Tag: Estate Planning

ILIT As An Effective Estate Planning Tool

Protecting one’s estate from creditors, predators, in-laws, and outlaws is a key reason clients with larger estates may consider establishing an Irrevocable Life Insurance Trust, or ILIT.

Acronyms can be mystifying, so let’s start with a definition.  An ILIT is a trust wherein the grantor gifts assets (and thereby gives up all incidence of ownership) so that the ILIT itself becomes the owner of the asset(s). That effectively removes the asset(s) from inclusion in the grantor’s estate.  So if all goes as it should, upon death there could be less or no estate taxes because the estate is smaller.  This makes the ILIT an essential tool for financial and estate planning.

As with many things that sound too good to be true, there are downsides.

1. Benefits of Ownership

Top is that the grantor typically also irrevocably forfeits the incidents of ownership.   This may include control as well as economic benefits such as cash flow.  The extent to which this occurs may depend on state law and the trust language.

2. Pull Back

If an individual owner dies within three years of gifting the asset, the value of the asset is pulled back into the estate for tax purposes.  It is important to remember that it is the death of the owner, not the insured, that influences the clock for this three year rule.

Depending on the client’s goals, ILIT’s often have either one or both of these objectives:

3. Liquidity

If the estate size is large enough to potentially be taxable, an ILIT can provide cash at death that could be used to pay estate taxes and estate settlement costs.  Under this scenario, life insurance on either one or both spouse’s lives is often used as the funding vehicle.  This contrasts with life insurance that is owned by the grantor and would thus be included in his or her estate for tax purposes.  It also provides a leveraged effect in that the dollars paid for premium are typically a fraction of what the actual death benefit can be.  The goal is to make sure the estate has sufficient liquidity so there is no pressure to liquidate assets at an inopportune time just to settle the tax bill.

4. Estate Reduction

Since an ILIT can hold virtually any asset of value, another goal may simply be to transfer the asset out of the estate.   This will make the estate smaller at death and thus subject to less or no estate taxes.  The strategy can be even more effective if the asset is expected to appreciate in value, since that appreciation would hopefully be out of the grantor’s estate and therefore also not subject to estate taxes.

So if the husband owns an insurance policy on his wife, as an example, and she dies, the proceeds that would be available to the estate at that time would not be subject to estate taxes.  However, upon the husband’s subsequent death, the value would be included and possibly taxable.

Using life insurance within an ILIT can offer an alternative.  First, life insurance proceeds are generally received income tax free by the policy beneficiaries.  Also, there can be creditor protection, since in many states life insurance proceeds paid to a named beneficiary are not subject to the claims of the policy owner’s creditors.  The specific rules of course can vary from state to state.

If the estate is named as beneficiary, the proceeds are still paid income tax free.  However by doing this we have converted a non-probatable asset into one that is subjected to the probate process.  This can create several disadvantages, including:

  1. Expenses are greater due to attorney and court fees;
  2. More time is needed to go through the probate process as opposed to just a beneficiary payment;
  3. Estate creditors could have access to the insurance proceeds depending, again, on prevailing state laws.  Hence a reason we would not usually recommend the estate as beneficiary of an insurance policy.  This also speaks to the prudence of always naming a contingent or secondary beneficiary;

In short, an ILIT is really a financial bucket designed to hold assets.  In dealing with life insurance, the policy’s value is not the insurance proceeds but rather the cash value or the market value, as determined by an IRS formula.  So when dealing with existing coverage, it is a simple matter of having the owner transfer or assign the policy to an ILIT by filing a change of policy ownership and beneficiary form with the insurance company.  Once the ownership change has been recorded by the insurer, it is also important to now name the ILIT as the new owner as well as the policy beneficiary.  Since this is a gift, a gift tax return form 709 should also be filed with the IRS even if there is no tax due.

Clients often ask how gifting an insurance policy to an ILIT could affect their annual gift exclusion.  In considering this, it is important to remember that the exclusion applies to present interest gifts which can be enjoyed now.  By contrast, gifts to an ILIT are of a future interest so they do not typically qualify for the exclusion.

As an alternative, we use a technique called the “Crummey” provisions.  The Crummey provision is based on prior case law and allows an exception when the ILIT trustee sends a letter to the trust beneficiary saying they have a specific time, say 30 days, to claim their portion of the gift.  Although they may not opt to do so, that the option exists effectively creates a “present-interest” gift exclusion.

