Rich in America Secrets to Creating and Preserving Wealth PHẦN 9 doc

They had begun their estate planning many years agowith another advisor and appreciated the power of giving money totheir two children while they were still alive currently an individual

informed when they make these kinds of decisions Eventually, afterhearing about the difficulties that can occur with court-appointedguardians, he rethought his plan and made a sensible guardian selec-tion But he continued to refuse to leave his children any money.Another wealthy couple who came in to see us recently had a dif-ferent attitude They had begun their estate planning many years agowith another advisor and appreciated the power of giving money totheir two children while they were still alive (currently an individual maygive up to $11,000 and a couple may give up to $22,000 per recipienteach year without incurring a gift tax).

This couple couldn’t have been nicer and more considerate Theironly problem was that they had given away so much of their moneythat they now had to ask their kids to give some of it back It wasn’tthat they needed the money to live on because they had already takenthose expenses into consideration But this couple had established alifetime habit of donating to charity, and had come to realize thatthey no longer had enough money to continue giving as they wished.The situation was embarrassing for them, although their children—grateful for everything their parents had done for them—had noproblem with the request The couple just hadn’t thought throughtheir planning carefully enough to determine the cash flow they reallyneeded to give to charities in the manner to which they had grownaccustomed

The Importance of Estate Planning

As these stories illustrate, estate planning is the most subjective ofthe wealth management and financial planning disciplines Decisionsoften must be made without the benefit of empirically correct answersthat are available when balancing issues surrounding, say, incometaxes or retirement Think of all the personal questions that must beaddressed:

• Do I leave my assets outright to my spouse or in a trust? If Idon’t leave them in a trust, how do I know my spouse will leave

my assets to our children?

• At what age should my children receive their inheritance?Should it be in a trust or outright?

• Who should be my executor and trustee?

• Who should be the guardian of my minor children?

For estate planning to be successful, you must be able to answer theseand other difficult questions as you work with your estate planner todraw up a plan that is both sound and tax-efficient

As mentioned earlier, many people procrastinate when it comes tofinancial planning They procrastinate even more over estate planningbecause it’s uncomfortable to focus on death They’re involved in run-ning their lives, building their wealth, and advancing their careers Fewpeople look forward to taking the time out to discuss their mortality.But if you don’t attend to estate planning, all those assets you’ve spentyour life accumulating may wind up somewhere that might make youturn over in your grave

Good estate planning begins with a few dispassionate questionsasked from an appropriate distance Think of it as if you were standing

on top of a mountain, looking down on your life From this tive, ask yourself:

perspec-• What are my assets?

• Who are the objects of my affection?

• What are my goals and objectives?

Once you understand the answers to these three general questions, youcan work out the specifics of what else needs to be done If you can’tanswer them yourself, any good estate planner will sit down with you

and try to gain some insights into who you are, what you care about,and what your concerns are For example, are you philanthropic? Whattype of relationship do you have with your family? What do you thinkmoney should be used for? Your response to these subjective issues willhelp your estate planner home in on more concrete objectives.

Each family has distinct concerns that will affect its estate ning choices For instance, one of our clients, Ben, emigrated to theUnited States as an impoverished young man With the help of a gov-ernment agency he’d been able to set himself up in a small business;eventually, it grew to the point that Ben became a terrifically wealthyman He felt very indebted to the government for his success and as aresult, Ben didn’t think there was enough he could do for this country,and paying taxes was the least of it This sentiment had a powerfulimpact on his estate planning, because every time we showed him how

plan-to lessen his tax bite, he objected Ben did want plan-to make sure that hischildren and not the government received his business, but he didn’tcare how much they had to pay in taxes to get it

Then there was the case of Dolores, a single mother who had losther husband many years ago and never remarried She had two chil-dren, a son with whom she remained on good terms, and a daughter,Christina Dolores and Christina had fought many years earlier, andoutside of a frosty exchange of Christmas cards, they had barely anycontact Dolores was wealthy enough to leave a significant estate.She knew her son could handle the money well—he was a successfullawyer with a family of his own—but she was worried about Christina,who never had any money, and whose soft heart might make her aneasy mark once she inherited Dolores’ wealth

Dolores had never given her children as much as a penny So, aspart of her estate planning, we suggested that she should give herdaughter cash gifts to the maximum allowed, which at the timewas $10,000 a year This way she could see how Christina handled

it Dolores did as we asked, and she received a gracious thank-you

from her daughter Over the next decade Dolores continued to giveChristina the maximum allowable tax-free cash gift, and slowly, thetwo women began to establish an uneasy but constant relationship.Furthermore, Christina turned out to be quite smart about managingher newfound money.

