• 02
  • September
    2010

When the economy is bad and the investment picture is unclear, as it is now, the best investment move may very well be to do nothing. But any Florida estate planning attorney can tell you that that same advice does not apply to estate planning.

Some estate planners might try to take "a wait-and-see" approach until Congress acts on a host of pending tax issues. A decade's worth of cuts in income, capital gains and estate taxes are slated to end in 2011, reverting to pre-2001 levels.

But waiting is not necessarily a good idea. estate planners can't afford to wait until all the dust settles. In any case, there is never a time when all of the dust is settled. There are always changes in estate and tax law and policy. A planner needs to look at what can be done with what we know now, not just wait to find out what might change in the future.

Continued...

Here's an example that faced an estate planner last year: a retired couple wanted a wealth transfer plan that would generate retirement cash flow while maximizing savings.

The couple, in their 70s and with a net worth in the millions, wanted to ensure their two grown children would be in good financial shape, and they wanted to maintain their lifestyle.

They had a life insurance policy with a cash surrender value of around $2.7 million. Many people try to put these policies in an irrevocable life insurance trust, but this couple hadn't done that.

They also had real estate and family-owned businesses; highly illiquid assets.

Because the poor economy was devaluing the illiquid assets, it was a good time to transfer them to the children.

The illiquid assets were sold to an irrevocable trust, removing them from the estate. The trust will pay the couple an amortized income while they are alive, and their children, as beneficiaries, score a win as well: Because applicable federal rates (which track the Treasury yield curve) are extremely low, the principal and interest being paid to the couple by the trust is relatively small, leaving more of the underlying assets within the trust to be either taken out as income for the beneficiaries or be redeployed into the trust to further its growth.

The $2.7 million life insurance policy was sold to an irrevocable grantor trust and generated cash flow from it to the couple by taking loans on the policy.

Taxes owed by the trust are being paid by the parents instead of the trust itself, so the trust assets can grow while the parents' estate is reduced.

The potential estate tax bill has been reduced from $10 million to $7.5 million and the couple's annual cash flow from the trusts is set to exceed $400,000. The amount of wealth that they can transfer to their children has gone from $15.5 million to $22 million.

So in this case, action paid off.

Source: Wall Street Journal "Doing Nothing Not An Option For Estates" 8/30/2010