May – June 2013Newsletter Word Template
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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Your Planning TeamSummary: Fostering a coordinated financial and estate planning team is perhaps the most important steps that you can take to assure that your planning is properly handled. Advance apologies if some portions of this article ruffle feathers, but that’s far better than the adverse consequences that might otherwise happen if your team is not coordinated. Some of the most significant planning opportunities, and some of the most costly planning problems, are not squarely within the purview of your attorney, CPA, wealth manager, trust officer, or other planning members, but rather in the less well demarcated overlap between the various disciplines. Remember those Venn Diagrams from grade school with the three overlapping circles? The point where the three circles intersect, the issues of tax and finance that draw on your CPA, attorney and financial planner, is so often the planning sweet spot. In most cases your lawyer cannot advise you how to optimally operate a trust without consideration of which assets are held by the trust. That’s an asset “location” (not allocation) decision. And if your attorney and financial adviser try the task alone, without the insight of your CPA on income tax considerations, they’ll miss the mark. Remember how mom always told you that “two heads are better than one?” Well they are, and three and four heads on a planning team are exponentially better still. There is another important reason for coordinating your team: checks and balances. Some advisers are incompetent, some are downright scoundrels. So insisting on coordinating the team will protect your financial and legal affairs. More commonly, no adviser can know everything, not even the top in their field. So coordinating your team will permit other advisers overlap and help compensate for an adviser that lacks the skill or insight to address a specific issue. When the team functions well, everyone watches your back and you benefit. So if a coordinate planning team is the cat’s meow, why doesn’t it really seem to happen enough? What can you do about it?
■ It Costs Too Much: Let’s start with number 1 on the Letterman top 10 list of why advisory teams don’t function properly. It’s a classic case of “penny wise and pound foolish.” The benefits of a coordinated team will almost assuredly, and in almost every case, outweigh the costs, often dramatically so. People worry that it will cost too much. “If my CPA talks to my attorney they’ll both bill me!” True. But if they both talk your planning might actually work. The better answer is to minimize the costs of the team functioning as such. Permit advisers to interact directly without your involvement. They can talk more freely, and using technical jargon, all of which will expedite the process. The cost of copying other advisers on an email to you, or anyone on your planning team, is negligible.
■ Emperor’s New Clothes: Many folks think they have a “team” because they have a CPA, an attorney and a financial adviser. The emperor may have had pants, a shirt and underwear in his dresser drawer, but he was still au natural. The fact that you have the component parts is good, but unless they operate as a team, you’re missing out. You as the client have to authorize and direct your advisers to communicate. Many advisers are reluctant to reach out to other members of your team because they’ve been chastised by clients in the past for doing what they know is right.
■ Adviser Arrogance: Coordinate often doesn’t happen because of adviser arrogance. The attorney assumes that he or she understands everything necessary to create a plan and irrevocable trust and doesn’t communicate with your CPA. But after the 2012 tax act, for most taxpayers the income tax is far more important than a federal estate tax that they no longer face. Most attorneys simply don’t have the income tax knowledge that most CPAs have. And even for those that do have the knowledge, even fewer have the experience CPAs do preparing tax returns. While some lawyers may look down on tax return preparation as an inferior tax “activity” to research or planning, understanding how to report a transaction is a critical part of the planning process. This also works in reverse with many CPAs presuming that an attorney will add nothing to the review of the income tax returns they prepare. While this might be the case in ordinary situations, for the first year of a new entity or trust, or if the underlying planning is quite novel or complex, involving the attorney who prepared the plan and documents in a least a limited review capacity, can be critical to properly reporting the transaction. Some wealth advisers and trustees have added estate planners, CPAs and other professionals to their staff. That can be a great backstop and second opinion for a plan, but too often some in the wealth management community view their internal staff as all that is necessary to handle trust administration or even planning. That too is a mistake. A CPA, even if less technically proficient than the staff accountants at the trust company you use, may have a decades long relationship with your family and may understand your goals better than the trust company. Often, CPAs and attorneys working “in the trenches” have a different type of perspective. So even if the wealth management firm’s staff has more technical knowledge, they don’t have the same perspective. Adviser arrogance is easily resolved. You as the client have to make it clear that you expect a coordinated team effort. When wealth management, CPAs and attorneys work in concert the team will play beautiful music, and you’ll benefit.
