Estate and Asset Protection Plan Strategies 3
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The irrevocable life insurance trust has an
additional advantage in that it requires minimum administration, usually only
once a year, just before the premium due date. Since the trust is
primarily unfunded prior to your death, there are generally no tax returns to
be filed for the trust. Your accountant (and you) will appreciate that
feature. However, you need to make annual administrative announcements
for the cash contributions by you to the trust for purposes of making premium
payments on the policies owned by the trust. We or your financial advisor
will be happy to assist in this matter to minimize any administrative headaches
for each of you relating to these trusts.
As required by current IRS
Regulations, each beneficiary of the Trust must be notified in writing of each
deposit made by you to the Trust's checking account for payment of insurance
premiums. By properly giving notice, and retaining file copies of these Notification
letters, each contribution of premium dollars by you to the Trust checking
account should qualify for the current annual gift tax exemption amount of
$13,500.00 (actually $14k, but should not write full check for $14k or
Christmas and birthday presents to that person become taxable gifts).
6. Buy-Sell
Agreement (for business owners)
The most common device used
for transferring ownership of a business on the death of a partner or
shareholder is the buy-sell agreement. Such contract hopefully will
facilitate the business continuing to run smoothly with the same people in
charge, minus one, provided proper business succession
planning has been put into place along with the buy-sell agreement.
Buy-sell agreements
typically provide that at the owner’s death, his or her interest in the
business will be purchased by the remaining partners or shareholders, leaving
the deceased partner’s family with the proceeds of the sale. Life
insurance is often a useful “funding vehicle” to finance these arrangements.
There are three (3)
principal ways to structure such agreements. An entity purchase allows
the business itself to take out a policy on the life of each owner and use the
life insurance proceeds to purchase the ownership interests of the deceased
partner. However, if the business is a “C” corporation there are significant income
tax disadvantages with such policy ownership by the corporate entity.
With a cross-purchase,
the co-owners personally take out insurance on each other and
each surviving business partner purchases his or her pro rata share of the
deceased partner’s interest. Since multiple polices become necessary with the
cross-purchase arrangement, an entity purchase is simpler; but, as noted above
the cross-purchase may be the preferred, tax-advantageous-arrangement if the
business is operating as a “C” corporation.
Alternatively, a trust-owned
policy insuring the lives of all the owners of the business can be
used to address these problems. Such policy would be owned by, and the
policy proceeds paid into, the trust upon the first death of any owner (thereby
only necessitating a single policy if the business is owned by two individuals,
as what is generally referred to as a "first-to-die" policy).
Obviously, if there are more than two owners in the business, then such policy
would carry a rider to continue in force for a subsequent payment upon the
second death of the remaining owners.
Generally, an independent,
third-party trustee is named in these arrangements; or alternatively, the
spouses of the business owners could form a "committee" of trustees
under the instrument. Then upon the first death of a business owner, his
or her spouse is removed from the trustee committee. The remaining
trustee(s) are directed by the written agreement to purchase the deceased
owner's interest in the business with the available life insurance
proceeds. If there were only two business owners, then the trust would
automatically terminate; or, in more than two owners the trust would of course
continue in existence until there is only one remaining owner left. Once
again, any trust, including the life insurance trust for a buy-sell agreement,
can be drafted to protect and preserve those insurance proceeds from the
family’s creditors, include a current or potentially future nursing home stay!
B.
Documents to Consider in Addition to Your LWT:
1. Living
Will
A written declaration that
permits you to state in advance your wishes about the use of life-prolonging
medical care if you become terminally ill and are unable to communicate or slip
into an irreversible coma; and, provides your written instructions to your
doctors and other healthcare providers regarding your wishes concerning life
support in the event you are terminally ill or, as a result of accident or
illness, cannot be restored to consciousness. This instrument permits you
to provide such instructions at a time when you are still able to “speak for
yourself”.
2. DFPOA
A Durable Financial Power
of Attorney appoints an agent to manage all or part of your business affairs in
the event of your incapacity, thereby permitting your “business affairs” to
remain private and confidential (not become a matter of public record). More
importantly, avoiding the delay, complications and significant expenses
otherwise required of your spouse or surviving family having to go through and
remain under the local probate court supervision. In this manner, the
DFPOA avoids the delays and significant legal costs and fees associated with a
court-appointed conservator, which would also have to pay an annual surety
bond. The DFPOA could easily save your family expenses upward of $5,000,
and more importantly, ensuring that your financial affairs will not become a
matter of public record.
Alabama law imposes
responsibility on the agent to act as your fiduciary. Since
this person can in effect do anything with your property, you should appoint
someone you trust completely and in whose judgment and ability you have
confidence (typically your spouse or one or more of your adult children).
You can limit the authority
of the agent in the document, giving him or her as many or as few powers over
your property as you wish by attaching conditions on their exercise of their
authority under your DFPOA.
3. Health
Care Power of Attorney
Allows you to appoint
someone to make healthcare decisions for you -- including, if you wish, the
decision to refuse intravenous fluids or tube feeding or authority to carry out
your wishes to turn off the respirator if you are brain-dead.
