Due in part to the recent growth in the stock market and the economy in general, many of our clients have sufficient assets to put them into a marginal Federal estate tax bracket of approximately 50%. Any inheritance from parents will also be subject to estate tax at 50% in the client's (child's) estate. We frequently recommend that the parents leave the child his or her inheritance in trust for the child's lifetime instead of outright to the child. The trustees typically are the child and another person, such as the child's sibling or spouse. The income of the child's trust is paid to him or her currently. In addition, in the discretion of the co-trustee, the principal can be invaded for the child. Upon the child's death, the trust is divided into shares for grandchildren, with each grandchild's share retained in trust for the grandchild until specified ages such as 30 and 35. The property in the trust avoids estate tax in the child's estate, since he or she does not own it. To discourage the foregoing technique, Congress enacted a generation-skipping transfer tax that is imposed at the child's death. The tax basically replaces the estate tax that would have been paid if the child had been left the property outright. However, the law provides for a $1,000,000 per parent exemption from the tax. If both parents are living, they can "skip" generations with an aggregate of $2,000,000, saving $1,000,000 or more in the children's estates. An additional benefit of all of the foregoing is that the child's inheritance is protected in the event of a matrimonial dispute. Under the law of most states, inherited assets are not subject to division in a divorce. As a practical matter, inherited assets are often commingled with the child's own assets and become subject to division. Leaving part or all of each child's inheritance in a lifetime trust identifies the inheritance as a child's separate property and prevents it from being divided by the divorce court. Furthermore, under the law of most states, the trust is protected from creditors such as malpractice creditors or business creditors. There are significant advantages to the child with this type of planning. However, it should be emphasized that this technique does not affect the estate taxes in the parents' estates. Non-citizen spouses. Most married clients can defer estate tax by leaving assets directly to their spouses. If your spouse is not a U.S. citizen, then you have been entitled to a marital deduction only for assets left to a "Qualified Domestic Trust". The requirements are complex and have been changed several times. The new federal legislation provides that if you satisfied the requirements in a Will (or living trust) executed before November 5, 1990, then your estate is eligible for the marital deduction even though you have not updated the Will to reflect the various changes. You should nevertheless contact your attorney if your spouse is not a citizen and if you have not recently updated your estate plan, because the changes in the law since 1990 permit a much less restrictive type of trust to be used.

A friend, whom I’ve known since college and worked with at Price Waterhouse years ago, asked my help concerning financial matters involving his father and mother. His 82-year old mother, R.P., was diagnosed with Alzheimer’s disease and various other health problems, and many matters in his parents’ financial situation needed to be addressed. Also, the family feared she would soon lose her ability to make sound decisions, and thus action needed to be taken quickly.

As a CPA and Personal Financial Specialist, I quarterbacked the financial planning work and enlisted the help of an attorney. We worked quickly on the planning strategies, presented the ideas to the husband, E.P., and with him we explained matters to the adult children, resolved issues and prepared necessary documents. We revised her will to better reflect her current wishes, transferred assets into certain trusts to potentially protect them against loss, and prepared for each her and him a durable power of attorney, health care proxy and living will. We made sure she was still of sound mind when signing the documents, which took many minutes for each signature given her frailty.

In addition, we put into place measures which better protected her assets against loss, including the transfer of her variable annuity to a company which stepped up the death benefit on an annual basis for increases in market value and also including selling individual stocks and reinvesting the proceeds into a mutual fund which protected principal against loss if it were held for 10 years. After pleading with the local bank branch managers, I was able to get them to waive early-termination penalties for the certificates of deposit we terminated and transferred into higher-yielding CDs elsewhere.

My friend’s father, E.P., was very appreciative and started referring several other seniors to me. He had become convinced that last-minute steps could be critical for other people, as in the case of he and his wife’s finances. One of E.P’s friend, J.M., had a wife whose health was also worsening quickly, in her case cancer. At first J.M. was resistant to my review of his matters, partly because of the preoccupation with attending to his wife, and partly because of relying on the recent advice of others, including his attorney and and his stockbroker.

Well, E.P. persisted to nudge J.M into meeting me, and soon I found myself at the dining room table one afternoon with J.M, while one of his sons cared for his wife in the nearby bedroom. After we discussed their assets, I reviewed their wills. I discovered that his wife’s will did not contain a provision to fund a unified credit shelter trust. Such a trust is a way to use and not lose the lifetime exemption ($675,000 in year 2000) upon $1 million to keep under his direct control. Thus, funding an irrevocable trust putting principal outside his direct control with him as income beneficiary would not jeopardize his own financial security. When I estimated for him the estate tax savings of over $200,000 at his own death by including a unified credit shelter trust in his wife’s will now, he was shocked and dismayed that his own attorney did not inform him of the choice of such a trust. Thus my recommendation was to revise his wife’s will as soon as possible to incorporate the trust.

In case his wife was not competent enough to execute a revised will, I developed a back-up strategy which was complicated but which would work. The strategy would transfer money from an existing joint investment account to a tax-deferred annuity in her name, signed by J.M on her behalf, with a newly-created irrevocable trust as a beneficiary of the annuity. At her death, the money in the annuity would become taxable in her estate, but then would fund the trust and use up her exclusion, thus saving future estate taxes.

J.M. asked me to meet with his attorney to discuss how to proceed. The attorney was able to assure himself that she was competent enough to sign a revised will to include a unified credit shelter trust, and they did so two days later. She died within a few weeks. E.P. deserves a round of thanks from family members for his persistence in getting his friend J.M. to engage me to review his situation before it was too late. The estate tax savings will be very much appreciated by the family members as they progress through their own lives, facing scores of thousands of dollars for the college education of their many family members. J.M. has nine children and twenty-nine grandchildren.