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The Age Game

Quick: Which advisor is more likely to win the inherited assets: The one who established the estate plan that channeled a client's money to the next generation, saving his heirs a fortune in estate taxes? Or the one whose actions consisted of calling every few months to ask, Are your parents dead yet? Obviously, the advisor who delivers real services and value wins business. But let's face it: Many

Quick: Which advisor is more likely to win the inherited assets: The one who established the estate plan that channeled a client's money to the next generation, saving his heirs a fortune in estate taxes? Or the one whose actions consisted of calling every few months to ask, “Are your parents dead yet?”

Obviously, the advisor who delivers real services and value wins business. But let's face it: Many financial advisors shy away from estate planning, citing the uncertainty of future tax-law changes, as well as the complexity involved in learning the various tax, legal and insurance aspects involved in a properly structured estate plan. The unpredictability of the future is not an obstacle to your success, and it is not a reason to avoid estate planning. Instead, it is a reason to embrace the process. The only things you can count on in this business are that people change, laws change and money changes hands. Every change that occurs triggers an opportunity to help people reach their goals and to change your personal financial situation for the better.

Fears over having to learn everything there is to know about estate planning are an even lower hurdle to jump, thanks to two inexorable truths: You will always be more knowledgeable about the process than your clients are (if not, please find another line of work); and, you have a vast array of experts within your firm, community and profession who are charged with knowing the “lot” that will complement what “little” you do know.

Whether your clients' estates are under or over the “death-tax” threshold, the following strategies will help ensure your clients' family wishes will be met in the most tax-efficient and cost-effective manner.

Under the Radar

Estates at the seven-figure threshold (or less) are unlikely to generate a big estate-tax bill. But there are still several issues you and your “hundred-thousandaire” clients need to address.

Naming names

It's a good bet many of your older clients haven't updated their wills in decades. Nor can they remember exactly who is going to get what, especially for life insurance policies and retirement accounts. Double-checking the beneficiary designations can reveal how much their “final wishes” may have changed over the years.

Probate's worse than death

Ask your older clients if they would mind if their detailed financial information becomes available for public consumption after their demise. Assuming the mere notion doesn't trigger a heart attack, you can tell them they can avoid the cost and exposure of probate by placing their assets in a living trust. The clients give up no control over the money, yet can be certain that their estates are settled quickly and confidentially after they die. A living trust can also ensure the clients' affairs are managed as intended if the clients become incapacitated.

Pay the piper

Inheritors avoiding the estate tax may still be on the hook for income taxes — especially if there is a large chunk of money left in tax-deferred annuities and retirement accounts. The situation goes from bad to worse if a lower-income parent dies, and leaves the accounts to a baby boomer in her peak earning (and tax-paying) years.

The effect can be mitigated by employing an annual withdrawal strategy while the elder parents are still alive. If you take just enough out of the accounts to keep the senior generation in the lower tax brackets, it's likely you won't put their Social Security payments in danger of being taxed, either.

Better yet, convert any withdrawn-but-unneeded IRA assets into a Roth IRA. The older generation will benefit from no taxation on the future earnings of the account, as well as no mandatory withdrawals. When the parents die, the inheritor will have the choice of taking any leftover money out tax-free, or removing only the minimum required distribution (and letting the rest compound with no taxation).

Catching the Eye of Uncle Sam

You may never have a chance to generate such a high return on your clients' money as when you help families with seven- (and eight-) figure portfolios reduce or eliminate estate taxes. Spending a few thousand dollars in legal fees, or even tens of thousands on life insurance premiums, can easily save their heirs millions down the road.

Divide and conquer taxes

Many unprepared couples plan to “cross-inherit” their assets — meaning the first to die gives the money to the surviving spouse. When the survivor dies, the cash goes to the kids. That's great if their assets are less than the exempt amount (currently $1.5 million). But you can help the heirs avoid paying estate taxes on at least twice that amount.

The trick is to take advantage of the fact that the exempt amount is per person, not per couple. So a husband and wife with $3 million can pass their whole estate to the kids (without any estate-tax liability) if they use a vehicle known by several names, but most commonly called a bypass trust.

The first step is to change the titling of the assets so that each member of the couple owns roughly 50 percent of their combined net worth. Then an attorney can establish an estate plan, dictating that upon the death of the first spouse, his or her portion of the assets (up to the exempt amount) will go into a trust that has their children named as the beneficiaries. After the first spouse dies, the survivor can still get access to the trust for maintenance, education, support and health care needs.