Obviously, no boilerplate formula can take into account all tions like these Your life circumstances are as particular to you as yourfingerprints What do you want to do with your wealth? Other thanyour family, whom do you want to inherit your assets? IndustrialistPaul Mellon left several million dollars to his horses, as well as severalmillion more to his dogs

situa-To make sure your estate planning is complete, don’t just jot down

a general list of your assets Take a complete and specific inventory:your bank and investment accounts, insurance policies, company bene-fits, IRAs, tangible personal property, real estate, etc If you havealready begun this itemization process through financial planning, youcan use the same information you’ve already gathered This may soundeasy enough, but it requires work, and we’ve found that clients oftenencounter some difficulty pulling together all the data Furthermore,many clients simply don’t want to do it because they value their privacyand are loath to reveal their whole financial picture to anyone

You also need to decide who will be the recipient, or beneficiary, ofeach and every asset, and make sure that you have all your beneficiarydesignations completed and ready for review—your IRA, your life in-surance, your property ownership, and so on

You also should consider how you wish your instructions to beinterpreted Often, people really can’t anticipate precisely what thenext generations will, much less should, do with their inheritance.U.S Trust once administered a trust that provided for the beneficiary,Carola, to receive payments to provide for her “health, education, main-tenance and support.” At a certain point in her life, Carola wanted tobuild a small gymnasium in her basement so she could exercise more

often Funds for a gym weren’t expressly granted in the trust, but onemember of our staff had known the original family well, and it wasclear to him that the decedent’s intentions were such that she wouldapprove, so we obtained a letter from Carola’s doctor stating that itwould be to her medical benefit to have the gymnasium.

Such situations are why we recommend using the broadest sible language in wills, trusts, and the like If you make the languageflexible, you give the document the ability figuratively to live andbreathe over time The more restrictive you are about the way your

pos-Six Things You Must Know about Estate Planning

1. If you die without a will, state law will determine who willreceive your property, which may not be in accord with yourwishes

2. The marital deduction provides that you can transfer ited amounts of property to your spouse (providing he or she

unlim-is a U.S citizen) without incurring gift or estate tax at thetime of the transfer (see the sections on QTIP trusts in thischapter)

3. You may give a gift of up to $11,000 a year without incurring

gift tax This is known as the annual exclusion.

4. In 2003 (assuming you have not made any taxable transfersduring your lifetime), you can leave up to $1 million to per-sons other than your spouse without having to pay any fed-eral estate tax This amount will increase incrementally until

assets can be used, the greater the possibility that you will hamstringthe recipient Not that some people don’t have that exactly in mind—they make sure that their wishes will be remembered from the grave.We’ve seen wills that tell people whom they can or can’t marry, andafter whom they should name their children One man who felt hischildren weren’t serious enough about getting an education created aninheritance reward program hinged on how far the kids advanced inschool—they received so much money if they graduated from college,more for earning a professional degree, and even more if any of themobtained a Ph.D We had another client who didn’t seem to trust hisson, and in his will dictated every detail of how the inheritance could

be used, from where the son could buy a house to what kind of car hecould drive

Choosing an Executor

However large or small your estate, it’s important to make sure thatyou pick a responsible executor for your estate An executor has manyduties He or she must locate the will and make sure it is properly pro-bated, i.e., that the will is proven to be legally valid

Next, all the assets specified in the will must be collected andappraised Although some people keep meticulous records, makingtheir estates easy to compile, others have assets scattered all over theworld, some of which no one—not even the deceased—was ever aware

of (if you select a competent wealth manager and keep up with yourfinancial planning, that shouldn’t be a problem for you)

The role of executor can be a difficult one, particularly if he or shehas to dole out unpleasant or surprising news to unsuspecting heirs (orthose who thought they would be heirs, but aren’t) Occasionally, theexecutor may be given the rather odd job of telling the heirs detailsabout the deceased that may surprise or disappoint them We had aclient who was a Boston-area schoolteacher; his wife was an account-

ant Together they had one daughter, one dog, and one Chevrolet theydrove into the ground The family lived in a small home outside thecity, and seldom spent any money.

