section 3 estate planning - the wpi · section 3 estate planning preface over the last ten years,...

OnPointe’s Financial Literacy Course

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Section 3

Estate Planning

PREFACE

Over the last ten years, estate planning, for some (higher net worth

clients), has been turned on its head. From 2011-2012, the per person estate tax

exemption (the amount an individual can pass to heirs without paying estate

taxes) was $5 million. If this tax law change was not re-enacted at the end of

2012, the tax law would have reverted back to a $1 million per person exemption.

Miraculously, Congress did pass legislation that kept the estate tax exemption at

$5 million per person.

In 2018, the law changed again raising the per head exemption to over $10

million per person. In 2020, the exemption is $11.58 million per person.

The estate tax rate (if you have wealth over the exempted amount, the

value of your remaining assets will be taxed at this rate) went from 55% in 2001

to 50% in 2002, to zero in 2010, to 35% in 2011, to 40% from 2013 to present

day.

The current limits are set to expire at the end of 2025, and the exemption

will fall back to $5 million per person.

I state the above because estate planning can be difficult when the rules

keep changing. I know that most readers of this material will not have estates in

excess of $5 million or $10 million; and, therefore, the material will focus on

estates of less than $10 million. I will have some information for those above $10

million; but if you are one of these readers and want more information on

“advanced” estate planning techniques for the affluent, feel free to email me at

[email protected].

INTRODUCTION

When I used to travel around the country giving asset protection seminars

for physicians, the ironic thing was that most physicians thought their estate plans

were set up correctly. Doctors seemed confident that their estate planning attorney

and CPA knew what they were doing. While it is true that most CPAs and

attorneys know how to put together a complete estate plan, rarely does it ever

happen.

The following are statistics from those who attended my seminars and

other clients I’ve had interaction with over the years. I would anticipate that the

statistics would be similar for those who are taking this financial literacy course.

Out of ten attendees at my seminars:

-1-2 will NOT have a simple will. (Usually, those are the younger

attendees. Without a will, you will be allowing the state you live in to dictate who

gets your assets at death and in what percentage).

mailto:[email protected]

Estate Planning

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-5-6 will NOT have Durable Powers. (Durable Powers deal with what to

do in the event you become incapacitated or, should the situation arise, where a

decision needs to be made about discontinuing a feeding tube to sustain life).

-5-6 will NOT have marital trusts (A&B, marital, or living trusts are used

to avoid the probate process and costs and minimize estate taxes for larger

estates).

-The above-mentioned tools (explained below) are just the basic tools that

are needed in almost every estate plan for someone with any amount of wealth.

WILLS

A will is the most basic part of a person’s estate plan. An attorney starts

with a will and then adds different estate planning documents as the client gets

married, has children, and increases the value of his/her estate.

If you do not have a will when you die, you will be seen as someone who

died intestate. That simply means that the property in your estate will be divided

up per your state’s statute on intestacy. In every state, there is literally a list of

who gets what and in what percentages when you die. If you have a spouse, some

states pour the entire estate to the spouse; however, that is not always the case. I

would suggest that you check your state statute if you do not have a will, but a

better idea is to go out and get one.

Minor children—the most important reason to have a will is so you can

dictate who will get custody of children under 18 in the event a parent dies. If you

are married, this isn’t an issue; but if you are a single parent, it’s a huge issue.

Additionally, it’s possible that both parents can die in an accident. It’s not likely,

but I had it happen to family friends when I was growing up; and there was a

lengthy custodial legal battle among the grandparents that was not good for the

children and was very expensive.

How much should a will cost? Not much. You should be able to get a will

for you and your spouse for between $250-$500. Attorneys do not do much when

creating a will; however, the professional liability with the document created lasts

for the life of the client, thereby justifying the fee.

What about going to LegalZoom or some other online form website to get

a will and fill it in yourself. You certainly could do that and save a couple of

dollars. If you have the simplest of needs, that might work; but I still do not

recommend it.

Why? First, if you screw it up, there is no recourse. Your heirs can’t sue

the lawyer who drafted it because you didn’t use one. Second, everyone should

have durable powers (legal and medical) which you can also get done using

online forms; but I strongly recommend against this because screw ups on these

documents can have devastating effects. So, you really should use an attorney to

draft your durable powers; then the wills will be thrown in as a package deal.


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How often should you update a will? You should update your will any

time you get married, have children, get divorced, increase the value of your

estate, if a child happens to predecease you, or if the tax laws change. You should

also update your will if you do not have A&B marital living trusts and want to

change who gets what when you die.

Why don’t I just handwrite a will instead of paying for one? A

handwritten will is called a holographic will, and many states do not recognize

holographic wills as a legal document. If you want to try to write out your will,

that’s your prerogative; but make sure your state allows for holographic wills. If it

does and you try to create one, make sure you follow the rules. I do not suggest a

holographic will because I believe every estate plan should use trusts, which

should be drafted by an attorney.

Can I leave my spouse out of my will? Because 50% or more of marriages

end in divorce and because there are so many second and third marriages, this is a

question that comes up.

Most states do not allow you to cut your spouse out of your will, so make

sure you check your state laws before doing anything drastic with your will. Also,

if you get divorced, you should immediately change your will so your ex-spouse

does not have a claim to some of your estate.

In some cases, a divorce, which is high profile and has substantial asset or

income issues, will continue for a year or more. In such cases, if you continue to

have the old will in place and you happen to die, there is a strong argument to be

made that, although you were estranged from your soon-to-be ex-spouse, he/she

still gets to take from the will as if they were still married to you (which would be

true at your death since the divorce was not final).

In some cases, those who have such complicated divorce cases should

consider consulting with both their divorce attorney and their estate planner to

consider changing the will during the divorce process while the spouse is

estranged. After the divorce is completed, another final will should be completed

to deal with the post-divorce situation.

Conclusion

Everyone should have a will if for no other reason than to prevent the state

from dictating who gets your belongings when you die. Wills are inexpensive and

not time consuming to put in place, and so I do advocate that everyone obtain a

will as soon as practical in life.

DURABLE POWERS OF ATTORNEY

It is expected that during the course of our lives we may become

incapacitated and unable to act either because of a physical infirmity or mental

incapacity. When that happens, it is important to have a Durable Power of

Attorney (DPA) in place to deal with the day-to-day issues of our lives when

incapacitated.

A DPA is a document that allows a person or entity, referred to as the

attorney-in-fact, to act on behalf of the person giving the Power.

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A Durable Power of Attorney is needed to allow the designated agent to

handle financial transactions, such as writing checks, voting stock rights, and,

generally, to act in all matters of a financial and/or legal nature for the principal

who generally is not in a position to act for themselves.

When most people hear the words “Power of Attorney,” they are on guard

that they might be giving away some power that will become abused and cause

the person authorizing the Power harm. In reality, a DPA is actually something

that could save you or your estate money and time.

Why would such a document save you time and money?

Let’s look at an example where we assume you are in good health and still

gainfully employed, then suffer an accident resulting in a total mental or physical

incapacity. If you do NOT have a DPA naming your spouse or a trusted relative to

act in business matters, i.e., paying bills, operating his/her checkbook, paying

taxes, signing business papers from bills of sale or contracts for services or

products, then your family will generally have to ask the court to determine that

you are incapable of acting on your own and that someone else should act for you

and be given these Powers that could have otherwise been included in the Durable

Power document.

