminary distress will be less traumatic than disclosing this information after the death of the client, or failing to appoint anyone so that court involvement would be necessary.

Chapter-Based Case Study

A Client-Based Estate Planning Recommendation Example

The estate planning analysis is integrative with other plan components. Some might argue that estate planning is the most integrative section within a comprehensive financial plan. For example, to calculate a client's potential estate tax liability, it may be necessary to review the cash flow and net worth statements. This can suggest another need, the availability of liquid assets for meeting immediate expenses for the decedent or survivors until insurance proceeds or other assets are available. Income tax issues also play a part in the estate planning analysis. The tax basis of certain assets, and the potential capital gains associated with the sale or purchase of other assets, must be taken into account when making recommendations for lifetime gifts and transfers at death.

The integration of life insurance planning and estate planning is typically recognized, but some of the details of that relationship may be less obvious. Life insurance certainly plays a role in the estate planning process, especially as it pertains to who should own the policy and who should be the beneficiary. If a client owns a significantly large life insurance policy, the use of an ILIT may be appropriate, especially if the client's estate is estimated to exceed the estate tax unified credit applicable exclusion amount. Having the client's spouse own the policy will generally result in the proceeds being includable in such spouse's gross estate.

An overriding concern of life insurance--beyond the obvious monetary benefit--should be that the life insurance proceeds do not create undue distribution hardship and estate or income tax consequences. The most efficient and effective method to control for these issues is ensuring that the appropriate beneficiaries are named and that the policy is owned by the most appropriate person or entity, regardless of whether or not that is a trust. Any incident of ownership by the decedent/insured could cause the proceeds of the policy to be included in the estate. If the life insurance proceeds become an asset of the estate, the same life insurance that was purchased to increase estate liquidity or to pay for estate taxes, may instead increase the very estate taxes the proceeds were meant to pay.

If having the spouse or insured as owner or beneficiary, respectively, may under certain circumstances create estate planning problems, what about the children? Children are another possibility, but with a new set of potential problems. To be named as a primary beneficiary, the child must generally be over 18 and mentally and emotionally competent to handle large financial decisions. In addition, naming a third-party as beneficiary, who is not a party to the contract (e.g., insured or owner) and who is not the owner's/insured's spouse could trigger unintended gift tax consequences. For example, a husband who purchases a life insurance policy on his wife, but names the two children as the beneficiaries, is in essence making a gift to the children in the face amount of the policy upon the death of his wife. An additional complication is that if the husband transfers ownership of that policy to his children within three years of his death, then the life insurance proceeds could be included in his estate.

In summary, while there are many possibilities for who should own or be the beneficiary of life insurance policies when estate taxes are of no consequence, there are fewer good choices if taxes are an issue. Therefore, establishing a trust to serve as either the owner or the beneficiary of a life insurance policy could make the estate transfer a much smoother process.

A well developed estate plan must reflect the integration of multiple planning areas and keep pace with the changing legislative environment. This requires periodic review and update. But the long-term impact can benefit multiple generations of the client's family or other social causes.

A Sample Recommendation: A Multifaceted Gift Technique

The following example shows how Sarah, a comprehensive financial planner, moved from strategy development to recommendation formation when working with a client named Kevin Gray. At the time, Kevin was a 56 year old single man living in Virginia. Kevin was referred to Sarah by a long-time client. When they began working together, Sarah told Kevin that she only worked with clients on a comprehensive basis. She also indicated that while she was not an attorney, and could not draft legal documents, she would review his estate situation and make recommendations where she felt it was appropriate.

Several months ago, Sarah had Kevin complete a client data gathering questionnaire. She used data from the questionnaire, in combination with information obtained through personal interviews with Kevin, to calculate Kevin's level of discretionary cash flow, his net worth, and his tax situation. She also used information given by Kevin to formalize his short- and long-term goals. It was only after all of this work had been completed that Sarah turned her attention to her favorite topic--estate planning.

Sarah reviewed her notes taken during previous meetings with Kevin. She knew that Kevin had a strong desire to help his alma mater, church, and family members financially, both while he was alive and after his death. She knew that Kevin had a current net worth of $2.7 million, and that his assets should continue to grow over the next 20 to 30 years. Kevin was in the 25% marginal tax bracket, had positive monthly cash flow, and was confident that he could afford to contribute up to $15,000 per year to charities and family members. Each contribution would consist primarily of cash generated from asset sales. Sarah knew that, based on Kevin's asset base and current occupation, he did not need additional income, either today or while retired.

