Thursday, June 30, 2011

Are AB trusts still necessary?

I wrote a post last year explaining AB trusts. Since then Congress changed the law to make the estate tax exemption portable. That means that the first spouse to die didn't lost his or her exemption. If the deceased spouse didn't use it, the surviving spouse inherited it. Since AB trust language is primarily used for preserving the exemption, AB trusts are no longer necessary, correct?

No, of course not. Remember, AB trusts are just revocable trusts with AB trust language. You still need a revocable trust for a whole host of reasons. As for AB trust language, thanks to the portability of the estate tax exemption, AB trusts may be obsolete for the moment. But recall, the current law was really a temporary bandaid until more long term reform can be made. Thanks to Congress's inaction, 2010 passed without an estate tax and 2011 wasn't addressed until the 11th hour. This new law is only in place until the end of 2012, when the old laws are back in place, including a $1M estate tax exemption. Going by Congress past (and repeated) failures to act quickly, I won't hold my breath for their next move on estate taxes.

Also, while it's true that AB trust language restricts the surviving spouse's right to the corpus of the B trust assets, the surviving spouse gets around that by appointing a co-trustee to make distributions. Therefore, as a result of the uncertainty surrounding the future of the estate tax, I still use AB trust language in my revocable trusts.

Wednesday, June 29, 2011

Name your family trust as the beneficiary of your life insurance policy

You purchased a permanent life insurance policy to, among other things, provide for your family upon your passing. You would like that policy to be available to pay off debts, including the balance owed on your home. Perhaps you have even planned for enough of the death benefit to be left over to help out your kids if you were no longer around. In order to do so, you have made your children beneficiaries of the policy. You passed your physical, you qualified for the desired amount, and your agent has assisted you with the beneficiary designations. All the paperwork is complete and you intend to rest easy knowing your family will be provided for.

The missing step here that I point out to my clients is the failure to name a trust as the beneficiary. Should the death benefit be available while your children are young enough to misuse it, the cash is unlikely to be used wisely. I think it's unnecessary to point out real-life examples of the detriment to young adults a cash windfall can cause.

Traditionally, estate planning attorneys will recommend an ILIT (Irrevocable Life Insurance Trust) to own the policy to avoid inclusion in calculating the estate tax. While still an advantageous option, generally they are less desirable today because the estate tax exemption is so high. In most cases, I recommend simply naming the family trust as beneficiary. The trust will hold the cash and the trustee will make distributions for specific purposes and/or at certain ages to preserve the cash and ensure the money is used wisely.

I've met with many life insurance agents. Their job is to match you with the right policy from the wide array of unique options available. They are experts at helping you decide on the right amount and the best way to invest the premiums. When it comes time to name a beneficiary, they can sometimes overlook the critical decision of what will become of the cash upon the death of the insured. When you reach this step, envision how you would like the death benefit to be used. It's almost always the case that a revocable trust can provide the best method for accomplishing that vision.

Wednesday, June 15, 2011

Countdown to 2013

The turmoil over the estate tax continues. Congress acted late last year to nail down a new and simplified estate tax structure for 2011 and 2012 after allowing 2010 to pass without an estate tax at all. However, that new law is only temporary and expires at the end of next year. If 2009 and 2010 are any indication, Americans are unlikely to know how to plan their estate to take into account an estate tax for beyond 2012 until the last moment.

In the mean time, a massive lifetime gift tax exemption of $5M is available for individuals ($10M for most couples) to shift wealth out of their estate to avoid being subject to an estate tax. This is up from only $1M in the recent past. This makes now a prime time to take advantage of planning opportunities for those who would not otherwise be able.

As with most planning, timing is critical and with the uncertainty of 2013 drawing closer every day, it is imperative that those concerned about the estate tax and asset protection take action right away.