The court will typically require notice to others and a hearing and

testimony, possibly including independent expert testimony concerning the extent

of the disability to allow the spouse (or other elected person) to act for the

incapacitated person.

The hearing procedure generally referred to in most states as a

conservatorship or guardianship is time consuming and expensive and, generally,

will require the services of one or more attorneys.

These hearings are NOT inexpensive, and they can be time critical

(meaning that you sometimes have to run to court to get approval to pay bills on

time).

Had you simply implemented a DPA signed in advance of the hardship or

incapacity, you would be able to use that document in lieu of the court hearing

and the court orders that would otherwise be necessary to act upon the assets

and/or businesses held in the name of the incapacitated persons.

What kind of Durable Powers are there and what should you inquire about

when you have to have one drafted?

In the above example, if you had a retirement account, pension account,

Profit Sharing, stock bonus plan, Keogh, or other retirement plan, a Durable

Power can have language which will allow the appointed person to act for you in

connection with those accounts. This is an important issue for a spouse when the

couple is retired and is primarily living off the income from the other spouse’s

IRA. Depending on the circumstances, without a DPA, the spouse might not be

able to access the money from the IRA without going to court to have someone

appointed to act on behalf of the incapacitated spouse.


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Some DPAs have “springing powers” which are only effective upon

disability and will, generally, terminate upon the disabled person becoming

capable or no longer disabled. Usually, these springing Powers of Attorney are

activated by one or two physicians stating the nature and extent of the disability to

verify that the DPA should be used; and when the period of disability ends, the

doctors will determine that such incapacity ended and the need for the use of the

Durable Power ends, thus putting the physician back in charge of his/her affairs.

Other powers are effective forthwith upon signing and allow the

designated attorney-in-fact to act for the incapacitated person immediately. One

should always check their resident state laws to determine what flexibility is

allowed under that state in developing a DPA.

Powers of Attorney can even provide for the delegation of an agent to deal

with a Section 529 College Education Savings Plan account(s). All DPAs or

springing Durable Powers should include specific language that allows the

attorney-in-fact to create, open, or invest the owner’s assets in a Section 529

account, to maintain that account, and make decisions with regard to handling

account disbursements and the change of a designated beneficiary of a Section

529 account.

Durable Powers can provide for another person to make gifts for the

principal, appoint a separate agent to vote the stock, make business decisions, and

the like.

Delegating medical treatment options and/or directives

In most states, a DPA can also appoint an individual called a Patient

Advocate (PA) to make medical treatment decisions if the individual is at least 18

years of age and of sound mind when the Power was signed. Usually, this kind of

patient advocate form would include language typical of the “living will” in

which the quality of life and opinion of the grantor is stated. The patient advocate

form would be used to cover the issue of the treatment, or lack thereof, of a

person desiring to appoint another to determine the future of the incapacitated

person’s medical treatment.

A Living Will used in some states would be similar to the Patient

Advocate form, which attempts to accomplish the same objective of appointing

someone close to the nominee to make decisions concerning medical treatment or

the lack thereof.

Why is a Patient Advocate Designation or Living Will important and why

you should have one?

Many Americans die in a hospital or other care facilities. Physicians and

health care workers who work in these facilities are generally charged with

preserving a patient's life. You may or may NOT want a physician or hospital

making decisions about your care when incapacitated. Health Care Directives

give you the opportunity to write out your wishes in advance and ensure some

legal respect for them if you are ever unable to speak for yourself.

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What is a Living Will? A Living Will, known in some states as a Health

Care Directive, sets out a person's wishes about what medical treatment should be

withheld or provided if a person becomes unable to communicate those wishes.

The directive creates a contract with the attending physician. Once the physician

receives a properly signed and witnessed directive, he or she is under a duty either

to honor its instructions or to make sure the patient is transferred to the care of

another physician who will honor them.

Health Care Directives are not used just to instruct physicians to withhold

life-prolonging treatments. Some people want to reinforce that they would like to

receive all medical treatment that is available, and the Patient Advocate Form or

Health Care Directive is the proper place to specify that.

In most states, you must be 18 years old to sign a directive of this nature;

and every state law requires that the person making a Health Care Directive must

be able to understand what the document means, what it contains, and how it

works.

If you are physically disabled, you may make a valid health care document

by simply directing another person to sign the document for you if you are unable

to sign it yourself.

If you do not have a Medical Directive, a Living Will, or Patient Advocate

Form or Durable Power with medical directives signed, then the physicians who

attend you will use their own discretion in deciding what kind of medical care you

will receive.

Problems also can develop when your family members are not in

agreement as to what type and extent of medical treatment you and/or your spouse

should receive or not receive. In the worst case, the court will decide the

treatment, even though the judge has little medical knowledge and no familiarity

with you. These legal court wars are usually expensive and begin to use up the

financial resources of the person incapacitated who would have otherwise, given

the choice, not wanted the heirs battling over the extent of medical treatment and

expensive legal fees and costs.

The execution of a Living Will, Patient Advocate Form, Medical

Directive, and/or other appropriate Durable Power would save time and the

expense of a court trial.

The Medical Directive should be a part of your medical record when you

are admitted to a hospital or other care facility. If your need for care arises

unexpectedly or while you are out of your home state or country, it is best to give

copies of your completed documents to your family and your personal physician.

Conclusion—Durable Powers and Patient Advocate Forms should be

incorporated into every estate plan so as to avoid delay in medical treatment or the

payment of household bills. As an attorney who has seen what kind of litigation

can be required in order to have a court determine who will have the authority to

pay bills and make determinations about your medical care (life and death

decisions), I can state with confidence that not having Durable Powers and Patient

Advocate forms in your estate plan would be a tremendous mistake.


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A&B, MARITAL, OR LIVING TRUSTS (different names used for the

same document)

Besides a will, A&B/Marital/Living Trusts (hereinafter A&B Trusts) are

the most commonly used estate planning tool and one I recommend in nearly

every estate plan, assuming you are married. If you are not married, you would

simply have one living trust which would have the same advantages in #1 directly

below. If you are not married, you cannot take advantage of #2 directly below,

which discusses maximizing estate tax exemptions among spouses.

What are the benefits of A&B Trusts?

1) The first benefit of having A&B Trusts is that your estate will not be

probated through the court system. Your will ends up being probated, but the

assets of the estate that are owned by a trust at death avoid the probate process

(and the time and expense of the process).

Some people will use Pour-Over wills that will move everything to a trust

upon death. This works to disperse your assets per the terms of the trust; but if the

assets are not owned by the trust prior to death, they will pass through the probate

process (which is time consuming and expensive).

Assets owned by the trust at death will typically be probated in an

“unsupervised” manner (meaning there is also privacy) where the court does not

have to probate everything in your estate; and when this happens, you save

between 1-8% (4-6% is average) of the entire value of your estate in probate fees,

although the amount is determined by the state in which you reside.

2) A&B Trusts maximize your estate tax exemptions.

This used to be a much more important benefit of using trusts in an estate

plan. Back in the day, the estate tax exemption (the amount of money you could

pass to your heirs’ estate tax free at death) was only $1 million per person. Now

that it’s over $10 million per person, it’s not a beneficial aspect for most

Americans.

Also, prior to 2013, the per person exemption was NOT portable if you are

married. What does that mean? Prior to 2013, if you died and didn’t use your

exemption properly (by passing wealth to a trust at death vs. passing everything

outright to a spouse), the exemption died with you.

Today, the exemption is portable meaning that, even if not used at the first

spouse’s death, the surviving spouse can apply the deceased spouse's exemption

at death.