In terms of estate planning issues, Kevin had conflicting goals and concerns. He wanted to reduce his current taxable income, while keeping an eye on estate tax reduction. He also valued education, and wanted to provide a scholarship fund to his alma mater. Several years ago, he had approached the university about making a donation, but was not pleased with how the foundation office had treated him. Since that time, Kevin had become skeptical about making an irrevocable gift to an institution that might mismanage the assets.

Sarah knew that Kevin needed guidance on several estate planning issues. Intuitively, she began to work through a process of strategy identification and recommendation development. She determined that Kevin needed to update his will and letter of last instructions. He also needed a living will, power of attorney, and a medical directive. She also believed that, given his marital status and net worth level, he needed a living trust. She made a note of approximate costs associated with each recommendation, and concluded that, if he used one attorney to draft all of the documents, the cost would be less than $2,000.

To Sarah, these recommendations were basic and prudent. What really concerned her was that Kevin's gross estate was significantly higher than the estate tax unified credit applicable exclusion amount. If the tax law was not changed by 2011, Sarah knew that Kevin's estate would be subject to a sizable tax bite that would limit his ability to maximize his estate planning goals. Her training, experience, and knowledge suggested that a gift plan recommendation would be the ideal way to reduce taxes on his estate, increase cash flow through the use of charitable tax deductions, and maximize transfers to charities and family members.

Sarah initially considered several gift strategies. Sarah knew that at a very basic level, Kevin could begin to give assets away to noncharitable beneficiaries, such as family members. If the gifts were less than the gift tax annual exclusion, no gift tax would be due. If Kevin needed to receive an immediate income tax charitable deduction for a gift and also receive lifetime payments, charitable giving alternatives, such as CRATs, CRUTs, and PIFs, would tend to make more sense. If, on the other hand, Kevin had a desire to play an active role in determining which charities received funding on an annual basis, and if he was willing to forego payments from a trust, establishing a donor advised fund might be an appropriate recommendation. Based on her experience, she also realized that it was possible and likely, that more than one gift strategy could be used in her final recommendation.

Sarah now faced a decision, namely: which of the gift strategies should she recommend to Kevin? She began the procedure of narrowing down the strategies by reviewing Kevin's goals and temperament. She knew that while Kevin would like to receive an income tax deduction for any gifts made, he did not really need income from the gift. Unless there was no other alternative, Sarah felt that using an income producing gift strategy would not be appropriate. This helped her eliminate the use of a charitable remainder annuity trust, charitable remainder unitrust, and pooled income fund from the list of potential strategies. It occurred to her that Kevin could combine gifts to a donor advised fund with annual gifts to family members.

Before making this recommendation, Sarah decided to compare the combined strategy of using a donor advised fund with annual gifts to each strategy separately. She knew that Kevin would face set-up and administrative costs with any strategy, but she wanted to document these before making a final decision. Sarah's calculations are summarized in the table below.

Sarah's calculations showed that the costs associated with each strategy were reasonable. In fact, making a contribution to a charity or to a donor advised fund provided a tax benefit that offset any costs associated with managing assets. Sarah ruled out recommending that Kevin give his family $15,000 per year. In that alternative, Kevin would not receive an income tax charitable deduction. She also decided against making direct charitable contributions even though the total value of the gift was the highest of the four solutions. She believed that Kevin would be unlikely to implement this recommendation because of his growing distrust about the management of assets held by charities.

Her final recommendation came down to a choice between a 100% contribution to a donor advised fund and a split contribution to a donor advised fund and family members. The donor advised fund strategy offered a reduction in Kevin's gross estate, an immediate tax deduction for contributions made to the fund, and the ability to manage distributions from the fund. Kevin could use contributions and earnings held inside the fund as gifts to one or more charities in a given year. If, at some point in the future, a charity dropped out of Kevin's favor, he could change the amount donated to the charity. The ability to control the assets, while maximizing tax benefits, made this strategy very attractive. Sarah also liked the fact that she could manage the assets held in the account for Kevin.

Sarah opted to recommend the combination strategy. The fact that Kevin wanted to help his family by giving them financial gifts on a yearly basis made the combination strategy the most appropriate, in her opinion, for Kevin. Her only question, at this point in the recommendation process, involved the percent of Kevin's annual $15,000 gift that should go to the donor advised fund versus his family. Sarah had originally thought that a $10,000/$5,000 split between the fund and the nephew would be optimal, but she was not sure how Kevin would feel about the allocation. So, she decided to recommend this split to Kevin and allow him to alter the recommendation if needed. Sarah felt that the best way to help Kevin understand the basic components of the recommendation was to review questions related to implementation. She used a recommendation form to summarize the recommendation. An example of how Sarah completed the form is shown in Figure 13.4.

