By Randy Fox, CFP,
Founding Principle, InKnowVision, LLC

It's easy to use the current economic upheaval and political uncertainty as an excuse to delay or defer your family's estate planning. In fact, this may seem reasonable to many. After all, the sub-prime crisis has started a domino effect on an already unsteady economy and the world seems to be coming apart dollar by dollar. Along with the fact that it is an election year and we have no idea who the next president will be and what the balance of power will be in Congress. It seems sensible to wait until the dust settles and we see what the future brings.

In fact, waiting is exactly the wrong thing to do. As successful business owners, professionals and executives taking action is normal. Taking action in challenging times and difficult circumstances often means professional survival. Why not adopt the same attitudes toward your personal planning needs as you do in your career?

For many, estate planning is a confusing and complex process. It is filled with jargon, acronyms and technical terms that leave all but the most informed completely baffled and perplexed. Most professionals who make estate planning their area of specialization don't realize that this is how they and their important work are perceived. Regardless of economic conditions and political uncertainty, this disconnect alone deters many families from planning.

Safeguard Assets When Some Wealth is in Jeopardy

This is not the first time in history that the economy has faltered. And it won't be the last. If some of your wealth has been eroded or is in jeopardy, it is more important than ever to assure that what remains of it is distributed to your heirs and beneficiaries as efficiently and effectively as possible.

Planning forces you to assess where all of your assets are, how they are held and how and when they will be disposed of if something happens to you. A down economy is the perfect time to harbor assets and reassess past plans. It is also an appropriate time to consider various asset protection strategies to safeguard assets that might be attacked by those that feel that the best way to reacquire wealth is by taking it from others. By waiting, you risk your family's well being now and in the future.

Current Rules, What Might be Coming

Whoever is elected, be it Republican or Democrat, must face the reality that the current rules for the estate tax effectively expire after 2010 and must be dealt with. Currently, each person is allowed to pass $2 million without tax when they die. The Federal estate tax is then imposed on anything above that amount at the rate of 45%. All of the "chatter" coming out of Washington indicates that a full repeal of the estate tax is highly unlikely, even if a Republican becomes President.

There have been many proposals brought before Congress that would implement significant changes to the current rules. There have also been proposals that advocate a complete, total and permanent repeal of the tax. While it's uncertain what will ultimately happen, it appears that both Democrats and Republicans are favoring keeping the tax in place and changing some of the key provisions.

While this is merely speculation, what appears to be most favored currently is some combination of provisions that would allow each person to pass on more of their current wealth without tax (somewhere between $3 million and $4.5 million are the most often discussed amounts) and imposing tax on anything above the specified amount at somewhere between 35 and 45%. And while many families are taking a "wait and see" attitude about their planning this position makes no sense whatsoever.

Your advisor should be looking at various strategies to meet your estate planning goals and needs. While you may have already implemented sound foundational planning such as revocable living trusts and powers of attorney, your estate may still be facing a sizable tax. Often the use of family entities such as partnerships and limited liability companies are appropriate. These may be coupled with the sale of those entities to a trust; the purchase of life insurance, charitable planning and other advanced planning techniques. All planning should be integrated and coordinated so that your lifestyle remains unchanged.

Case Study in Coordinated Planning

Here's a brief case study to illustrate a coordinated planning effort:

Steven and Annette Bailey are 74 and 71 years old respectively. They have three grown children and seven grandchildren. Their current net worth is $13.5 million with more than half of the assets, $7.5 million in mutual funds that Steven oversees by himself. Steven and Annette live a modest lifestyle which requires about $100,000 per year. They currently have about $500,000 of life insurance in place. Steven has had some heart problems recently and Annette had a bout with cancer less than a year ago. A life insurance carrier recently declined Annette and rated Steven a table D risk. They have hesitated in going forward because of the costs. A financial advisor who is trying to get Steven as a client referred them to a local attorney for estate planning and that attorney brought the Baileys to us.

The Baileys' goals suggest that they want to transfer as much of their wealth to their children and grandchildren as possible while maintaining their current lifestyle. They favor charitable interests over paying taxes. They also have a beach house property that has been a family gathering place and would like to make certain it stays under family control for the future use of their children and grandchildren. They also have expressed an interest in making regular gifts while they're alive but have been reluctant to without understanding how those gifts would affect their ability to support themselves. Steven and Annette currently have no advanced estate planning in place and have not made any taxable gifts yet.

The Family Wealth Diagnostic indicates that if Steven and Annette were to die this year, $4.5M would be lost to taxes while the heirs would receive about $9.5M. If they live to their joint life expectancy, $14.5M goes to taxes while only $13.5M goes to their heirs. There are no charitable gifts in any of their current documents even though they have expressed a strong desire to make a significant charitable gift.