Let’s look at an example assuming the estate tax exemption is $5,340,000

per person (as stated earlier, it’s over $10 million per person right now but it

could revert back to the lower number in the future, or Congress, like they have

many times, can lower it back down to $1 million per person or whatever they can

get away with as a revenue generator).

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Assume Bob and Sue are married and have all of their assets jointly titled

and their net worth is $8,000,000, Bob dies first and the federal estate tax

exemption is $5,340,000 on the date of Bob's death, and portability of the estate

tax exemption between spouses is in effect:

$8,000,000 estate - $10,680,000 exemption (for the couple) = $0 taxable

estate.

As above, when Bob dies, his estate will not need to use any of his

$5,340,000 estate tax exemption since all of the assets are jointly titled and the

unlimited marital deduction allows for the automatic transfer of Bob's share of the

joint assets to Sue by right of survivorship and without incurring any federal

estate taxes.

Assume that, at the time of Sue's later death, the federal estate tax

exemption is still $5,340,000, the estate tax rate is 40%, and Sue's estate is still

worth $8,000,000.

Enter portability of the estate tax exemption—using the concept of

portability of the estate tax exemption between spouses, under these facts, Bob's

unused $5,340,000 estate tax exemption will be added to Sue's $5,340,000

exemption, in turn giving Sue a $10,680,000 exemption.

Since Sue has "inherited" Bob's unused estate tax exemption and she can

pass on $10,680,000 free from federal estate taxes at the time of her death, Sue's

$8,000,000 estate will not owe any federal estate taxes at all.

Therefore, portability of the estate tax exemption will save the heirs of

Bob and Sue about $1,064,000 in estate taxes.

What should A&B Trusts cost?

Size of the estate Cost

Up to $3 million $2,500

$3 to 5 million $3,500

$5 to 10 million $5,000

$10 to 25 million $7,500

Over $25 million $10,000

I get upset when I hear that clients have paid $25,000-$50,000 or more for

estate plans. Unless your estate is over 25 million dollars, you should be able to

get an entire estate plan for less than $15,000. If your estate is less than five

million dollars, you should be able to get an entire estate plan done for around

$5,000. These fees do NOT include a lot of specific asset protection planning or

advanced planning with Family Limited Partnerships

If you are wondering why estate plans can get costly, it is because of the

lingering liability with the estate plan. The malpractice liability for estate planning

attorneys does not go away until you die, which could be 50+ years for some

clients. Physicians can usually understand the problem.


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Revocable

A&B Trusts are revocable trusts (this also means they provide ZERO asset

protection of the assets in the trust from creditors).

Funding—it is very common for an attorney to set up A&B Trusts and

NOT put anything in the trusts (attorneys get their money for the documents and

don’t want to spend unprofitable time helping clients fund their trusts). I would

say that 90% of the A&B Trusts out there are not funded correctly. I suggest

funding them with something when you implement them.

It is very typical to transfer the family residence into the trusts. If, for

whatever reason, you want to take assets out of a trust, it is not a problem since

the trusts are revocable (there are no tax consequences).

As stated earlier, assets that are NOT owned by a trust at the 2nd

spouse’s

death will go through probate (which is expensive, time consuming, and public).

Conclusion—I know it is a strong statement, but EVERYONE with any

amount of assets should have A&B Marital/Living/Revocable Trusts, or if you are

not married, just a single trust, to avoid probate and maximize the estate tax

exemptions. It is just that simple. If you do not have A&B Trusts, you are doing

your heirs a tremendous disservice and eventually will make the federal and

possibly state government very happy at your death.

TITLING OF JOINT ASSETS (a type of co-ownership)

Depending on how your joint assets are titled, it can have a huge impact

on what happens to the assets at death. There are three main types of co-

ownership: Joint Tenants, Tenants in Common, and Tenants by the Entirety.

1) Joint Tenancy (JT)—a JT is a single estate in property, real or personal,

owned by two or more persons, under one instrument or act of the parties, with an

equal right in all to share in the enjoyment during their lives.

On the death of a JT, the property descends to the survivor or survivors

and at length to the last survivor.

Some people use JT to avoid probate, but usually it’s a terrible way to own

property because you can’t predict who is going to die and when. Leaving the

passing of an asset to chance is never a good thing to do.

Also, a JT owner can sell, gift, or transfer the interest to another without

the permission or consent of the other owners. If the joint tenancy is severed, it

then becomes a “tenancy in common” (discussed in the next section).

Finally, from an asset protection perspective, a JT is awful. The property

owned as a JT is an asset that a creditor of any JT can get their hands on. So, if

one joint tenant is texting and driving, causes an accident and is sued, the creditor

can go after the JT asset.

Bottom line with JTs is that they shouldn’t be used (it will make much

more sense to change ownership in the property to a Limited Liability Company

(LLC) (see the asset protection section of the course material to learn why this

type of entity is the best for asset protection planning and estate planning)).

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2) Tenants in Common (TIC)—a TIC is an interest held by two or more

persons, each having a possessory right, usually deriving from a title in the same

piece of land. TICs also apply to personalty (personal property). Though co-

tenants may have unequal shares in the property, they are each entitled to equal

use and possession. Thus, each is said to have an undivided interest in the whole

property. An estate held as tenancy in common can be partitioned, sold, or

encumbered.

Rights of an owner in property held as tenants in common:

-Each owner of property owns an undivided interest in the property. For

example, three people (all with separate families) own a vacation home as 1/3

owner.

-The ownership interest of a tenant in common is transferable. Unlike a

joint tenancy, if a tenant in common died, the interest in the property would pass

to the heirs like all other assets (vs. reverting to one of the JTs).

Like JTs, properties owned in TICs have the same asset protection

problem. If you are texting and driving and cause harm to someone who sues you,

if they win the lawsuit, the TIC property can be taken.

As such, it is not a good idea to own property as a TIC. It is much better to

have the property owned by an LLC which once set up correctly will accomplish

the same estate planning goals but will also protect the property from creditors of

the owners.

3) Tenants by the Entireties (TE)—TE is a unique way to own property

that is only available to a husband and wife (this could include same-sex couples

in certain states (make sure to check your state statute)).

Why is it unique? Neither husband nor wife is allowed to alienate any part

of the property to be held without (the) consent of the other. That means one

spouse can’t sell his/her interest in the property, can’t take a loan out on the

property, etc., without the other spouse’s consent.

The survivor of the marriage is entitled to the whole property, and a

divorce severs the tenancies by the entirety which then creates a TIC.

One good thing about TE is that, if one of the spouses has a liability issue,

assets owned by TE are not at risk to that spouse’s creditors. So, in my texting and

driving example, the person suing the spouse that caused the crash can’t go after

the marital home that is titled as TE.

Joint creditors can go after TE property. This comes into play, for

example, when you have a party at your house and you overserve someone too

much alcohol. If that person drives home and gets into a crash, the homeowners

who overserved the driver will both get sued. Because it’s a lawsuit against both

spouses, the property owned as TE will be at risk.

In most states that offer TE, the only asset that can be owned as TE is the

home. While I prefer to use LLCs to protect assets, an LLC is not a good tool to

use when protecting a marital residence (so owning it as TE is as good as you can

do).


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Summary of tenancies—anything you can accomplish with a JT or TIC

you can accomplish with an LLC; and, therefore, if you own property as either a

TJ or TIC, I strongly recommend getting with an advisor who can help you

convert the interest to that of an LLC.

