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Issues in estates and trusts

By David H. Glusman, CPA

In gaining an understanding of how to plan for the future, as well as to optimize the issues people have to address in their current business and financial lives, an understanding of estates and trusts is essential. This article will briefly go over some of the highlights of issues that need to be addressed.

In general, individuals are currently allowed a $2 million exemption from estate taxes for federal purposes when they die. While, at the current time, the future of the exact amount of the exemption is in question, the concept is likely to stay in place for the foreseeable future. In addition, individuals are allowed to make life-time gifts without any gift or estate tax implication. The current amount of the exemption is $12,000 per donor per donee per year. This means that a married couple can make tax-free gifts of $24,000 a year to each of their children, as well as to any other individuals that they may so choose. The essence of these issues is the methodology for minimizing the ultimate estate tax that will be paid when both members of the couple are deceased. In addition to the ability to transfer amounts to others, as well as the ability to escape taxation, there is an additional vehicle that allows a husband or wife to transfer any amount at their death to their spouse with federal estate tax. The combination of these provisions, as well as the use of certain tax beneficial provisions in trusts and certain partnership issues, can further optimize long-term family financial and estate planning.

One additional issue that frequently comes up for professionals regarding estate planning is the issue of asset protection. Individuals need to ascertain whether they have a “overriding need” for asset protection. In general, asset protection is an issue that should be addressed by an individual with their attorney and their estate planning professional on a regular basis. Issues of asset protection will generally include the titling of various property. While there are many specific issues that would be discussed, in general, assets that are held in joint name will not be subject to attachment in the event of an unsuccessful lawsuit against an individual for professional malpractice insurance, and of course this would only come into play when the malpractice insurance amounts are inadequate to cover any ultimate judgments.

Consider the following example. Physician, Mary Smith is married to accountant John Smith. Mary Smith has malpractice issues in her practice. John Smith has potential malpractice issues in his accounting practice. In almost all circumstances, a finding against either of them (barring some very unusual circumstances where they might be deemed jointly liable) would only result in assets being seized where there is single ownership. If Mary Smith was found to be liable in a medical malpractice action – and the finding was in excess of her medical malpractice insurance and any medical practice assets – the plaintiff might be able to attach or seize assets in her individual name but any and all assets held jointly by Mary and John (tenants in common with right of survivorship, for instance) would preclude the plaintiff from seizing those assets as long as John Smith was alive and the assets were jointly owned by Mary and John Smith.

Ultimately, the issues in estate planning need to be balanced against asset protection issues that may be available in the estate planning process. In some cases, the two issues end up working against each other. For this reason, it is important to understand options with regard to asset protection, additional insurance thought processes, as well as various trust opportunities.

Trusts may be used in a variety of areas to optimize the estate planning process. As a summary, a trust may be utilized inside the estate planning process; that is, included in an individual’s will, whereby the trust does not come into creation until the death of the individual. This may allow for amounts to be paid into the trust to optimize the use of the marital deduction noted above. Such a trust will also allow the remaining spouse to benefit from the income produced by the assets placed in the trust during his or her remaining lifetime.

Trusts can also be set up during an individual’s lifetime for a variety of purposes. One of the most common purposes is to hold life insurance. This type of trust, known as a Crummey Trust, (named after a physician, Dr. Crummey, who did really good planning in the past, and whose trust survived IRS scrutiny) can use a combination of the annual gifts noted above, together with the exclusion of life insurance from one’s estate to make certain that an individual who is attempting to provide funds for the remaining family members after the individual’s demise, will not inadvertently have those funds included in the taxable federal estate.

Trusts can also be used for a variety of purposes, including the provision for family members with “special needs,” including those with mental or physical incapacities.

Certain types of partnerships can also be utilized in the process, both to optimize the valuation issues as well as to be part of the gifting process. Family limited partnerships (FLPs) are a good vehicle to potentially utilize in the combination of managing ones’ assets during ones’ lifetime, and simultaneously, making certain provisions for the transfer of a portion of the assets to other members of the family. Because of the restrictions that exist with regard to the transfer of the assets during the lifetime of the limited partners, and because the FLP ownership interests are in fact “limited,” there are a variety of discounts that can be applied to the essential underlying value for gift and estate purposes. While the IRS has successfully attacked a number of FLPs in the past, these have been circumstances where the grantor of the trust has essentially abused the underlying issues.

Life insurance was mentioned above with regard to its use in a trust, but life insurance in itself is an issue that needs to be addressed in the estate planning process. There are a variety of types of life insurance that may be utilized, depending on the likely needs of the individual. Many life insurance policies are “term” and have no “cash surrender value” being built up. These are technical terms that need to be understood when one is doing his or her planning. In addition, life insurance may have cash surrender value and be what is referred to as “permanent insurance.” In some cases, permanent insurance can be designed so that an individual pays a limited number of premiums and, thereafter, the policy will continue to fund itself no matter how long the individual lives. Working with a qualified estate planner, together with a qualified insurance specialist will allow for the optimum use of various types of insurance in the estate planning process.

One area in estate planning that is often overlooked is communication with the survivors. While there is no legal holding, a “post-mortem” letter often will allow for easier implementation of the estate plan, and a continuation of smoother financial sailing after the death of the primary wage earner. This is especially true when that individual has taken care of most of the financial details during their lifetime. A post-mortem letter will generally cover a variety of subjects including: where assets are, how they are titled, who may be contacted in order to understand them and make transfers after death, as well as other general administrative matters.

In summary, the estate planning process can greatly enhance the overall financial wealth of the family, and allows for a variety of tools to be used to make certain that the individual’s desires are as closely met as possible.

David H. Glusman, CPA is a principal at Margolis & Company P.C. and is co-chair of the firm’s Healthcare Services Group.

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