This legal instrument can
also be used by you to authorize your healthcare decision-maker to make other
decisions about such matters as nursing homes, surgeries, and artificial or
tube feeding. In this manner, the HCPOA avoids the delays and significant
legal costs and fees associated with a court-appointed guardian. The
HCPOA could easily save your family expenses upwards of $5,000 otherwise
associated with probate court guardianships.
C. Suggestions:
1. Coordination
It is a good idea to prepare the DFPOA, HCPA,
and Living Will at the same time, perhaps with a necessary update of your LWT,
in order that your attorney can make sure these legal documents are compatible
with each other and your overall estate plan intentions. All these
documents should be regarded as essential components of any estate plan.
2. Long-Term Care Policies
Look into Long-Term Care (“LTC”) policies, and
particularly investigate policies that will provide coverage/benefits for
in-home care, whether provided by professional care-givers or family members;
assisted living facilities; and nursing homes. Also, there are quite favorable
products now available that will allow your “premium” dollar
to do “double duty” for you and your family.
These newer policies might consist of primary
life insurance coverage on one or perhaps both spouses (what we typically refer
to as a “second-to-die” policy) with a long-term care rider added. If
nursing or in-home care and assistance is in your future, the policy pays those
needed benefits by simply reducing the otherwise available death benefit; but,
if you and your spouse are continually blessed with relative good health and
nursing care can be avoided, then at the death of the insured life, the
surviving spouse or designated family members receive a substantial
inheritance, all tax-free. The policy has provided you and your spouse
with the peace of mind that benefits for extended in-home, assisted-living, or
nursing home care will be available should such need arise, while at the same
time providing a sizable inheritance for your designated family members.
If you are still employed, you may wish to
discuss the possibility of your employer adding LTC under an existing group
plan; otherwise, if you are self-employed or retired, remember that Uncle Sam
will pay a portion of the LTC premiums as they are now tax deductible.
3. Section 529 Educational Plan
Next, consider investing a lump sum amount that
you are comfortable you will not need the income from, in a 529 Plan.
These are tax-advantaged accounts that permit you to set aside
a large sum (thereby reduce your own current income taxes) so that it might
grow to provide for future educational needs for your children, grandchildren
and other family members, once again, all tax-free.
A Section 529 plan
established for one’s children or grandchildren is an excellent family wealth
transfer vehicle that not only allows the parent or grandparent to
significantly reduce their own taxable estate (up to a maximum of $70,000 per
child and grandchild), but also allows for the funding of that college and
post-graduate or professional education with tax-free dollars. Future
growth and appreciation is removed from the parent or grandparent’s taxable
estate, and unlike the lost of control over a custodian or minor’s account when
the child reaches age 21, the Section 529 plan and its funds remain in
the control of the parent or grandparent establishing the college fund.
Also, the Section 529 plan provides greater
flexibility than generally available with a custodian or minor’s account or
even that under a formal trust arrangement. Under the 529 plan, if
circumstances change, the controlling parent or grandparent can change the
beneficiary of the funds (a child or grandchild becomes unavailable or perhaps
chooses to not avail themselves of the educational opportunities) and can even
liquidate the account if they need the funds later (of course, there would be
accompanying income tax consequences if the parent or grandparent takes the
money back, including a 10% tax penalty; nevertheless, as a good
“safety net” the account is there to be availed by you if needed).
4.
Maximize Retirement Savings
Next, if still employed, take full advantage of
all possible retirement plans and “sock away” for your own future. These
are tax-deferred opportunities that of course, permit you to keep the
“government’s money” working for you; you will only pay income taxes on
those amounts as you begin to take distributions at retirement. In
additional to tax-deferral and the principle of compounding working for you,
most retirement plans are also “creditor” or lawsuit protected.
Your creditors and potential lawsuit claims are
precluded from taking your retirement funds from your account; and, with
a properly drafted Will and “special needs” trust designation as beneficiary,
those hard-earned dollars will not become a “retirement nest egg” for the
nursing home! Of course, once you begin taking the required minimum
distributions at retirement, then as amounts are received by you they would
then be subject to such creditor claims.
5. Put Those Lazy Dollars to
Work
Finally, take a “close look” at your other
investments, particularly those of a liquid nature (checking account, passbook,
CDs, etc.) Are those funds working for you, keeping you ahead of
inflation (after-tax dollars)?
There are currently good
products available such as annuities that offer the advantage
of compounding your interest earnings, on a tax-deferred basis, while at the same
time providing you a guaranteed rate of return tied to future market gains (all
the upside advantage with a guarantee of your principal as if a bank CD); and,
also immediate annuities if a current income
stream is desired, such as to provide funding for that loved one’s “special
needs” trust.
Also, some states currently
“exempt” an immediate annuity under certain conditions and will not consider
the purchase of such an annuity as a disqualifying “transfer” for Medicaid
qualification purposes; but, unfortunately, Alabama is currently not among
those states.