COMMUNITY PROPERTY STATES

Nine states treat the property of married couples differently from the other

41 states. These states are called "Community Property" states. They are:

-Arizona -California -Idaho -Louisiana

-Nevada -New Mexico -Texas -Washington

-Wisconsin

If you are married and live in a community property state, these property

ownership rules apply:

-Each spouse's interest in the community property is subject to the claims

of the other spouse's creditors (meaning all CP assets are at risk).

-If you acquired property before you were married, this property belongs

to you alone even after you are married.

-Any property you accumulate during your marriage is considered to be

community property. You and your spouse own an equal, one-half interest in this

property.

-If you receive personal gifts or inheritance after you are married, that

property continues to be owned separately by you.

LIFE INSURANCE

Does anyone like life insurance? Typically, the answer is no. Even so, it is

a necessary tool to protect loved ones in an estate plan. Also, as you will read in

the sections of the course on life insurance and mitigating risk in the stock market,

cash value life insurance can be a beneficial tool without regard to the death

benefit.

Because I have an entire section of this course on life insurance, I’m not

going to take the space in this section to do a deep dive into each type of life

insurance policy. I’ll focus more on the use of life insurance in an estate plan.

From an estate planning perspective, life insurance has two functions:

1) Protect loved ones who will need the money

2) Pay estate taxes for those with large estates.

When do you need life insurance in an estate plan? There are three main

reasons to buy life insurance outside of estate taxes:

1) When you get married—Many times one spouse is the primary

breadwinner and, as such, life insurance is needed to protect the other spouse in

the event the breadwinner dies early. This need could change over time as

incomes change or circumstances change; but because term life insurance is so

inexpensive, it’s a fairly easy decision to purchase it to protect a spouse.

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2) When you have children—I believe it’s vitally important to purchase

life insurance if you have children. Again, situations will vary depending on if

one or both spouses work and how much each makes, but the simple truth is that,

if one parent dies, that will have an effect on the family’s finances. The death

benefit could be earmarked for living expenses for years to come for the children

and/or earmarked for college expenses.

Anytime I talk with parents who say they do not have some kind of life

insurance when there is a child under the age of 18, I cringe and advocate that

some amount be purchased.

3) To pay off a debt—the #1 debt of most people is their home mortgage.

There is a special type of mortgage insurance (term life) used to pay off a

mortgage debt. It makes sense to pick a certain amount of death benefit that is

needed for an overall estate plan. For those who don’t want to purchase what

would be thought of as the right or prudent amount to protect a spouse and/or

children, the minimal amount of insurance that should be purchased is an amount

to cover the debt of a mortgage.

The unique thing about mortgage insurance is that it has a decreasing

death benefit. As your mortgage gets smaller every year as you start paying down

the debt, the death benefit coverage also goes down. This is one reason mortgage

protection insurance is so inexpensive.

HOW MUCH LIFE INSURANCE DO YOU NEED?

The answer is it depends. There are a few different ways insurance agents

calculate your life insurance needs—the “needs” approach or “human life”

approach. From Investopedia—Understanding the Needs Approach. The

needs approach is a function of two variables:

1) The amount that will be needed at death to meet immediate obligations.

2) The future income that will be needed to sustain the household.

When calculating your expenses, it is best to overestimate your needs a

little. For instance, the needs approach will consider any outstanding debts and

obligations that should be covered, such as a mortgage or car payments. The

needs approach also recognizes that the need for income replacement may

gradually decline as children living at home move away or if a spouse remarries.

From Investopedia—Human-Life Approach Explained:

When using the human-life approach, it's necessary to replace all of the

income that's lost when an employed spouse dies. This figure includes after-tax

pay and makes adjustments for expenses (like a second car) incurred while

earning that income. It also considers the value of health insurance or other

employee benefits.

The Human-Life Approach Calculation

Step One: Estimate the insured’s remaining lifetime earnings, taking into

consideration both the “average” annual salary and potential future increases,

which will have a significant impact on life insurance requirements.


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Step Two: Subtract a reasonable estimate of annual income taxes and

living expenses spent on the insured. This provides the actual salary needed to

provide for family needs, minus the presence of the insured. As a rule of thumb,

this figure should be close to about 70% of the pre-death income, although this

number may vary from family to family, depending on individual budgets.

Step Three: Determine the length of time for which earnings will need to

be replaced. This time period could be until the insured’s dependents are fully

grown, and no longer require financial support, or until the insured's assumed

retirement age.

Step Four: Reverse engineer the death benefit needed assuming a certain

rate of return on the death benefit once paid.

Human-Life Approach Calculation Example

Consider a 40-year-old that makes $65,000 per year. After following the

above steps, it is determined that the family needs $48,500 per year to support

itself and must do so until retirement age (25 years away). If you assume a 5% net

return on the death benefit that paid, the current death benefit that is needed

would be $717,734.

In other words, if the insured died today, you’d need $717,734 in a lump

sum earning a net 5% every year to generate an after-tax amount of $48,500 each

year for 25 years.

While some advisors would like to think this is an exact science, it’s not.

It’s just a good guess and because of that, I highly recommend overinsuring

because the costs to add more death benefits are minimal. It’s difficult to plan for

expenses 5, 10, 20+ years into the future. Spouses get remarried. Some children

go to college and some don’t. Health problems are always a wild card.

What’s important is that you understand the issues at hand and can make

an informed decision about how much life insurance you need.

WHAT TYPE OF LIFE INSURANCE SHOULD YOU BUY?

This question is best answered once readers have a full understanding of

the different types of life insurance (so you may choose to stop reading this part

of the course and go to the life insurance section of the course).

The main question that needs to get answered is whether you are going to

use cash value life insurance as a wealth-building/retirement tool. A good cash

value life insurance policy:

1) Allows money to grow tax free

2) Allows money to come out tax free

3) Has no risk of loss due to downturns in the stock market

4) Gains are locked in every year

A good cash value life insurance policy is one of my favorite wealth-

building tools. So, if you chose to allocate money to a cash value life policy not

for death benefit planning but for wealth-building, that policy would, of course,

come with a certain amount of death benefit.

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If, based on the premiums, you didn’t purchase enough death benefit with

your cash value life policy, then you can choose to supplement that with cheap

term life insurance.

What kind you buy is typically determined by your age and amount of

money you have available.

Most younger people do not have significant money to allocate to life

insurance premiums (some older people as well, but younger people like

newlyweds or young married couples with 1-2 children typically don’t have a lot

of extra money to fund life insurance).

Term life insurance—the cheapest way to buy life insurance is term life

insurance.

You are NOT buying “permanent” coverage that will pay no matter how

long you live. With term, you are literally buying for a term of years (5, 10, 20,

30).

Once the term is up, your coverage is over (unless you bought a policy

with a conversion privilege (discussed at length in the life insurance section of the

course).

Why is this the cheapest type of coverage? The statistics are staggering.

Over 97% of all term life insurance policies do not pay claims. What does that

mean? It means that insurance companies price these policies and included in that

price they price in the lapse rate. Therefore, if most policies never pay, that means

the cost can be quite low as compared to buying the same death benefit with a

“permanent” policy what will pay no matter when you die.

There are different types of term policies.

Annually renewable term is the cheapest. It literally reprices itself every

year (which means it gets more expensive every year but starts as the cheapest

form of insurance).