Action Plan

The solutions that we incorporated in the Family Wealth Goal Achiever included the following:

First, Steven and Annette establish a Family Limited Liability Company (FLLC) with voting and non-voting member interests. They then transfer $7.2M of marketable securities to the FLLC in exchange for the voting and non-voting shares. The FLLC will now establish a Restricted Management Account (RMA) with $5M of the marketable securities. It is our strong advice that the $5M be managed very differently than it had been prior and that Steven must give up control of the assets in order for the RMA to be properly respected. The financial advisor who introduced Steven and Annette to the attorney has been chosen to manage this $5M. After the RMA has been funded, the FLLC and RMA are professionally appraised.

The Baileys now established Grantor Deemed Owned Trusts (GDOTs). They will make a cash gift to the trust of 10% of the appraised value of the FLLC interests and then sell the non-voting LLC interests to the trusts for an interest only note. Interest will be paid at the long term Applicable Federal Rate (AFR) at the time the GDOT is funded. The note payment of about $198,000 per year more than supports Steven and Annette's lifestyle requirements.

One additional concern is the need for life insurance that would allow the Baileys to complete their charitable intentions without significantly reducing their children's inheritance. Because Annette is currently uninsurable and Steven is rated, survivorship insurance is very expensive for them. However, Steven has a sister, Elizabeth, who is the same age as Annette and is in very good health. We had Steven and Annette gift Betty a non-voting FLLC interest. There is now an "insurable interest" in Betty because she is a member of the same FLLC.

The GDOT can now apply for $5M of survivorship insurance on Steven and Betty at a greatly reduced premium cost ($180,000/year) which can easily be paid with the assets in the GDOT. The GDOT also enters into a buy sell agreement with Betty which agrees to repurchase her FLLC interests when the insurance pays off at the last death.

This added liquidity allows the Baileys to leave their qualified plan money to a Family Charity. They also like the idea of a Testamentary Charitable Lead Annuity Trust (TCLAT). The TCLAT will allow them to zero out their estate taxes completely and to give additional funds to the Family Charity without reducing their heirs' inheritance.

They also feel confident enough about their planning to begin making annual gifts to their children and grandchildren. This should move another $240,000 per year out of their estate.

Now, their heirs will receive $14.6M if Steven and Annette die immediately and family charity will receive $6.2M. There will be no estate taxes due. If they live to life expectancy, heirs will receive $23M, family charity will receive $8M and taxes are still eliminated. Furthermore, the financial advisor who brought in the case is now managing $5M, life insurance was placed when everyone thought it was impossible and there was an RMA fee earned and the attorney has a client who is thrilled with his work. Everyone wins with good planning.

Furthermore, avoiding the tax on transferring your estate is only one small element of a good estate plan. Comprehensive planning is also to ensure that the people who you want to get your assets, get those assets. And they get them in the way you want, when you want and how you want. A proper estate plan can create methodologies that will allow your assets to avoid estate taxes virtually forever, no matter what they do in Washington to the current and future estate tax laws. The same planning should include provisions that would address issues like disability or incapacity. Why wait? What if your health changes before you have a chance to create the plan that you really want?

Guides for Selecting an Estate Planner

Often, the reason that families avoid completing their estate planning is that they can't identify the right professional to help them through the process. Successful families often have attorneys and other professional advisors who may have helped them with various business matters. However, these same professionals may not be competent as estate planners. Here are some issues to consider when looking for estate planning excellence:

1. Find a specialist. Just like doctors, lawyers can have specialties. Estate planning requires very specific knowledge and you should not trust your family's planning to a generalist. Think of it as open heart surgery.

2. Smaller firms (one to four lawyers) can be better. They are often more responsive and timely, service may be more individualized and personal and legal jargon is often kept to a minimum. They are aware that this is their competitive advantage over larger firms.

3. Find a member of one of the national organizations of estate planners; The National Network of Estate Planning Attorneys and Wealth Counsel are two such organizations.

4. Don't limit your planning team to just lawyers. Good estate planning should be done by a team as a collaborative effort. Your team may include financial advisors, insurance professionals, CPAs, valuation experts, number crunchers, family business consultants, psychologists and other specialists.

5. Think globally. Your advisors can be from anywhere in the country. The internet and current technology allow elements of your planning to be performed from anywhere. Your team should be the best team, not the best local team.

6. Don't be driven by costs, be driven by value. This is an investment in the future outcome of all of your accumulated wealth. Many of the best advisors charge project fees, instead of hourly rates. This methodology is often based on providing value that cannot and should not be measured by time. It allows for more personal involvement without the worry of receiving a bill for additional "hours."

While national estimates about families completing estate planning vary, they all indicate that there is still much work that needs to be done. Successful families owe it to themselves and future generations to undertake this element of their financial lives. While the economy may be uncertain, the future of the estate tax is unknown and competent professionals challenging to identify, there is still no reason for any family to delay their planning. The price of waiting is simply too great.