Another option is to allow for spousal access.  This means that the trustee in his or her sole discretion may distribute money to the spouse or the grantor for health, education, maintenance or support.  We usually see this in the form of separate ILIT’s for each spouse with the non-insured spouse being the beneficiary.  If done properly, the provision can allow the spouse to withdraw dividends and interest earned by the policy at, say, retirement, while keeping a majority of the death benefit available to the estate.

With any irrevocable trust, and ILIT’s are no exception, there can be an issue of retaining too much control over the transferred assets.  When this occurs, we face the danger of having the policy being pulled back into the estate for tax purposes.  That is why it is often advisable to spend the additional expense in order to involve a professional trustee.  Professional trustees, often a trust company or bank, typically bring a high competence to the table that may help assure all functions as it is intended.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary, no obligation “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara City College and Pasadena City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

How Can You Avoid Wealth Transference Failure?

If you believe that everything has been done to preserve your estate as it passes to your heirs, you may want to think again. Almost 70 percent of family wealth transference and business succession plans fail, according to studies cited by Victor Preisser and Roy Williams, in their book Preparing Heirs.

Continue reading “How Can You Avoid Wealth Transference Failure?”

How Can You Avoid the Top 10 Estate Planning Pitfalls?

Upon your death, the best thing you can do for loved ones upon death is allow them to resolve your estate quickly and easily, so they can get on with their lives. But people often fall into 10 estate planning traps. Here is how to avoid them. Understanding and avoiding these common errors can help minimize the tax bite for your heirs and assure that your wishes are fulfilled.

1.  Not funding your living trust

This important trust places your assets “in bin” while you are alive. Postmortem a pre-appointed trustee is provided to manage them. Living trusts can usually help avoid probate (a costly court proceeding that decides which heirs receive your assets after your death) and help reduce taxes on your estate. No matter how thorough your living trust is, it needs to be adequately funded. Generally, to be effective, you must move property and assets into the trust by making the trust the legal owner of those assets. If you don’t make the appropriate title transfers, assets may be subject to probate and eventually, estate taxes.

2.  Too much JTWROS property

Joint-tenancy-with-right-of-survivorship (JTWROS) is a type of brokerage account that you share with your family members while you are alive. After you pass away, your survivors inherit your share of the account. While titling assets under JTWROS does avoid probate, it does not avoid estate taxes. It is important to keep in mind that property titled JTWROS goes to the surviving joint tenant regardless of what a will or trust says.

3.  Leaving too many assets to a surviving spouse

Under the current tax laws, you are allowed to transfer as many assets in your estate as you wish to your spouse either while you are alive or at your death. The problem and extra tax may come when those assets pass to the next generation. A major goal of a living trust is to preserve the first-to-die spouse’s applicable exclusion amount. This is the amount that is exempt from estate and gift taxes. It is advisable to check the current amounts with your attorney.

4.  Not equalizing assets through gifts between spouses

This is another example of improper titling and wasting the applicable exclusion amount. Having all property titled in one spouse’s name can create problems when the non-titled spouse dies first and does not pass on any property under his or her credit.

5.  Not having a will

If you die without a will, the disposition of property falls under the purview of the state intestacy laws. In effect, a judge decides who gets what according to a preset formula based on lineage. Not only can your wishes be thwarted, but this process can also bring additional legal costs, taxes, delays and frustrations to your heirs.

6.  Improper ownership of life insurance

Policies are often owned by the insured, payable to the insured’s estate or survivors. This is included in the owner’s taxable estate and is therefore subject to estate taxes. You can avoid this by giving the policies directly to the beneficiaries or transferring them to an irrevocable trust.

7.  Being donor and custodian of a UTMA account

If you are the custodian and donor to a uniform transfer to minors account, that account will be included in your estate and possibly subject to painful estate taxes.

8.  Not knowing where all the documents are

Heirs are often burdened with hunting down accounts and documentation. A scattered estate plan by a secretive deceased person may cause some assets to be left uncollected, undistributed and even lost. It is best to keep copies of documents, recent account statements and safe deposit box information in a notebook and to make your trusted heirs aware of its contents.

9.  Naming the wrong executor

The tasks facing an executor are often formidable and demanding. If you are concerned that your spouse, relatives or friends are not up to the task, consider hiring a professional or a trust company.