Additional Resources

Leimberg et al, Tools & Techniques of Estate Planning, 14th Edition (Cincinnati, OH: National Underwriter Company, 2006).

Cady, Field Guide to Estate, Employee, & Business Planning, published annually (Cincinnati, OH: National Underwriter Company).

Quantitative / Analytical Mini-Case Problems

1. Sandomir and Rasia Kolbe, ages 58 and 57 respectively, and their three grown children recently attended his father's funeral in Poland. They realized that they do not know if their estate will have any federal estate tax consequences, nor do they have any legal documentation that would support end-of-life medical or financial decisions. So, upon returning home, Rasia called her mother for a recommendation on financial professionals to interview. Her mother suggested an attorney for the legal documents and her own financial planner for the other estate planning needs. Assume all family members are U.S. citizens.

Based on the Kolbes' financial information, the lawyer and the financial planner jointly made these recommendations.

Recommendation 1: Establish testamentary trusts for both Sandomir and Rasia.

Recommendation 2: Retitle assets in preparation of funding trusts.

Recommendation 3: Transfer life insurance ownership to the three children.

To assist the Kolbes in their estate planning, answer the following questions.

a. What type of trust(s) might be recommended in keeping with the clients desires of minimizing estate taxes, maximizing privacy, and easing ownership transfer?

b. How might the assets be retitled to ensure that all trusts can be adequately funded?

c. What are some of the challenges with transferring ownership of the insurance policies to the children? What are some of the problems with the current life insurance designations? What other strategies could also be considered for alleviating any potential estate, gift, or income tax issues?

d. Besides completing wills and trust documents, what other legal documents should the Kolbes consider?

2. Assume the following estate planning information for a client and spouse.
                             Client      Spouse   Joint *

Assets                    3,000,000   1,200,000   500,000
Debts                                             100,000
Funeral                      20,000      20,000
Estate Administration        20,000      20,000
Charitable Contribution      20,000      20,000
Marital Plan                    A-B         A-B

* Jointly owned with rights of survivorship between client and spouse


a. With an A-B plan that eliminates estate tax at the first death, how much should the credit shelter bypass trust be funded with and how much should the marital trust be funded with if the client dies first in 2008?

b. With an A-B plan that eliminates estate tax at the first death, how much should the credit shelter bypass trust be funded with and how much should the marital trust be funded with if the spouse dies first in 2008?

Comprehensive Bedo Case--Analysis Questions

Before beginning the estate planning analysis for the Bedos, it will be important to review case details related to asset ownership, liabilities, and other assumptions, including estate tax growth rates. A review of the household net worth statement will help with the gross estate calculation for both Tyler and Mia. The effect of state taxes paid should be ignored for purposes of the case narrative.

An assumption must be made as to who will predecease whom. It is typical to assume that the primary breadwinner of the household dies first. In this case, this would mean that Tyler predeceases Mia.

Tyler's gross estate would, therefore, include one-half of all jointly held property, plus the fair market value of any other personally owned assets, including life insurance. Funeral and administrative expenses and debts should be deducted to arrive at Tyler's adjusted gross estate. For this purpose, debt is limited to a lien, mortgage, or other form of debt that is attached to assets included in the estate. Tyler's taxable estate should then be calculated. The use of the unlimited marital deduction ought to be considered in the initial analysis.

A similar analysis should be conducted for Mia. It is possible that upon Mia's death there may be federal estate tax due.

Use the following questions to guide you through the estate planning process.

1. Develop an estate planning goal for the Bedos. When conceptualizing this goal, consider the following.

a. Is the goal developed in agreement with any or all goals and objectives that the clients have identified regarding estate planning?

b. What situational factors might influence their estate planning goals? Are these factors explicit, implied, or assumed? Is additional information required from the Bedos?

c. Identify life events that may impact the estate planning analysis for Tyler and Mia and should be reviewed at future client meetings.

d. What is the desired outcome for the clients?

2. Develop a list of globally accepted, client specific, or planner generated planning assumptions that will structure the estate planning situation analysis.

3. Using the Financial Facilitator, calculate the following scenarios for the Bedo household as a part of the analysis of their current estate planning situation. For each scenario, ignore any applicable state estate taxes.

a. Scenario One. The amount of federal estate tax due if Tyler were to predecease Mia and they both died in 2008.

b. Scenario Two. The amount of federal estate tax due if Mia were to predecease Tyler and they both died in 2008.

c. Scenario Three. The amount of federal estate tax due if Tyler were to predecease Mia and they both died in 2011.