Isabelle, the daughter, grew up expecting little, although the ily had made sure she received an excellent education She then be-came a high school teacher, and a single mother when she and herhusband divorced not long after their baby was born Isabelle’s parentssent her a small sum of money now and then, and she made enough tosupport her child

fam-However, when the parents died, Isabelle learned the truth: Theyhad been excellent investors, and over the course of their lifetime hadaccumulated about $5 million Isabelle was thrilled to inherit such alarge amount of money But it seemed a slap in the face to learn this onlycourtesy of the executor, and wrestle with why her parents hadn’t beenmore generous to her or their granddaughter while they were alive.The executor may have to perform several other duties For exam-ple, it will take time for the deceased’s house to be sold or transferred,

so mortgage payments on the house must be continued Bills for water,heat, and electricity must be paid (unless you want to inventory thecontents in the dark) Insurance premiums must be kept current (incase the house is burgled before the division of assets is complete) Theexecutor will have to change the name of all of the decedant’s accounts

to estate accounts and open a bank account for the deceased’s estate sothat fees and payments are covered and there is a repository availablefor any money that may still come into the estate, such as dividends,bonuses, and salaries Finally, the executor is responsible for preparingthe decedent’s final income tax returns, preparing the estate tax returns,and paying all funeral expenses, debts, and administration expenses.Once the administration of the estate is complete, the executor dis-tributes the estate’s assets When making your choice of executor, re-member that the tasks with which you charge this person may have astrong, sometimes negative impact on those who receive (or don’t re-ceive) your assets—and the executor may bear the brunt of these feelings

One of the most prevalent estate planning tools is the trust A trust is

simply a contractual agreement requiring the administration and position of property The typical parties to a trust are the grantor, the

dis-trustee, and the beneficiaries There are two types of trusts: a

testamen-tary trust, which you establish in your will, and an inter vivos trust,

which you create during your lifetime An inter vivos trust may be

rev-ocable, which means that it can be changed, or irrevrev-ocable, which means

that it cannot be changed A testamentary trust is not effective untilyou die, and is irrevocable thereafter This is because you can changeyour will as many times as you wish before you die; you can’t afterward.One advantage of a revocable trust is that you can avoid probate.The probate process means that a will may become a public document,which anyone then may ask to see A revocable trust is not public, so

it can provide confidentiality Note, however, that this confidentiality

is not absolute Some states require that a copy of the revocable trust

be filed along with the will, if the will contains a bequest to the cable trust

revo-Another advantage of a revocable trust is that it provides the ity to avoid delays in the administration of your estate Until your will

abil-is admitted to probate by the court, your executor or personal sentative has no authority to take any actions with respect to the assets

repre-of your estate But if the bulk repre-of your assets are held in a revocable trust

at your death, any delay encountered in probating your will will have

no effect on your trustee’s ability to administer the assets therein.Revocable trusts are quite popular in states such as California, wherethe probate process is particularly onerous and time-consuming Mostpeople do not own all of their assets through a revocable trust, how-ever Accordingly, even if you choose a revocable trust as your vehicle,you must still execute a will in order to dispose of those assets that you don’t own through your revocable trust The final advantage of arevocable trust is that in the event of your disability or incompetence,

someone else can step in and take over for you, allowing continuousmanagement of your property.

If your estate is going to include a trust, you should appoint a

trustee A trustee will be the person or institution who will take

respon-sibility for the trust, administering it in accordance with the trust’sterms He or she either hires a professional to act as agent or investsassets, makes distributions to beneficiaries, and files tax returns alone

In return, the trustee receives a fee for his or her ser-vices You mustmake sure that your trustee is someone in whom you have completeconfidence In many cases, an institution such as a bank is your bestchoice for a trustee, because it has both the procedures and the experi-ence to administer a trust and invest the assets Moreover, the institu-tion will be there to serve multiple generations I personally believe thebest solution is to involve an institution and a trusted individual or fam-ily member to serve as executor and trustee The individual executor ortrustee, either alone or in connection with the beneficiaries, should also

be able to remove a corporate fiduciary and replace them with a ent corporate fiduciary In addition, the beneficiaries should have asimilar right to remove and replace corporate, as well as individual,trustees In this case all beneficiaries should agree with the action inorder to have this right There may be adverse tax effects if this provi-sion is not drafted appropriately in the trust or will Once you have set

differ-up a trust and selected a trustee, again, make sure that the language inyour will is flexible so the trustee can make necessary changes as con-tingencies arise

U.S Trust had one case in which a grandmother created a trustfor her daughter and her daughter’s two children, a boy and a girl.According to the terms in the trust, the mother was able to access thecapital only for medical emergencies The grandchildren, however,were able to use it for “support” and “lifestyle.” For the most part, allwent smoothly, until the female grandchild decided that she wanted tohave a baby Unfortunately, for various medical reasons she was notable to become pregnant except through in vitro fertilization, which

can be extremely expensive, especially if the first attempt doesn’t work.She was looking at bills of upward of $50,000 Theoretically, accord-ing to the trust, this woman could not claim medical reasons for dip-ping into her trust principal.