10. Not periodically updating an estate plan

It is human nature to think about dying. That makes estate planning one of the most frequently procrastinated aspects of our financial plans. Often when the original documents are drafted, people are tempted to put it on a shelf and be done with them.

As your economic situation, health, family and the tax code inevitably change, so too should your estate plan. You should review your estate plan at least every couple of years. It’s best to work with an experienced advisor who can help make the necessary modifications.

Even the most sophisticated estate planning tools can go awry due to some simple oversights. Be sure to work with an experienced financial professional to help you achieve your estate planning goals.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

A Survivor’s Financial Checklist

No one likes to think about death, and yet we all have to face it sooner or later.  My clients often request a checklist when someone they know has passed away.  It can provide some structure during a time that can seem overwhelming.  This financial checklist is in no way meant to be legal recommendations. A couple of things to note:

  1. Since each estate is unique, your own legal and accounting professionals should guide you through the overall process.
  2. If you are a Trustee, the estate planning documents will give you immediate access to funds possibly needed for funeral and other expenses related to the death of the individual.
  3. If you are a named executor, you will have to wait for court appointment for access to funds but you should be able to retrieve the individual’s original will from his/her safe deposit box.

Within the first few days –Take your time. Recognize that you are going through a grieving process. Do not be rushed into any decisions. At the immediate time of death, there is nothing that needs to happen from a legal standpoint. You can spend your time dealing with the doctors, funeral homes and immediate family members. Get yourself through this time and process. After that, your next step will be to:

1. ____Locate any health care powers of attorney, advance health care directives, funeral and burial instructions, etc. and review them for possible instructions about disposal of the body and funeral arrangements.

2.____ Locate any papers relating to prearranged funeral services or pre-purchased burial plots.

3. ____If your loved one has served in the U.S. Military, check the website www.USMilitary.about.com and search for information on Military Honors available at burial such as US Flag and Military Representative.

4.____ Check with the decedent’s banks to see if they have any safe deposit boxes.

5.____ Locate the original copy of the will or trust, if there is one.

6.____ Locate all the legal and financial documents that pertain to the deceased person’s assets such as deeds, vehicle titles, stocks, bonds and insurance policies.

7.____ Locate and secure important personal documents such as driver’s license, social security card, passport, birth certificate, divorce decree, legal separation agreement, Marriage license, military separation papers, citizenship and retirement documents.

8.____ Maintain a detailed list of all expenses relating to the final care and/or death of the decedent. You will probably be able to obtain reimbursement for these expenses from the decedent’s estate or trust, and some of these expenses will be deductible for estate tax or income tax purposes.

9.____Contact the deceased person’s financial planner, CPA and estate planning attorney. They each need to know and will each have a role in helping you. The attorney will prepare any documents necessary to confirm the authority of the successor trustee of the trust. This will give the trustee access to assets within the trust to cover costs of the funeral and/or other related expenses.

10.____Request a minimum of five (5) death certificates from the funeral home. Most life insurance policies and related assets require an original certificate with the claim form.

Within the following week – The deceased’s financial planner will often help with the following.

1.____Contact the insurance agent or agency handling each life insurance policy and request death benefit claim forms. If the deceased had a financial planner they will often do this for you. Note that most insurers will usually cut a check relatively quickly following the death of a loved one.

NOTE: Do not feel compelled to invest this money immediately. Most insurance companies will let you keep the proceeds from a life insurance policy in an interest bearing cash account until you have a plan for investing it. If you know your loved one had a life insurance policy but you cannot find it, contact the American Council of Life Insurers (www.acli.com), which offers guidance in tracing missing policies.

2._____Notify all other insurance carriers i.e., health, long term care, umbrella, disability, accidental death, travel, vehicle, homeowners or renter’s insurance.

3.____Get a list of all the beneficiaries of the insurance policies with their age, relationship to deceased and their current address and phone number.

4.____Contact the deceased’s current and past employer to see if any retirement plans or life insurance policies are in place and request the necessary claim forms.

NOTE: Many companies make every attempt to help the families of their employees after a death. They may cut you a check right away for wages owed, vacation pay, sick pay, and life insurance benefits. If the death was the result of an accident on company time, there may also be accidental death and dismemberment benefits.

NOTE: Also notify Worker’s Comp, if appropriate.

5._____Gather all of the decedent’s bills and expenses that are coming due, bank and brokerage statements, and last year’s tax return.