Level Term is the most common. It guarantees your premium for the

length of the term. So if you chose a 30-year term, the price will be levelized over

the term; and the payment is the same every year (but it will be much higher in

the early years than annually renewable term, and over time the cost of annually

renewable term will be higher than the level term).

Most people who know they need a certain death benefit for a period of

years will buy level term.

PERMANENT LIFE INSURANCE

Permanent life insurance is where, if you pay your premium every year,

the insurance company guarantees you the death benefit will be paid. Anytime

you have guarantees, the cost is higher than non-guaranteed.

Whole life is what I call the old school type of permanent policy. It is a

type of cash value policy that guarantees a certain rate of return on the cash in the

policy but also is considered a permanent policy because, if you pay your


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premium every year, the company is contractually obligated to pay the death

benefit.

It sounds great, but anytime you are carrying cash in a policy designed for

death benefit (vs. a cash value policy designed for minimum death benefit and

maximum cash), you are paying too much, in my opinion, for the death benefit

provided.

Guaranteed Universal Life is a policy that normally doesn’t come with

guarantees for growth or death benefit. However, these types of policies can come

with a guaranteed death benefit rider that will guarantee the death benefit.

I call these policies no-cash value policies. Why? Because, if you just pay

the minimum premium to keep the death benefit, after so many years, there will

literally be no cash in the policy (but it’s still considered a “permanent” policy).

Why is this good? Because you are essentially buying a paid-up term

policy; and because you are not trying to build cash in the policy, it’s a much

cheaper way to buy permanent death benefits than a whole life policy.

The caveat to using a no-cash value policy is that, if you got to year 10,

15, 20 and you didn’t have the money to pay the premium, the policy will lapse

and you’ll have no death benefit. With a whole life policy that carried cash, there

would be enough cash in the policy for a period of years to pay the premium

internally with the cash value (this will typically only last for a handful of years,

but it does eliminate the issue with having the policy lapse if you miss a

premium).

One last item with no-cash value policies; you can short pay the premiums

instead of making annual payments. So, if you have the money and you didn’t

want to risk missing a payment years down the road, you could literally make one

payment and have a guaranteed paid-up life insurance policy.

SHOP YOUR INSURANCE

When all else fails, work with an agent who is able to work with many

different life insurance companies so you will get access to several different

policies in an effort to choose the best one. Many agents are only able to work

with one insurance company because of an exclusive contract. These agents are

what I call career agents or captive agents. For example, the chances of you

getting a competitive price on life insurance from a Northwestern Mutual, Mass

Mutual, NY Life, State Farm, and many other career or captive agents are about

zero.

Also, if you already have insurance, find a good insurance agent to review

the policy. If term insurance, there is a high likelihood you can get a better price

(the cost of insurance on policies has gone down in recent years). If it’s a cash

value life policy, the chances are high that you are not using what I would

consider a “good” policy. If your surrender charges are low or if they are gone,

you can 1035 exchange your current policy for a new/better designed policy.

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LIFE SETTLEMENTS

I did want to briefly touch on Life Settlements (LS). Most people have no

idea what they are; but in the right situation, they can be a valuable tool.

What is a life settlement? It’s when you choose to sell your current life

insurance policy for cash.

The concept behind LS is fairly simple. LSs are for someone who

purchased a life insurance policy, no longer needs the policy (for a variety of

reasons discussed below), and would like to sell the policy today for cash and use

the proceeds for any number of different purposes.

This concept has been around for years, but again, is not widely known by

consumers or advisors.

Why sell a life insurance policy? I think a better question is why keep a

life insurance policy you have no need for? That question brings us to the age-old

question of why and when should someone buy a life insurance policy (which is

discussed earlier in this section of the course material).

Let’s look at a real-world example and see if it makes sense for an

example client, Dr. Smith, to consider selling his life insurance policy.

Facts: Dr. Smith is a 70-year-old retired orthopedic surgeon who is

married to a 70-year-old retired nurse. Dr. and Mrs. Smith have three children and

six grandchildren. Their assets consist of a home worth $1,000,000 that is paid

off, a $2,000,000 brokerage account, a $1,500,000 IRA, a vacation condo in

Naples worth $350,000, and a universal life insurance (UL) policy on Dr. Smith

with a $2,000,000 death benefit and a cash surrender value of $75,000.

Dr. Smith does not need this policy to protect the family and he has no

estate tax problems. He’s tired of paying premiums into a policy that is not very

good when it comes to building cash.

In our example, what might the Smiths be able to sell their $2,000,000

policy for? An educated guess based on the current life settlement market would

be $345,000 (which is way more than the cash surrender value).

Who buys life insurance policies as investors? One of the biggest

purchasers of no longer needed life insurance policies are hedge funds. They

allocate millions of dollars to buying policies and paying future premiums while

they wait to collect the death benefit that pays off when the insured dies.

Tax consequences of selling a life policy? The amount of premiums paid

into the policy is its “basis,” and no tax is due on that value. The cash surrender

value in the policy is taxable as ordinary income, and the life settlement payment

which accounts for the remainder of the sale price (if any) receives long-term

capital gains tax treatment (not too bad).

If you or a loved one is 65 and older (70 and older is better) and have a life

insurance policy you don’t need, you might want to look into whether a LS is

something that makes financial sense. Oh, and if you have a term life policy, if the

term goes out far enough, these too are saleable policies.


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DISABILITY INSURANCE (DI)

I just want to briefly touch on DI. Most people do not have DI. The ones

who do are typically professionals (doctors specifically).

What Is Disability Insurance? Disability insurance is a type of insurance

that will provide income in the event a worker is unable to perform their work and

earn money due to a disability.

As stated, doctors are the primary people who buy DI. If a surgeon has a

car crash that insures his/her hand, he/she can no longer perform surgery; and a

DI policy with the right terms will pay a monthly income benefit to replace the

income lost due to the doctor’s inability to perform surgery.

Types of Disability Insurance—there are two basic types of disability

insurance.

Short-term disability insurance policies offer a worker a portion of their

salary if they are unable to work for a short period—typically three to six months.

Long-term disability insurance offers a worker a portion of their salary if

they are unable to work for a longer period—typically a period of over six

months.

Both short-term and long-term disability policies have a period that a

person must be disabled before that individual is able to start receiving disability

benefits. That period of time is called an elimination period. If a person becomes

disabled, they must wait until the elimination period is over before they start

receiving benefits.

If they are able to work before the elimination period is over, the person

will NOT receive a benefit.

For example, a surgeon buys DI in case he/she has an accident that hurts

his/her ability to perform work.

Policy Definitions—“any occupation” vs. “own occupation”

The two most common definitions are "own occupation," where a person

is considered disabled if they are no longer able to perform the occupation they

had prior to becoming disabled, and "any occupation," where a person is

considered disabled if they are unable to perform any job at all. Obviously, the

"any occupation" definition is stricter.

Even though “any occupation” coverage is less expensive, insureds

typically go with the more expensive “own occupation.” Why? The surgeon in my

example doesn’t want to be told he/she won’t be given a benefit by the DI

company because he/she can still see patients in an office or can become a

professor at a university.

Individual vs. group policies

DI can be purchased on an individual or group basis. Group insurance is

usually provided by an employer or purchased individually from a sponsoring

professional association. Although initially low in cost, group policies have

several limitations. They can be canceled (by the association or insurance

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company), rates increase as you get older, and premiums are subject to

adjustments based on the claims’ experience of the group. In addition, group and

association contracts often contain restrictive definitions of disability as well as

less generous contract provisions.