■ Adviser Ignorance: Some advisers, e.g. an older small adviser you may have outgrown years ago, naysay anything a new or more sophisticated adviser recommends. Instead of admitting ignorance or discomfort with a document, plan or product, they negate it. There are several ways to assure that this common roadblock doesn’t happen. Encourage advisers to review planning as a team without your involvement. An adviser who doesn’t understand a technique will be more likely to ask questions freely if not embarrassed in front of you as the client. Welcome new ideas from your team, and if another adviser shoots an idea down, understand why.
■ Adviser Control: The more one adviser can control of your financial, estate and legal planning process, the more they can gain from your relationship. But their gain is not necessarily your gain. If a bank and complete income tax returns for a trust, and provide estate planning services, that’s great if they have the returns prepared or reviewed by your independent CPA before filing, and review the estate planning recommendations with the team. If not, are they seeking to enhance the perceived importance they have to you at the expense of the rest of your advisers? Insist on full cooperation and an approach that strengthens the team, not one adviser’s position.
■ Adviser Greed: Thankfully this is a bit rarer, but it does exist, and your team can protect you. If a “financial planner” suggests you buy a product, but suggests you don’t need to speak to your other advisers, be like Uncle Martin on My Favorite Martian and raise your antennae. Recently, an “insurance consultant” had a client’s insurance trust sell all life insurance and buy annuities. The sales person told the clients that there was no need to consult her attorney who wrote the trust or her financial planner who managed all her money. Apart from violating the trust, not providing the cash flow to the desired persons, and being inconsistent with the clients financial plan, it was the active discouragement from communicating with other advisers that permitted this misguided “plan” to be implemented for the financial betterment of the consultant. The stories of high commissioned products being sold when obviously inappropriate is legion. So too are the incidences of other advisers milking an elderly or ailing client that is too feeble to protect themselves. Did the elderly person name their attorney as sole executor because of a long term relationship, or as a result of overreaching and manipulation? If any adviser insists that a new plan or major decision doesn’t need to be reviewed by any other adviser, that is the sign that you must review it with your team.
■ Compartmentalization: A common occurrence is for clients to tell each adviser something different. This may not be intentional and may only result from the different types of matters each adviser may address. The reason is irrelevant, but the reality is important. When your advisers each freely share information each is likely to be better informed about your facts and circumstances. Yes, some cost, but more important, your planning will likely improve.
■ Yes Men: Some folks just love to hear what they want to hear. Some advisers are only too happy to say whatever those magic words are to keep a controlling client happy, on board and paying their bills. That destroys the free flow of ideas from a team. This is common because so many people seeking estate planning services have forceful personalities, after all, that is what enabled them to be successful and amassed the wealth for which they need planning! Encourage the free flow of ideas, especially dissenting ideas. The dissenting opinion might just be the most valuable to you, and may if followed break the damn on other beneficial planning scenarios.