As trustee of the will, we sat down and had a long discussion.Ultimately, we decided that the woman’s ability to have a child could

be considered part of her general support and lifestyle And, of course,

we were certain that her grandmother, who had selected us to be thetrustee in the first place, would have loved her granddaughter to have

a family of her own Taking care of her heirs was truly the concern ofthe trust in the first place We made a decision to distribute the funds,and our client eventually had her baby

Power of Attorney

A power of attorney offers you a relatively simple and inexpensive

mechanism by which you can appoint one or more persons to act onyour behalf in a variety of financial and legal affairs These powers may

be broad or limited, depending on your wishes For estate planningpurposes, you also can allow this person to make gifts on your behalf

A durable power of attorney is one that remains effective even if you

become incompetent In such a situation, the durable power may letyou avoid a situation in which a court appoints a guardian to manageyour property In this context, the durable power also serves as a sim-ple substitute for a revocable trust, which can also provide for themanagement of your property in the event of incompetence Uponyour death, the power of attorney ceases

As with selecting an executor or trustee, since the power of ney confers significant authority on the agent, you must take care inchoosing the right individual If you don’t want to confer immediate

attor-authority, you can use a springing power of attorney This means that

the power takes effect only upon the occurrence of a specified event,such as disability

Although power of attorney is a useful option for handling cial and legal matters, it is generally not used to convey medical deci-sion-making authority In order to authorize someone to make your

finan-medical decisions, you should use a health care proxy This document is

typically executed in conjunction with a living will, which contains astatement of your wishes regarding life support and similar measures.The laws regarding powers of attorney, health care proxies, and living

Why You Should Have a Living Will

A living will does not dispense assets or establish trusts; it presses your wishes in case you need life-sustaining treatment, orany other urgent medical care for a serious condition As such itshould be viewed as part of estate planning

ex-Let’s say you’ve been in a terrible accident and can only bekept alive with artificial life support You may not wish this kind

of treatment, but you’re in no condition to say so Only through

a living will can this kind of decision be made by someone else—adecision informed by your wishes As mentioned, a health careproxy is the document in which you choose an agent to make thesedecisions; in turn, the agent is guided by what is in the living will

A piece of advice: Let the person whom you’ve picked tomake these life-and-death decisions know ahead of time what isexpected It can be quite a surprise to find out that you’re respon-sible for a choice that might have to be made in a matter of hours

As with power of attorney, you should use a lawyer to draftthese documents Make copies of the living will and the healthcare proxy, and make sure that they’re accessible when needed.You also might want to consult with your physician about yourchoices, particularly if you have a chronic health condition In fact,

it makes sense to give your doctor copies of these documents whenthey are drafted

wills vary from state to state Consult with your attorney to make tain you are in compliance with applicable law.

cer-Tax Laws and Estate Planning

Now that you understand the broad considerations of estate ning, you can make specific financial decisions that will be most tax-advantageous and financially lucrative for you and your beneficiaries.Changes to the tax laws are an important consideration

plan-In 2001 the government made sweeping changes to the federaltransfer tax system From 2002 to 2009, the estate, gift, and generation-skipping transfer tax will be reduced In 2010, the estate and generation-skipping transfer taxes will be repealed, although the gift tax will remain

in effect Beginning in 2011, the estate, gift, and generation-skippingtransfer taxes will revert to their form before the 2001 legislation (seeTable 6.2)

In light of this, as previously noted, one of the best and most efficient strategies for estate planning, if you want as much money as

tax-2002 $1 million $1.0 million $1.1 million

2003 $1 million $1.0 million $1.12 million

2004 $1 million $1.5 million $1.5 million

2005 $1 million $1.5 million $1.5 million

2006 $1 million $2.0 million $2.0 million

2007 $1 million $2.0 million $2.0 million

2008 $1 million $2.0 million $2.0 million

2009 $1 million $3.5 million $3.5 million

2010 $1 million (Tax repealed) (Tax repealed)

2011 $1 million $1 million $1 million**

Calendar

Year

Gift Tax Credit

Estate Tax Credit

GST* Tax Exemption

*Generation-skipping tax.