4. Evaluate and comment upon the following:

a. The appropriateness of Tyler's current will.

b. The appropriateness of Mia's current will.

c. Given their current situation, what other estate planning documents should the Bedos have in place?

5. A planner's observations and results from analyses may be communicated through a letter or a comprehensive or a modular plan. Using some combination of text, bullets, or graphics, summarize your observations about the estate planning situation and the identified planning need(s) for the Bedo household.

6. Based on the goals originally identified and the completed analysis, what product or procedural strategies might be most useful to improve the estate planning situation for the Bedos? Be sure to consider strategies matched to the planning needs identified for each member of the household. When reviewing the strategies, be careful to consider an approximate cost of implementation, as well as the most likely outcome(s) associated with each strategy.

7. Write at least one primary and one alternative recommendation from selected strategies in response to each identified planning need. More than one recommendation may be needed to address all of the planning needs. Include specific, defensible answers to the who, what, when, where, why, how, and how much implementation questions for each recommendation.

a. It is suggested that each recommendation be summarized in a Recommendation Form.

b. Assign a priority to each recommendation based on the likelihood of meeting client goals and desired outcomes. This priority will be important when recommendations from other core planning content areas are considered relative to the available discretionary funds for subsidizing all recommendations.

c. What considerations should be taken into account when naming beneficiaries to any new life insurance policies for the Bedos?

d. Comment briefly on the outcomes associated with each recommendation.

8. Complete the following for the Estate Planning section of the Bedos' financial plan.

a. Outline the content to be included in this section of the plan. Given the segments written above, what segments are missing? What disclaimers, if any, may be important to include in this section of the plan?

b. Draft an introduction to this section of the plan (no more than 1 paragraph).

c. Identify at least five terms, concepts, or planning strategies that may be included in this section of the plan. For each, write a definition or explanation that would be helpful to the typical client with limited knowledge of estate planning.
            Estate Tax Unified Credit
Year        Unified Credit              Applicable Exclusion

2006-2008          $780,800                 $2,000,000
2009             $1,455,800                 $3,500,000
2010                     NA                 NA
2011               $345,800                 $1,000,000

Top Estate, Gift, and GST Tax Rate

2007-2009   45%
2010        35% *
2011        55%

* Gift tax only

Sarah's Notes for Estimating Strategy Costs

Calculation          Annual Gift   Donor Advised Fund

Cost of              $0            $300; Sarah estimated
Contribution                       that management
                                   fees would average
                                   2% of total
                                   contributions per year.

Percent of           100%          98%
Contribution
Used for Gift
Purpose

Estimated            $0            $3,750
Income Tax                         ($15,000 x 25%)
Benefit (at a 25%
marginal tax rate)

Total Value of Gift  $15,000       $18,450

                      Charitable   Donor Advised Fund +
Calculation           Gift         Annual Gift

Cost of               $0           $200; Based on $10,000
Contribution                       gift to donor advised fund,
                                   charging 2% of contributions
                                   per year. Plus $5,000
                                   gift to family members

Percent of            100%         99%
Contribution
Used for Gift
Purpose

Estimated             $3,750       $2,500
Income Tax            ($15,000 x   ($10,000 x 25%)
Benefit (at a 25%     25%)
marginal tax rate)

Total Value of Gift   $18,750      $17,300

Current Division of Assets

Assets                                     Total   Sandomir

Cash and savings                         $83,500     $4,500
Securities and annuities (non-qual)      625,000          0
Securities and annuities (qualified)      55,000          0
Retirement plans                         605,000    425,000
Automobiles                              105,000          0
Personal property                        150,000          0
Residence                                500,000          0
Other real estate                        350,000          0
Business interests                       225,000          0
Life insurance (see next table)          164,000     84,000

Total Assets                           2,862,500    513,500

Assets                                   Rasia       Joint

Cash and savings                        $7,000     $72,000
Securities and annuities (non-qual)          0     625,000
Securities and annuities (qualified)    55,000           0
Retirement plans                       180,000           0
Automobiles                                  0     105,000
Personal property                            0     150,000
Residence                                    0     500,000
Other real estate                            0     350,000
Business interests                     225,000           0
Life insurance (see next table)         80,000           0
Total Assets                           547,000   1,802,000