Benefits provided—it depends on your profession, but there is always a

limit to the benefit received. For doctors, it might be a maximum of 60% of the

typical income up to a $15,000 a month benefit limit. If the benefit is too high, the

incentive to try to take advantage of the insurance system is too great.

Cost of DI—the premium rates are based on several factors including age,

sex, monthly benefit, riders added to the policy, and the occupational

classification the insurance company assigns to your medical specialty.

The younger you are when the purchase is made, the lower the cost of the

insurance. Therefore, you should purchase a policy as early in your career as

possible to lock in lower premium rates.

Renewability provision—the renewability provision is one of the key

features of an individual disability income insurance policy. This provision

defines your rights when it comes to keeping your disability policy in force. In

general, a disability policy can be Guaranteed Renewable only or both Non-

Cancelable and Guaranteed Renewable.

Guaranteed Renewable—if a policy is Guaranteed Renewable only, the

insurance company cannot cancel or change any provisions of the policy as long

as you continue to pay your premiums (up to age 65). However, the insurance

company does reserve the right to increase premiums with state approval for an

entire class of policies in the event of poor claims’ experience.

Non-Cancelable and Guaranteed Renewable—if a policy is both Non-

Cancelable and Guaranteed Renewable, the insurance company cannot cancel,

change any provisions, or increase the premiums for the life of the policy (up to

age 65); therefore, a policy that is both Non-Cancelable and Guaranteed

Renewable is preferable as it provides you with an added level of security.

Cost-of-Living Adjustment (COLA) Rider—DI policies can come with

several different riders. The main one is a COLA rider which is designed to help

your benefits keep pace with inflation after your disability has lasted for 12

months. This adjustment can be a flat percentage or tied to the Consumer Price

Index. Ideally, you want a COLA that is adjusted annually on a compound interest

basis with no “cap” on the monthly benefit.

Sidestep the Maximum Monthly Benefit Level—insured who makes a

lot of money will want to buy more coverage than companies will allow.

One of the easiest and least expensive ways to increase your DI coverage

is through a retirement plan contribution protection.

Think about it—if you become disabled, who is going to make your

retirement plan contribution? The answer? No one. This type of DI policy will

pay a contribution to an account that will act as a retirement plan contribution. So,

if you are a business owner and would have normally made a $40,000


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contribution to your retirement plan but can’t because you are disabled, this plan

would essentially make the contribution for you.

Another way to sidestep the benefit limit is to purchase Business

Overhead Expense DI (BOE). A BOE policy provides reimbursement for the

expenses of operating your business if you or one of your partners are sick or hurt

and cannot work. These expenses may include staff salaries, office rent or

mortgage payments, utilities, malpractice insurance premiums, and other fixed

costs normal to the operation of your business.

If you are one owner in a multi-person business, if you get disabled, your

partners are going to expect you to pay for your fair share of the office overhead

and BOE can help with that (and it’s relatively inexpensive insurance).

Summary—this material is not meant to make anyone an expert in DI. It’s

in the course because most people are not familiar with DI and those who have it

may not be aware of the ways to increase their coverage with not a lot of extra

cost. Essentially, I’m giving you enough information to determine if DI is

something you might want to look into further.

LONG-TERM CARE INSURANCE

Long-term care insurance (LTCI) is the number one most frustrating estate

planning topic I deal with. In my opinion, LTCI in some form is an absolute must

for people who have an estate size of over $500,000; but yet few have it and no

one wants to purchase it.

Look at the following LTC statistics. If they don’t scare you into taking a

long look at obtaining some kind of long-term care insurance (LTCI), nothing

will.

-On average, 69% of people age 65 or older will need some form of long-

term care (according to www.longtermcare.gov).

-The average daily cost of a private nursing home room in 2018 was $275

a day or $100,375 annually (private room).*

-The average daily cost of an assisted living care facility in 2018 was $132

a day or $48,180 annually (private room).*

-However, in some states the cost for nursing home care is much higher:

Alaska ($907 per day), New York ($401 per day), CT ($452 per day), California

($323 per day), and Pennsylvania ($333 per day).*

-Americans who are 65 years old and older and have incomes greater than

$20,000, only 16% have LTC insurance.

*Genworth Cost of Care Survey 2018

“Failure to prepare for the cost of a nursing facility stay or other long-

term care is the primary cause of impoverishment among the elderly.” (The

American Health Care Association, 1997)

Do you have LTCI? Based on the statistics, I know for most the answer is

NO.

http://www.longtermcare.gov/

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Should you have LTCI? Based on the statistics, I know the answer is YES!

If the average cost of a nursing home stay is over $100,000 a year, how many

years do you have to stay in that home before spending a good percentage, if not

all, of your wealth?

Why don’t people purchase LTCI? There are really two reasons people do

not buy LTCI. 1) Cost. It can be expensive. 2) Need. Many people have the “it

won’t happen to me” attitude when it comes to the need for LTC expenses.

The sad truth is that the people who buy LTCI are people who have had a

loved one or a friend who felt the devastating effects of LTC costs and didn’t

have LTCI.

What does LTCI cover? It depends on the policy purchased. Some cover

only nursing home care while others cover in-home care as well as a number of

other expenses. The coverage will have a limit (usually a daily or monthly limit).

What triggers LTCI coverage to kick in? Typically, it’s when you can’t

perform “2 of 6 ADLs.” ADL stands for Activities of Daily Living: Bathing,

Dressing, Toileting, Transferring, Continence, and Eating without help.

LTCI options—there are several different ways to obtain LTCI coverage.

Depending on your situation, one may be better for you than another.

Traditional LTCI—this is the best but also the most expensive type of

LTCI. You pay an annual premium of $2,500-$10,000+ a year (depending on

your age); and if you incur LTC expenses, the policy will pay up to its daily limit.

Traditional LTCI is like term life insurance. If you don’t use it, you do not get the

premiums back.

The biggest problem with most traditional LTC policies is that the

premiums are not locked in and insurance companies have increased premiums

significantly on current policyholders (some increases have been 200%-300%).

SINGLE PREMIUM LIFE INSURANCE

What is a “Single Premium” Life (SPL) policy?

It’s a life insurance policy designed to act partially like an annuity and

partially like an LTC policy.

Most life insurance policies are funded for two reasons: 1) death benefit or

2) cash accumulation.

An SPL policy is funded partially for the death benefit, but it is also

funded to provide significant “living” benefits (and accelerated for LTC expenses

and if the client has a critical and terminal illness).

I discuss in some detail in the life insurance section of this course the

concept of “living” benefits of a life insurance policy. In short, when a policy

provides living benefits, it’s essentially giving the insured a portion of the death

benefit before death in the form of an LTC payment.

Benefits of an SPL policy—A good way to help you understand why you

need to learn about these products is simply to list the benefits. The benefits

below are not necessarily offered with every product.


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Simplified issued—these policies are NOT medically underwritten like

traditional life policies.

Long-term care benefits—this is a benefit built into almost all SPL

policies and the main reason people will use them.

Because most people do not like the idea of paying LTC insurance

premiums (they see it as a waste of money since they may never use it, not to

mention that it’s expensive). That means most people will choose to self-insure

their LTC expenses by keeping money available in CDs or money market

accounts (not a good use of the money since the returns are pathetic and taxable

each year).

An SPL policy will have tax-free LTC benefits and, if you don’t use those

benefits, a nice death benefit will pass income tax free to your heirs (much more

money will pass vs. keeping money in CDs or money market accounts).