I like ILITs

Clients with estates well over the exempt amount (or single clients who can't split assets with a spouse) can still minimize the damage estate taxes might do to their legacy by having an insurance company pay the estate taxes instead. It's not as simple as just buying a policy with a death benefit that's big enough to settle the tax bill. If the clients own the policies, then the proceeds are included in the estate and are subject to estate tax.

A better idea is to establish an irrevocable life insurance trust (ILIT), with the heirs as the beneficiaries. The trust purchases a “second-to-die” policy, with a death benefit that will be roughly what the estate-tax bill might come to. When the latter member of the couple dies, the death benefit goes to the descendants with no income or estate taxes. [Just one more thing about ILITs: Don't let the insured just write a check to pay the life insurance premiums — it could jeopardize the arm's length distance necessary to keep the life insurance proceeds out of the estate. Instead, the older benefactor can “gift” the premium money to the younger generations, who can then use it to pay the premiums.


What about your healthy and wealthy clients who want to minimize the estate taxes their kids might pay, but also would like their “golden years” paid for with income produced by the assets they intend to bequeath?

This have-your-money-and-give-it-away-too goal can be accomplished by using a “grantor retained annuity trust” (GRAT). Your client establishes the trust with his heirs as beneficiaries. He then transfers assets to the trust, and pays gift taxes incurred by the transfer (although the amount can be little or nothing — see below). He keeps the right to receive a fixed amount of income from the trust over a pre-established period. Once the period expires, the leftover assets can remain in the trust, or be distributed to the beneficiaries — either way, there is no additional gift or estate tax. One caveat: Your client must outlive the predetermined income distribution period. If not, the assets will remain in his estate.

Now is an especially good time to consider GRATs. The IRS uses the Applicable Federal Rate (AFR) in Section 7250 of the tax code to determine the value of the remainder gift. The lower the rate is, the smaller the gift is, and the less gift taxes your clients will have to pay when the assets are transferred to the trust. Right now, the AFR is hovering just above its all-time low (you can find rate updates at

Special Situations

It would be nice if every estate-planning client were Ozzie and Harriet, looking to transfer their millions in liquid securities to their grateful heirs. But many cases aren't that simple. Here are some tools to address the more complicated legacy desires.

The family business

Government statistics suggest that families have more money in small businesses and farms than in stocks, bonds, CDs or mutual funds. Unlike, say, a 10-year Treasury or a thousand shares of Exxon, the emotional attachment a mom and pop may have to their shop makes it likely they would want to pass the entity intact down to the next generation. But the illiquid nature of the business structure makes it less possible to find money to pay any gift and estate taxes, without depleting all the extra cash in the coffers.

Enter the family limited partnership (FLP). Once thought to be made extinct by a tax-court edict, a recent ruling has renewed enthusiasm for the maneuver. The owners create an FLP and then transfer the farm or business into the partnership. They then gift small shares in the partnership annually to children and grandchildren. Because the shares have limited voting power, they can be discounted by as much as half of their actual proportion of the business net worth. The discount should allow parents to keep each year's gift below $11,000 per recipient, and therefore no gift taxes will be due when the shares are transferred.

The FLP allows the farm or business to continue to be managed as a single operation, with the general partners maintaining control. It also spreads the tax burden on partnership income among lower-bracket family members, which should reduce the overall income tax rate paid by the family. Finally, the FLP structure may provide one more barrier of asset protection against creditors and frivolous lawsuits.

You get some of what they give

The philanthropic group Giving USA estimates that charities received $21.6 billion from bequests in 2003, a 12.8 percent rise over the previous year's gifts. And, naturally, you'll find a direct correlation between the size of the estate and the owner's charitable intentions. Knowing the basics of these strategies can help you get the attention of people with big hearts and bigger portfolios:

Charitable Lead Trust (CLT)

The owner transfers assets to the trust, possibly receiving an income tax deduction. The charity gets income from the trust for a predetermined time period. When the period is up, the owner's beneficiaries receive whatever remains in the trust.

Charitable Remainder Trust (CRT)

The donor gets the income over the period, and the charity gets whatever is leftover at the end of the distribution phase. A Charitable Remainder Annuity Trust (CRAT) gives the owner a specific dollar amount each year, while a Charitable Remainder Unitrust (CRUT) pays out a fixed percentage of trust assets annually.

The Next Step

Spend the next 30 days calling each of your over-60 clients, telling them, “I'd like to sit down and discuss possible strategies to save your family thousands of dollars in taxes and legal expenses.” Handled properly, the campaign could guarantee that your grateful heirs end up with an estate tax “problem” of their own.

Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future.

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