                          Current Life Insurance Information

                          Face Value   Cash Value     Owner

Life Policy # 1 (Term)     $220,000           $0    Employer
Life Policy # 2 (Whole)     250,000       45,000    Sandomir
Life Policy # 3 (Whole)     150,000       30,000       Rasia
Life Policy # 4 (Term)       20,000            0       Rasia
Life Policy # 5 (VUL)       300,000       50,000       Rasia
Life Policy # 6 (Whole)      50,000        9,000    Sandomir
Life Policy # 7 (Whole)     150,000       30,000    Sandomir

Total Life Insurance      1,140,000      164,000

                           Insured   Beneficiary

Life Policy # 1 (Term)    Sandomir    Sandomir
Life Policy # 2 (Whole)   Sandomir       Rasia
Life Policy # 3 (Whole)   Sandomir    Children
Life Policy # 4 (Term)       Rasia    Sandomir
Life Policy # 5 (VUL)        Rasia    Sandomir
Life Policy # 6 (Whole)      Rasia    Sandomir
Life Policy # 7 (Whole)      Rasia    Children

Total Life Insurance

Figure 13.2

Will and End-of-Life Documentation Checklist

Question                                                       Yes   No

1. Is the client's name correct?
2. Is the spouse's name correct?
3. Are the children's names and ages correct?
4. Is the executor properly named?
5. Is the guardian for dependent children named?
6. Is the guardian for dependent children appropriate?
7. Are special bequests adequately identified?
8. Are charitable bequests up-to-date and adequately
  identified?
9. Is the simultaneous death clause appropriate for the
  state of residence?
10. Are trust documents referred to in the will?
11. Does the client have a power of attorney in place?
12. Does the will refer to a particular trust if a trust
  exists?
13. Have special considerations been made for parents?
14. Have special considerations been made for siblings?
15. Have special considerations been made for grandchildren?
16. Are codicils up-to-date and accurate?
17. Has the client written a letter of last instructions?
18. Has the client drafted a living will?
19. Has the client drafted an advance medical directive?
20. Does the client have a medical power of attorney in
  place?
21. Does the client share time in different states? If so,
  are all documents appropriate?
22. Is there a current list of all financial professionals,
  including the estate attorney, available for the survivors
  or the executor?

Figure 13.4 Estate / Trust Recommendation Form

Planning Recommendation Form

Financial Planning Content Area   Estate and Gift Planning

Client Goal                       Provide Annual Gifts to Charities
                                  and Family

Recommendation #: 1               Priority (1 - 6)
                                  lowest to highest:   5
5

Projected/Target Value ($)        $15,000 per year

Product Profile

Type                              Donor Advised Fund and Annual Gift

Duration                          Yearly

Provider                          Donor Advised Fund: National
                                  Heritage Foundation

Funding Cost per Period ($)       $15,000

Maintenance Cost per Period ($)   2% of each contribution made to
                                  the fund, or approximately $200
                                  per year

Current Income Tax Status         Tax-Qualified   X   Taxable

Projected Rate of Return          Conservative

Major Policy Provisions           Once fund size reaches $10,000,
                                  assets may be actively managed. At
                                  that point, an annual management
                                  fee may apply.

Procedural Factors

Implementation by Whom            Planner   Client   X

Implementation Date or            Begin monthly contributions
Time Frame                        October 1st

Implementation Procedure          Our firm will prepare foundation
                                  documents to meet approval by the
                                  National Heritage Foundation; once
                                  the account is established, client
                                  may begin contributing to the
                                  fund; distributions from the fund
                                  may only be made to charitable
                                  entities as approved by the IRS.
                                  Gifts to the client's nephew can
                                  begin whenever the client is
                                  comfortable doing so; the annual
                                  gift should not exceed $5,000.

Ownership Factors

Owner(s)                          At account set up, the donor
                                  advised fund becomes its own legal
                                  entity; sample name could be the
                                  Kevin Gray Foundation.

Form of Ownership                 Trust

Insured(s)                        NA

Custodial Account                 Yes   No   X

Custodian                         NA

In Trust For (ITF)                Yes   No   X

Transfer On Death (TOD)           Yes   No   X

Beneficiary(ies)                  Any charity approved by the IRS;
                                  family members through direct gifts

Contingent Beneficiary(ies)       NA

Proposed Benefit                  Contribution to the donor advised
                                  fund will result in an income tax
                                  deduction at the client's marginal
                                  tax rate(s); all gifts, including
                                  those to the nephew will result in
                                  a reduced gross estate.
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Publication:The Case Approach to Financial Planning
Date:Jan 1, 2008
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