**To be adjusted for inflation.

T ABLE 6.2 G IFT AND E STATE T AX C REDIT

possible to go to loved ones, is to start giving gifts of money Individualsare permitted to give away $11,000 per recipient annually without pay-ing gift tax; a married couple can give $22,000 The earlier the gift ismade, the greater the potential tax savings may be Suppose you give

$22,000 to your child when he or she is very young, and that moneygrows to more than $250,000 by the time you die That $250,000 is notconsidered part of your estate So no estate tax will be due on the money.Under current tax law, you will have to pay a gift tax if you giveaway more than $1 million worth of property during your lifetime (notincluding the annual exclusion, gifts to a U.S citizen’s spouse, anotherperson’s tuition payments or medical bills, and charitable gifts) If youare married, each spouse may make the gift of $1 million There aremany vehicles available to you to maximize the value of that $1 millionexclusion, such as family limited partnerships, grantor retained annu-ity trusts, and charitable trusts, discussed below

Estate Planning Options

Based on the current transfer tax laws, the estate and gift tax can beviewed as a voluntary tax By that I mean that there are so many tech-niques available to minimize transfer taxes that you can go a longway toward eliminating transfer taxes There are trade-offs in order toaccomplish this goal, the most significant being the transfer of yourassets from your own name into trusts or other vehicles Most peopleare not willing to make that trade-off They enjoy the control and thepower and therefore still end up with very large estates

Here are a few basic estate planning vehicles that you may want toconsider as you prepare your own estate planning (see Table 6.3) (thesedefinitions are abbreviated for easy reading—to learn about each infull detail, please consult with an expert on the subject):

Estate tax credit: Full use of this credit avoids taxation of the property

in the surviving spouse’s estate when he or she later dies To obtain the

maximum advantage from this credit, each spouse should have assets

in his or her own name equal in value to the unified credit This estateplanning technique is most commonly accomplished by a will provi-sion using a formula

Marital deduction and the QTIP trust: This technique allows estate tax

to be deferred until the death of the surviving spouse If he or she is a

T ABLE 6.3 B ENEFITS OF T RUST

Charitable lead trust • Income tax charitable

deduction

• Excess appreciation to non-charitable beneficiaries

Children’s trust • Management of assets

• Control over distributions

taxation of insurance proceeds

Lifetime

Qualified personal residence trust (QPRT) • Transfer of residence forless than fair market value

Lifetime Qualified terminable

interest property (QTIP) trust

• Deferral of estate tax until surviving spouse’s death

• Control over distribution

at surviving spouse’s death

Typically at death

Revocable trust • Property management in

case of disability

• Avoidance of probate at death

Lifetime

Unified credit trust • Avoidance of estate

taxation in surviving spouse’s estate

Lifetime or at death

U.S citizen, the marital deduction is unlimited in amount and can beobtained by making an outright bequest or by placing assets in a qual-ifying trust, usually a qualified terminable interest property (QTIP)trust The surviving spouse must receive all the income from the trustand may receive discretionary principal payments The QTIP trust hasthe advantage of allowing the first spouse to control the ultimate dis-position of the property.

Tuition and medical exclusion: Tuition payments made directly to an

educational institution and medical care payments made directly tothe provider are exempt from the gift tax This exclusion is unlimited

in amount, and does not affect the gift tax annual exclusion

Life insurance trust: This technique avoids estate taxation of life

insur-ance proceeds in the estates of both spouses In order to implement it,

an irrevocable trust must be the owner and beneficiary of the lifeinsurance policy The grantor (the insured) may not be the trustee ofthe trust At the death of the insured, the proceeds of the policy arepaid to the trust and disposed of pursuant to the trust terms (Table 6.4illustrates the savings from an insurance trust stragety.)

Grantor retained annuity trust (GRAT): Through a GRAT, a grantor

transfers property to a trust and retains an annuity for a chosen term ofyears If the trust is structured properly, the creation of the GRAT gen-erates little or no gift taxes For this technique to succeed, the grantormust survive the trust term If the trust property appreciates at a rate

in excess of the IRS prescribed interest rate, the excess appreciationpasses to the remainder beneficiaries free of gift tax

Personal residence trust: This technique allows an individual to transfer

a personal residence for less than its full value The individual transfers

a residence to a trust for a term of years and retains the right to live inthe residence At the end of the term, the residence passes to the trustbeneficiaries If the individual desires to remain in the residence after