Avoiding probate—because the death benefit from an SPL policy is paid

as a death benefit (which is not the case with CDs or money market funds), the

money will pass outside of the probate process. In some parts of the country, this

can save the heirs up to 10% of the value of the asset.

Liquidity—when people think of funding a life insurance policy, they

typically think of large surrender charges. There are SPL policies out there that

have what is called a Return of Premium (ROP) option to them. That means at

any time you can surrender the product and receive your entire premium back.

Other living benefits—besides an LTC benefit, some policies have other

accelerated living benefits such as a terminal or critical illness rider. These riders

allow the insured to access a significant portion of their death benefit while living

(vs. having to die in order for a life insurance policy to be useful).

Example—I wanted to show a simple example of the benefits you can

receive with an SPL policy. Assume the client is a 65-year old female who is

receiving SS benefits and who has $100,000 sitting in CDs. She does not want an

annuity because of the surrender charges and is very worried about LTC

expenses. If she purchased an SPL policy, the benefits would be as follows:

Death benefit $230,000 at issue

LTC benefit $449,248 in total benefits

If the insured dies before needing LTC, a death benefit well in excess of

the CD balance will pass to her heirs. If she needs the money to pay bills, it is

there through the return of premium option. If she incurs LTC expenses, they are

covered by the policy; and the benefit is significantly more than the balance of her

CDs.

Summary—since nearly 70% of all Americans will need LTC at some

point in their lives, it’s a given that everyone should have LTC insurance. I know

traditional LTC insurance can be expensive so an SPL policy can be a nice

alternative for money that people would typically keep in a safe place such as

CDs or money market accounts.

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SPECIAL NEEDS TRUSTS (SNTs)

I didn’t use to include SNTs in my books or educational material, but it

seems that there are more and more people who have special needs children and

so I thought it would make sense to put a little bit in this course material

explaining the benefits of SNTs.

Who has special needs? Those who have a mental, emotional, or physical

disability. Special needs can include many different medical or mental

impairments ranging from autism to epilepsy to visual impairments.

What is an SNTs? An SNT is a specialized trust that allows the disabled

beneficiary to enjoy the use of property that is held in the trust for his or her

benefit, while at the same time allowing the beneficiary to receive essential needs-

based government benefits.

What does that mean? The government provides financial assistance to

those with special needs (Medicaid or supplemental security income). This aid is

means tested. If a potential beneficiary of the aid has too much income or too

many assets, they will not qualify for aid.

An SNT can be funded and the benefits of that trust are not countable

when doing a means test to determine the special needs person’s eligibility for

government-provided aid. Therefore, the benefits from the trust can be used in

addition to the government aid to improve the lifestyle of the person with special

needs.

First-person and third-party trusts—There are two primary SNTs that can

be set up. First-person trusts are set up and funded by the person with the

disability. Third-party trusts are set up by someone else who wants to fund a trust

for the benefit of the disabled person.

Practical uses of SNTs

Inheritance—think of a fact pattern where the parents of a special needs

child are going to leave an inheritance to the child. If the money is given outright

to the child, that money will be counted when the government aid is means tested.

This is the most common fact pattern. Parents, many times, will be the

primary caregiver to their special needs child. The child many times can live a

long life and certainly can outlive the parents. The parents worry about who and

how the child will be taken care of once they pass. So, they set up an SNT that

will be funded at their death to make sure there is sufficient money to a “quality”

caregiver to take care of the child.

Personal injury settlement—many car crashes end up with injuries that

cause permanent damage (thus creating a person who then would be deemed

someone with special needs who could qualify for government aid). If the

proceeds from the personal injury case are placed in an SNT vs. given outright to

the person injured, then those assets can be preserved and used to supplement the

aid received from the government.


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Summary—if you have a special needs child or know someone who does,

the use of an SNT can play a vital role in helping protect assets from government

spend down and increase the available funds used to improve the lifestyle of the

person with special needs. These trusts can make parents feel good about making

sure their special needs child is going to be taken care of for years or even

decades after they are gone.

PROTECTING ASSETS IN A DIVORCE

Unfortunately, there is very little someone getting divorced can do to

protect their current assets in the divorce. The planning needs to come from the

parents.

Have you ever had a friend or relative come into an inheritance and then

hear the horror story about how that friend or relative lost half of it to an ex-

spouse in a divorce? It happens more than you would think.

What is the departing spouse entitled to? The answer is it depends on the

state; but if you have been married for more than 10 years, the chances are

significant that your spouse is going to get half of everything you inherited from

your last remaining parent. If that does not make you sick to your stomach,

nothing will.

So, when thinking about protecting assets from divorce, what you need to

think about are inherited assets. Let’s look at an example.

Mrs. Smith (widow), age 80, has a $2,000,000 estate. She has one son

who is married and has two children. When she dies, she plans on leaving her

money to her only son.

Assume Mrs. Smith dies and leaves the money outright to her son. Now

assume the son gets divorced 1-, 2-, 3-years later.

What happens to the inherited money? In most fact patterns, that money

will get co-mingled into the marital bank account; and when the divorce goes

through, guess who is getting 50% of the inherited assets?

The son’s soon-to-be ex-spouse!

How can this be prevented? The easiest way to prevent this is for the mom

to have a good estate plan that takes into account the potential that her heirs will

get divorced someday.

Using a trust to protect mom’s assets from the son’s divorce

What mom should NOT do in the example is leave assets outright to her

son after death.

Instead, mom should pass the assets to a trust for the benefit of her son.

Typical trust language has a schedule such as 25% of the assets shall pass to heirs

at age 55, 60, 65, and, finally, at 70. The thinking behind this is that, if you are

still married at those ages, the chances of getting divorced (assuming you have

been married for a while) are much less likely.

However, as everyone has seen, today people are getting divorced at all

ages (including after 60, 65, or even age 70).

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This is why it might NOT be prudent to just give assets outright at a

certain age and instead keep money in the trust but have liberal trust language as

to how money can come out of the trust for an heir’s needs.

Then, when and if an heir has marital problems or is going through a

divorce, the trust needs to have a protective spendthrift provision stating:

If my heirs have known marital problems and certainly if one is going

through a divorce, no distributions shall be allowed from the trust until the

divorce is final. The only exception to this is to help the heir pay for legal fees for

an attorney and life-sustaining expenses such as food, rent/mortgage, electric, etc.

Again, the language needs to be such that the trustee who controls the

money has the flexibility to give an heir funds or not depending on the marital

problems at hand.

Once the assets are in a trust, a judge will not be able to issue an order

forcing a distribution from the trust. And, as such, the money in the trust will be

protected from division in divorce.

Prenuptial Agreements—many people with significant wealth will use a

prenuptial agreement to dictate exactly what each spouse is entitled to in the event

of a divorce. Most of the time prenuptial agreements are used in second marriage

situations where one of the spouses has already amassed a significant estate and

where one spouse has almost no estate.

The spouse with significant wealth going into the second marriage

typically desires to preserve the majority of the estate for his/her children from a

prior marriage, and a prenuptial agreement is a nice way to accomplish that goal.

Prenuptial agreements are not an easy topic to discuss with a potential

spouse; and because of the touchy nature of the subject, many times wealthy

clients who really should have a prenuptial agreement do not. Hindsight is always

20-20;and if you are concerned that a spouse will be awarded more than what you

think is fair in a divorce matter, then you should seriously think about a prenuptial

agreement prior to marriage (especially in the case of a second marriage).