6._____Locate and organize notes regarding assets and liabilities, such as Promissory Notes, Loans, Business Interests, Patents, and Royalties

7.____ Check with banks and credit card companies to see if there was additional life insurance connected with the decedent’s accounts.

8.____ Contact all of the financial institutions that hold any assets of the deceased. Tell them you need the date of death values on each asset in each account. Ask them to send you a copy of this information. Note the name of the individual assisting you.

9.____ Locate and secure any items mentioned in a governing document, will or trust or documents of title.

When You Have Received the Death Certificates

1.____ Process Life Insurance Claims

2.____ Apply for Social Security Benefits at 1-800-772-1213 (and/or the Veteran’s office at 916-731-7300 if applicable) and inform them of the death of the individual. Otherwise you will be required to pay back any monies that are overpaid to the decedent. Many times the funeral home will have notified Social Security; confirm this with them.

3.____ Close Credit Card Accounts and destroy Credit Cards.

4.____ Notify banks and brokerage firms and remove the deceased’s name from any joint accounts.

5._____Meet with the deceased’s financial planner or yours, as appropriate, to develop a long-term investment plan for the estate assets, including any life insurance benefits to be received.

Within the Next Few Weeks After Death

_____ Gather the legal documents (deeds, promissory notes, deeds of trust, loan or real estate documents), estate planning documents (such as wills and trusts), all current and/or past due bills, statements, claims forms, etc., and set up an initial meeting with the financial planner, CPA and the estate planning attorney to identify what needs to be done and coordinate who will do it.

Some of the tasks that will need to be addressed include the following:

  • Lodge the original will with the court in the county of his/her domicile (legal residence).
  • See an attorney to determine whether a petition for probate of the will must be filed.
  • Beginning to prepare for filing the estate tax return (Form 706). Some of the forms and documents you have been collecting will be needed by your CPA or attorney to document date of death calculations for that return.
  • Your attorney or CPA can assist you with finalizing and understanding any legal documents and/or forms that you have received.
  • The financial planner and estate attorney can also assist you with funding the trusts (if applicable) and with making distributions to any beneficiaries.
  • The financial planner and CPA can help you make IRA and pension plan election decisions.

Things to consider:

  1. When you are ready, taking charge of the financial affairs can be a very healing process. It gives us focus and empowerment when we may need it the most.
  2. If applicable, contact a human resources (HR) representative of the decedent’s employer for help with retirement plans. A surviving spouse will be able to roll over money from the deceased spouse’s retirement plan into his or her own IRA. In most cases, that will make sense, but if you are considerably younger than your spouse you may want to keep the assets in your spouse’s retirement plan. That may allow you to tap into those assets at a younger age without penalty.
  3. Make sure you have sufficient cash on hand. One of the biggest concerns immediately following a death in the family is making sure the survivors have enough cash to meet their current expenses as well as funeral costs. You may want to take part of your life insurance proceeds or other death benefits and increase your cash reserves. Try to have at least six months’ worth of living expenses covered in a money market or other very accessible account. This will help ensure that you are not too rushed into making other major financial decisions right away.
  4. Consider creating a lasting memorial. One of the most healing experiences for survivors is to find a way to honor the people they have lost. Whether it’s through a brick paver in a memorial walkway, a scholarship in the name of your loved one at his or her alma mater, or a donation to a favorite charity, creating a tangible remembrance is an important part of paying tribute to those who have blessed our lives.
  5. If you wonder if you could benefit from any type of bereavement counseling or other support, you probably could. Please feel free ask us for a list of community resources. Don’t overlook the vital role your church, synagogue or mosque may play in providing spiritual and social support for you and the family involved.
  6. For many, particularly those who are not the chief financial decision maker in the household, professional financial counseling may be a comfort. Be sure to carefully screen financial advisors before you agree to work with them. Key resources can be the web sites for the Board of Standards for Certified Financial Planners (www.cfp.net) and the Financial Planning Association (www.fpanet.org).

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them. Remember, for those who could benefit we offer a complimentary, no obligation “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory firm like ours—one that delivers services according to the needs and perspectives of its clients.

This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.  Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN)/Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

Written By

Mitchell E. Kauffman, Managing Director

CERTIFIED FINANCIAL PLANNER™

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN).  Kauffman Wealth Management is a separate entity from WFAFN.