Month: January 2009

Customize a Hypothetical CRT Scenario to Control Family Wealth – Vaughn Henry & Associates

Need A Hypothetical CRT Scenario?

CRT Scenario Options

Check only if the asset is mortgaged or encumbered

Check if asset is owned by an individual (not corporation or partnership)

Check if the charitable beneficiary/ies is/are public charities or 501(c)3 organizations

OR (select either the private or public charity box, not both)

Check if the charitable beneficiary/ies is/are private charities or family foundations

(do you want your family to control the charitable distributions?)

Check if a “Zero Estate Tax Plan” is a desired goal

(assets that otherwise would go to the IRS are redirected to family philanthropies)

Check if a retirement plan or IRA is a significant part (50%+) of the estate’s assets

Check if the estate’s assets exceed $1,500,000

Check box if you are satisfied that your estate plan, trust or will has eliminated all unnecessary taxes and is currently up to date

Check box if there are family heirs to protect with a wealth replacement trust

(using insurance or other gifted assets to replace wealth transferred to charity)

Planning for the Second Time Around

Planning for the Second Time Around

Vaughn W. Henry

Although nobody likes to enter a marriage thinking about the potential for problems, they happen. It’s a statistical probability that some marriages will fail, no matter how genuine the couple’s romantic intentions. Second and third marriages are particularly prone to uncertainty, as both parties are usually older and less flexible. There are often children from previous relationships and the couple may bring considerable assets or debts into this new marriage. It is these commingled assets and liabilities that cause serious disputes when the union starts to split apart. Deciding early on what is mine, yours and ours is important, otherwise it becomes a constant source of irritation in a blended family. To deal with complex financial problems while both parties are alive is difficult; it’s overwhelming to deal with family issues after a death.

While property held in joint tenancy passes to the surviving owner, any remaining assets may be up for grabs. Unless the surviving spouse has waived the statutory right to the deceased’s estate, any children from an earlier marriage may be effectively disinherited. This right to disclaim effectively puts the step-parent in line for one-half of the estate, despite the late spouse’s original intentions. Worse yet, the children of the surviving spouse may ultimately walk off with the bulk of both estates, leaving the first family cut out of the loop.

This unpalatable situation can be remedied with a series of trusts designed to preserve each family’s original assets. Notably, the QTIP (Qualified Terminable Interest Property) or ABC Trust allows each spouse to direct how their assets will be distributed, while still providing lifetime security for the surviving marriage partner. Assets placed in a properly drafted QTIP Trust qualify for the unlimited marital deduction, and this action postpones any estate taxes normally due at the first death. The QTIP also reduces the possibility of assets passing out of the original family’s control due to a future remarriage of the surviving spouse. This specialized trust is particularly useful in protecting children of a previous marriage from being disinherited by the surviving step-parent.

Less obvious problems in second marriages include being inattentive about beneficiary designations on insurance policies and retirement plans. All too often, the ex-spouse receives an unexpected windfall, while leaving estate taxes and final expenses up to the new family. Most companies will provide beneficiary change forms for insurance, annuities and qualified retirement plans, so there is no excuse for making this oversight..

Estates of married couples that are under $650,000 (including life insurance) and not likely to exceed this amount in the future use different planning techniques. While smaller estates will generally not benefit tax-wise from either the traditional Credit Shelter or QTIP Trust, a living trust and durable powers of attorney are still valuable tools. Families below the federal estate tax threshold still can unintentionally lose assets to another family, and this is a serious problem requiring good planning.

Many legal specialists recommend prenuptial agreements to minimize potential disputes and protect assets. However, some clients are uncomfortable with the complete disclosure needed to make these contracts binding. Other planners suggest the use of Family Limited Partnerships (FLP) as a way to protect assets and insulate the children of previous marriages. Assets held in these specialized partnerships allow the parent, as general partners, to still control both income and management. Children, on the other hand, as limited partners, are treated as passive investors in the family assets. Since the future heirs already have paper ownership of the family assets, there is little chance of losing them to another family. Of special interest to parents is the creditor protection provided to family business assets held by a FLP. Asset protection for limited partners is based on the inability to force a partnership to relinquish property. Although a judge may issue a charging order that allows a creditor access to the partnership distributions, the creditor only takes the place of the limited partner. However, the general partner still controls the timing of income distributions. As a result, creditors may find themselves in the unpleasant position of receiving tax liabilities from the partnership, but having no income distributed to pay the bill. Most creditors would prefer to avoid that situation, and this provides heirs with some leverage for negotiations.