If you are currently married and wish you had a prenuptial agreement, you

can see if your spouse will sign a postnuptial agreement, which will work the

same as a prenuptial agreement.

GENERATION SKIPPING TAX (GST)

If your estate is over $10 million today (if you are single) or over $20

million (if you are married), then you might want to take steps to mitigate your

estate plan around the GST. A GST doesn’t come into play when passing wealth

to your direct heirs (sons or daughters). It comes into play when someone with a

large estate tries to pass wealth to the next generation (grandchildren (alive or to

be born in the future)).


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Because the vast majority of those who take this course will not have to

plan for the GST, I’ll not take space covering it. However, if you have a large

estate or know someone who does, feel free to email me at

[email protected]; and I can email you a multi-page summary

on how to avoid or mitigate the GST.

CHARITABLE PLANNING

Charitable planning is a subject all its own that merits an entire

educational module. I’ll give a brief overview on charitable planning and some of

its benefits.

Charitable planning is a term used by people in different ways.

For some, it’s as simple as giving to their church on a weekly basis.

For others, it’s about leaving a lasting legacy at a church or non-profit by

adding them to a will or as a beneficiary of a life or annuity product.

However, when most in the legal community think of charitable planning,

that usually means using a structure of some sort to accomplish a purpose in

addition to charitable giving.

Some of the charitable planning tools are: Charitable Remainder Trust

(CRT), Charitable Remainder Annuity Trust (CRAT), Charitable Remainder

Unitrusts (CRUT), Charitable Lead Trust (CLT), Family Foundations, Charitable

Gift Annuities, and the list goes on and on.

I’m going to discuss one charitable planning tool which is simplest but

powerful and can be useful in certain situations to benefit the client and the

charity.

Charitable Gift Annuities (CGAs)—A CGA is an arrangement between

a donor and a non-profit organization in which the donor receives a regular

income payment for life based on the value of assets transferred to the

organization. After the donor's death, the assets are retained by the organization.

Why use a CGA? CGAs are often used with highly appreciated assets

(stocks, mutual funds, or real estate).

While people should be happy with having highly appreciated assets, the

consternation comes in when the owner thinks about selling the asset. What

happens when you sell a highly appreciated asset? You have to pay capital gains

taxes.

CGA Quick Facts

-A charitable gift annuity is a contract between a donor and a qualified

501(c)(3) public charity.

-The donor makes an irrevocable gift to the charity in exchange for a

promise of lifetime income.

-Typically, the lifetime income is paid to the donor or to donor and spouse

(joint and survivor).

mailto:[email protected]

Estate Planning

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-The charity pays the donor(s) for life (monthly, quarterly, or annually) at

an agreed upon rate.

-Once reserve or reinsurance requirements to make donor payments have

been satisfied, the charity uses whatever remains from the original gift for its

charitable purposes.

-Some charities allow a portion of this “charitable remainder” from the

CGA to pass into a client/donor’s Donor Advised Fund (DAF).

-A CGA can provide lifetime income at a high rate that is guaranteed by

the charity and an immediate tax deduction for the donor.

Charitable Benefit—once a charity has met its payment obligation to a

donor, it can use the remainder of the gift from the donor for its charitable

purposes. Some charities allow all or a portion of this remainder to be designated

for a Donor Advised Fund (DAF) which is typically funded at the death of the

donor(s). This permits the donor (or the heirs if funded at the death of the donor)

to have some say in an advisory capacity as to how the charitable funds are used

and provides an excellent method of establishing a legacy.

Substantial Tax Benefits—there are three primary ways in which a CGA

can assist in tax management.

First, when transitioning the ownership of a highly appreciated capital

asset (marketable securities, real estate, business interests, etc.) to a charity in

exchange for a CGA, the donor does NOT realize a lump sum capital gain. The

capital gain is reduced significantly and then amortized over the donor’s life

expectancy. This means that a portion of the donor’s CGA income will be taxed at

the lower capital gains rate.

Second, a substantial immediate income tax deduction is given, which can

be used to offset current income taxes up to a certain amount based on adjusted

gross income. Any surplus deduction can be carried over up to five additional

years. The amount of the tax deduction is based upon the projected value of the

ultimate gift to charity.

Third, transitioning an asset to a CGA removes the asset from the donor’s

taxable estate, which can greatly reduce potential estate taxes. In some cases,

depending on the type of asset, transitioning an asset can also avoid Income with

Respect to a Decedent (IRD) taxation at estate settlement.

Wealth Replacement—for those who don’t need the income stream from a

CGA, oftentimes they will take the income and buy life insurance. The insurance

purchased many times can be a larger amount than the asset given to the charity

(meaning the heirs will receive the value of the asset given away and the donor

reduced the capital gains tax due and received an immediate income tax

deduction).

Summary—again, charitable planning is a subject matter that merits its

own entire educational module. What I tried to do in this estate planning section

of the course is to make readers aware that there are charitable planning

techniques that may be a viable option in an estate plan.


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If you have a large estate, the chances are high that a charitable plan will

be a fit in some way, shape, or form. However, even for smaller estates, there are

times when charitable planning can also be a viable tool (especially when dealing

with highly appreciated assets). This is a topic that you’ll need to get help from a

qualified advisor (and not one categorized as a bad advisor in the Bad Advisor

section of this course).

OTHER ESTATE PLANNING TOOLS

This educational module on estate planning does a good job of going over

the basics and even more than that with some of the items covered. However,

estate planning can become quite complicated and can use many different tools

for those with sizeable estates. Some of these tools are:

-Family Limited Partnerships (FLPs)

-Grantor Retained Annuity Trust (GRAT)

-Intentionally Defective Grantor Trust (IDGT)

-Qualified Personal Residence Trusts (QPRT)

-Irrevocable Life Insurance Trust (ILIT)

-Freeze Partnerships

If you have an estate with a net worth over $10 million (if you are single)

or $20 million (if you are married), then you’ll want to make sure you are

working with an advisor who knows how to use the previously mentioned tools.

SECTION SUMMARY

While this section of the course contained a lot of material, it’s not a

difficult subject to understand.

Everyone should have the basic estate planning tools (wills, trusts, durable

powers).

It’s best to avoid joint ownership of assets such as joint tenants with rights

of survivorship or even tenants in common. It’s much better to use an LLC which

can accomplish the same goals with much more certainty and asset protection.

Most people can benefit from the use of life insurance. The chore is

making sure to have the right type and the appropriate amount.

If you are 70 and older and have a life insurance policy, if you no longer

have a need for that policy, a life settlement might make sense.

If you are a professional (especially if you are a doctor), it may be prudent

to have disability insurance.

If your parents or grandparents are going to leave you assets upon their

death or if you are going to leave assets to your children or grandchildren, it is

best for those assets to be left in a trust that makes sure the assets will not be

subject to division in the event the heirs go through their own divorce.

Everyone should plan for long-term care expenses; but because traditional

LTC insurance is very expensive, it may be prudent to use a life insurance policy

designed to pay an LTC benefit while you are still living (a much better use of

your money than leaving it in a money market account or CD).

Estate Planning

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For some, charitable planning will make sense (especially for highly

appreciated assets that will be subject to capital gains taxes upon sale).

Finally, if you have a special needs child or loved one, using a special

needs trust is a terrific idea.

So, don’t be intimidated about estate planning. If you know the subject

matter from this course, you are well armed with the knowledge to sit down with

an estate planning attorney and financial planner to map out your estate plan.

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