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Checklist: Second Article 2 lines less than One Page [about 54 lines]:
[Laweasy.com Category: ### ]
Checklist Article Title: New Tax World
Summary: After the 2012 tax act most folks will never face a federal estate tax. If you’re a family under the $10.5M wealth level, or an individual under $5.25M (and those amounts will be adjusted upward for inflation in future years), then what do you do with existing planning? In some cases you might just be best off eliminating planning that was done previously, but in most cases you can retool prior planning to make it work better under the new tax rules. (Before zapping Consider the following:
√ Family Limited Partnership (FLP) or Limited Liability Company (LLC): Many of these entities, holding family investment assets, were formed to create discounts that would reduce estate taxes. Now, however, if your estate is not likely to be subject to an estate tax, you might not see the point of keeping that FLP/LLC around and paying annual fees to your CPA for the income tax return, legal fees, complexity and more. But before you zap that FLP/LLC reconsider how you can still benefit. ◙ The entity might provide valuable asset protection. In most states if you own only a portion of the interests in the entity it can be quite difficult for a claimant to realize any benefit. ◙ In divorce, the entity might avoid commingling immune assets with marital assets and protect a child who has received gifts or inheritances outside of trust. ◙ If you want to avoid discounts have the partnership agreement (LLC operating agreement) revised to eliminate the restrictions that previously created them. In that way, on death, the absence of discounts will mean a greater step up in tax basis and lower capital gains for your heirs. Be cautious in the changes made to accomplish this as you don’t want to excessively undermine the asset protection the FLP/LLC provides while eliminating the discounts. ◙ If you’ve given away interests in the FLP/LLC to heirs, it may be possible to reinforce or even create retained interests that for estate tax purposes might bring the entire FLP/LLC back into your estate for basis step up purposes. That could be a better result than liquidating since only your interests would then get a basis step up. ◙ Finally, so long as you meet the tax rules of Code Section 704(e) you can use the FLP/LLC to shift income to lower bracket family members.
√ Bypass Trust: Many widows and widowers have existing bypass trusts formed when their spouse passed away. These trusts may have made a lot of sense at the time (and even until last year when there was worry of the estate exemption dropping to $1M), but do they make sense now? ◙ Does the cost of filing a tax return, dealing with an attorney, and the complexity still pay to keep? If you assuredly won’t face a federal or state estate tax, it may not. ◙ If the assets in the bypass trust have appreciated (e.g., stocks held for years) your heirs won’t receive a step up in income tax basis on death to the fair value of those assets. So they will face a larger capital gains tax. That capital gains tax may outweigh any state estate tax your estate will bear. The trustee might have authority to distribute out appreciated assets so that they do, even if the trust is not liquidated. ◙ The trust might be able to provide significant income tax savings if all your descendants are named beneficiaries by distributing income each year to the beneficiaries in the lowest income tax brackets. ◙ In some cases, unless the asset protection (lawsuit protection) benefits of the trust remain meaningful, you might just want to distribute the trust out and close it down (assuming the terms of the trust permit this).
√ QPRTs: Qualified Personal Residence Trusts are special trusts to which you may have given your house to remove it from your estate in a tax advantageous manner. ◙ If you did this when the exemption was much lower, you may no longer need the QPRT to save estate tax (but watch out for state estate tax). ◙ If a QPRT succeeds the house is outside your estate which means no increase in tax basis (the amount on which gain or loss is calculated when heirs sell after your death). That could be costly. ◙ If you don’t face a large enough estate tax the income tax cost your heirs will face may outweigh the estate tax savings (if any). ◙ Consider unraveling the tax effects of the QPRT (you probably cannot unravel the QPRT since the trust is irrevocable). Assuring you hold a “retained interest” will cause estate inclusion and provide your heirs with a basis step up. Consider signing a lifetime lease for $1 a year. Watch trustee liability!
Recent Developments Article 1/3 Page [about 18 lines]:
■ Buysell Agreement: Every family (and other) business should review their buysell agreement and be sure it is current. Caution, the tax laws (IRC Sec. 2703) contain tough rules as to when a family buysell will be respected for setting value for estate tax purposes. If you have an old pre-October 8, 1990 buy-sell agreement you’ve still never updated, be careful that a significant change might subject that agreement to the stringent IRC Sec. 2703 rules that it be comparable to arm’s length agreements between unrelated parties, so that it may no longer depress value for estate tax purpose. See PLR 201313001.