For the more determined clients, an international trust may provide a mechanism to better protect and control the original family’s assets. Although there are a lot of hoops to jump through in order to keep everything legal, these trusts offer many advantages for individuals with potentially big exposures. To keep from conveying property fraudulently, planning must occur before any litigation or threat of legal action occurs. The major advantage to holding assets off-shore lies in the difficulty of attaching assets in any legal action. Most judges feel that such assets are held outside of their jurisdiction and not subject to the court’s control. Other asset protection features of these trusts include blocking frivolous litigation by forcing all proceedings to occur in the foreign country where the trust is located. This hurdle prevents most lawsuits from moving in directions unfavorable to the client. To evaluate the best use of asset protection strategies and integrated estate planning, experienced legal, tax and financial advisors should be consulted.

Vaughn W. Henry deals primarily with planned giving programs and estate conservation work and is a member of the Central Illinois Planned Giving Council.

Estate Planning the Second Time Around

Estate Planning Needs Vary

Vaughn W. Henry

 Q – As a retired widower, I keep hearing new proposals for estate tax relief and am wondering how will my estate planning be affected by a remarriage?

. – Although there has been a lot of publicity about estate tax reform, the likelihood of meaningful change is remote. After all, the projected estates subject to tax over the next 25 years exceed $10 trillion, and with federal budget tightening, the odds of Congress walking away from that windfall are pretty slim. That said, do not wait for estate taxes to be eliminated, it’s not going to happen.

With divorce statistics on the rise, and the increasingly longer life span of many of our senior citizens, it’s very common for estate plans to be a consideration when contemplating a second or third marriage. Different states have specific laws concerning individual, joint and community property acquired during a marriage, so you should check with your legal advisor about how to best hold title to your property in each and every state. If you want property to go to your children and not to your new spouse’s family, then you need to be very specific about your intentions.

Generally there are five basic problems which should be addressed in replanning and organizing your estate.

• Children of previous marriages will occasionally throw up roadblocks if they feel that an outsider threatens “their inheritance”. Whether or not this feeling is deserved, it is something that should be addressed as quickly as possible. Otherwise, the underlying tensions in a family may create messy legal battles down the road. If there is an eventual dispute about an inheritance, it’s a rare family that has as much harmony and good will after parents die as before.

Good communication is very important. You can be specific about explaining and setting up a plan that is equitable, but not always equal, while you’re still alive. It’s much harder to properly unravel the reasons behind complicated distributions through a will or trust after death. To provide the most control of assets and their eventual ownership, it’s often better to distribute proceeds during your lifetime. Then, there’s no question about your intentions. If the estate is sizeable, you may want to take advantage of the $10,000 annual gifting exclusion to avoid tax on the estate and the problems of uncontrolled growth of your assets’ value and subsequent taxation.

•Prenuptial agreements are necessary if you want to preserve your assets for the original family. No longer a tool for the rich and famous, a well thought out agreement will avoid misunderstandings all around. Some clients avoid mentioning the subject of a premarital agreement because they don’t want to appear distrustful. However, it’s generally a better approach to go into a new marriage with a clear understanding of what’s mine, yours and ours.

•Insurance policies, pension and retirement plan beneficiary designations will need to be re-evaluated. Is the beneficiary or ownership correct on your contract? Many policies, locked away in a safety deposit box, still list deceased or ex-spouses as beneficiaries, much to the dismay of the family when it comes time to settle an estate. An annual review of your all insurance and annuity contracts should be a part of your plan. Remember, owning an insurance policy on your life puts the proceeds back into your taxable estate, no matter who the beneficiary is.

• Consider how powers of attorney should used. Generally, you will need someone to handle both medical and financial issues if you are disabled. Will it be better to have a child from a previous marriage or your new spouse making those critical decisions?

•If you have retirement income, check with your pension representative about the rights to survivor income if you should pass away before your new spouse. The same thing can be said about social security benefits.

The basic role of the estate plan is to conserve and distribute assets, provide adequate liquidity for survivor income, avoid excessive tax and transfer costs, and maintain family control for any ongoing business. Unique circumstances like disabled dependents needing special care, or opportunities for charitable gifting or managing estate assets for minors are all issues that a well constructed estate plan will address. Increasingly common are plans that decide in advance what percentage of the estate will pass to children, charity and the IRS. When presented with a choice about disinheriting the IRS, almost everyone prefers charity and heirs to wasteful and unnecessary taxation. Since tax changes in 1969, anyone with appreciated assets might be well advised to look at a §664-CRT scenario for income, security, reduced taxes and improved control of family wealth. CRT planning is a highly specialized field and unfortunately, few professionals work with them. This isn’t a “do it yourself” project, since estate planning should encompass wealth preservation planning. A team approach with qualified advisors will present you with a number of flexible strategies that will help you meet your family goals