■ Is the 4% Rule Dead: Financial planners have used a 4% rule for many years. The “rule” isn’t really a rule but a rough generalization that suggested that if you don’t spend more than 4% of your principal you’ll never run out of money. So if you planned on retiring with $5M in savings (ignoring your house which you can’t spend) you could spend $5M x 4% or $200,000/year and be “safe.” There seems to be a growing chorus expressing concern that in the current investment environment 4% may be too high for someone that has retired or is retiring shortly. While rules of thumb are only as good as the thumb you’re using, the bottom line is that caution is advisable. Everyone should review their budget and financial plan to be sure they remain on course at least annually. Many wealthy people view budgets as something for the proletariat, no so. No matter how big your nest egg, there are limits to how you can spend. It is amazing how many people stress over how they’ll divide up their estate, without first assuring they’ll have an estate at the end of the line. “The 4 Percent Rule is Not Safe in a Low-Yield World,” the study by Michael Finke, Wade Pfau and David Blanchett.
■ Can’t Always Use Your CPA as an Excuse: An estate’s CPA filed an extension for the estate tax return and told the executor it was a 1 year extension when extensions are really only for 6 months. The IRS zapped the estate and the Court would not let the executor use the CPA’s bad advice as a get out of jail card. That advice did not constitute “reasonable cause” to excuse the late filing. Peter Knappe, Executor of the Estate of Ingborg Pattee v. U.S. (CA 9 4/4/2013) 111 AFTR 2d 2013-612.
Potpourri ½ Page:
■ Disclaimer Trusts are the Rage But Should You Disclaim? With the new high $5M inflation adjusted federal estate tax exemption the most common estate tax planning technique may well become a disclaimer bypass trust. You leave all outright to your surviving spouse (great in a 3rd marriage or if your spouse is a physician worried about malpractice risks, but alas that is another story). Then your surviving spouse can disclaim (renounce) any portion of that bequest which will go into a bypass trust which she/he has access to, but which won’t be included in her estate. This is a great way to use the benefits of hindsight to determine if a trust should be used and how much to put into it. But in many cases there is a better option. Most bypass trusts are, and will likely remain, less than optimal vehicles. Most are simply not drafted using modern trust drafting techniques. Why settle for a Big Mac if you can have a steak at Ruth’s Chris steakhouse (I’m a vegetarian, but that sounded like a good analogy)? Don’t disclaim (unless you’re imminently going to be sued). Accept the inheritance and immediately set up a modern, state of the art, trust and gift the assets you just inherited (and more if you wish) to that trust. The trust should be set up in one of the trust favorable jurisdictions (Alaska, Delaware, Nevada or South Dakota). It should be a grantor trust (you pay income tax on the trust earnings to further reduce your estate but also so you can swap assets to pull appreciation back into your estate). The trust should be a long term or perpetual trust so you can lock in the tax and asset protection benefits for yourself and all your heirs. You can be a beneficiary of the trust which makes the trust a “self-settled” trust. This does create some risk, which you should evaluate with your advisers. This approach can enable you to avoid multiple trusts (e.g. a bypass trust from your late spouse, a marital trust from your late spouse, and a trust for your estate planning). If you live in a state with an exemption lower than the federal exemption amount (e.g., NY, NJ) you can greatly enhance the state estate tax savings with such a plan (except in CT and MN which have a gift tax, but even then it might still be beneficial). Yes, these are more complex and costly, but Ruth charges more too, and she doesn’t sell Big Mac steaks!
Back Page Announcements:
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Your Planning Team
New Tax World
Is the 4% Rule Dead
Can’t Always Use Your CPA as an Excuse
Disclaimer Trusts are the Rage But Should You Disclaim?
Your Planning Team
- Fostering a coordinated financial and estate planning team is perhaps the most important steps that you can take to assure that your planning is properly handled. Advance apologies if some portions of this article ruffle feathers, but that’s far better than the adverse consequences that might otherwise happen if your team is not coordinated. Some of the most significant planning opportunities, and some of the most costly planning problems, are not squarely within the purview of your attorney, CPA, wealth manager, trust officer, or other planning members, but rather in the less well demarcated overlap between the various disciplines.