Bullivant Houser Bailey PC: Building Blocks in Estate Planning

Bullivant Houser Bailey PC: Building Blocks in Estate Planning

By Darin Christensen

The following represent opportunities to address important issues in your estate plan. In some cases, these will be reminders about conditions that often are overlooked. In others, these will highlight alternatives that may save money or reduce tax exposure for individuals and families. The list will continue to grow each week. Stay tuned.


One of the most important estate planning issues is who should you choose as a fiduciary (particularly personal representative, trustee, and agent under a power of attorney). Your fiduciary plays a very important role in managing your assets and ensuring that they are administered the way you would like them to be administered. You have two types of fiduciaries to choose from: individuals and corporate fiduciaries (usually specialized trust companies or the trust departments of large banks).

Individuals tend to be quicker to respond, have more investment flexibility, and often charge less. On the other hand, they often make unwise investment decisions, favor one beneficiary over another, don't account regularly, or misappropriate assets.

Corporate fiduciaries usually invest conservatively (but have a lot more investment choices that they had decades ago) and have a broad range of investment experience, account regularly, are bonded (insured) in case any of their employees embezzle your money, and work hard to be impartial. However, they tend to charge more than individuals (depending on the amount of assets being managed, they will typically charge about 1% of assets under management each year with a minimum fee of several thousand dollars for small accounts), sometimes have a lot of trust officer turn over, and can take a while to make distribution decisions.

Because of potential problems with bad investment decisions, bias, and misappropriation of assets, I recommend clients use corporate fiduciaries when they don't have individuals who they absolutely trust and who would invest assets well or hire a good investment advisor-and sometimes even when they do have such individuals they could name.

Charitable Giving

If you make charitable gifts and have appreciated publicly traded stock, you can increase your tax benefits by donating the stock to the charity rather than giving the charity cash. By doing so, you get the same deduction you would receive by giving cash, but also don't have to include the stock's gain in income. If you want to stay invested, you can take the money you would have given to charity and buy replacement stock-effectively receiving a free increase in the stock's tax basis.

Most charities are able to easily receive the stock and then sell it. Other appreciated assets also can be transferred to charity to receive the same benefits, but the nature of those assets adds some additional complexity.

Note: the size of the charitable deduction you can take each year is limited to a portion of your adjusted gross income (your contribution base). The contribution base for gifts of appreciated property is lower than for gifts of cash (30% instead of 50% for gifts to publicly supported charities or 20% instead of 30% for gifts to private foundations).

Opportunity Shifting

One of the most effective estate planning techniques for wealthy individuals is opportunity shifting when the right opportunity comes around. This involves having your intended beneficiaries or trusts you form for their benefit invest in the investment opportunities you have that that are likely to do extremely well.

For example, assume you see an opportunity to enter a new business (perhaps you get the opportunity acquire one of your suppliers or service providers after the death of the owner, invest in a high quality start up, or buy distressed real estate). The new business investment will take $50,000 of initial equity, but you are confident the new business will be worth $500,000 within 5 years. By placing $50,000 in a trust for the benefit of your beneficiaries and having that trust acquire the business or asset, the subsequent $450,000 in appreciation and/or earnings are effectively transferred with no gift or estate tax cost.

This strategy can be combined very effectively with a beneficiary controlled trust. For example, assume you see a great opportunity that will take a small amount of initial capital. You have a parent, spouse, or close family member fund a trust for your benefit with the required seed money and name you as investment trustee. If properly structured, you will benefit from the trust assets but keep them out of your taxable estate and beyond the reach of your creditors.

Minor Children

If you have minor children, one of the most important things your estate plan does is express your desires about which friends or family will raise your children if you are not able to do so. This helps prevent a later fight among your family members about who should be named and who you would want to raise them. The court is highly likely to follow the written instructions of the parents.

Beneficiary Trusts for Greater Protection

Being the beneficiary of a properly structured trust can be better than receiving the trust assets directly. The assets of a properly structured trust are protected from the beneficiary's creditors (including future ex-spouses) and excluded from the beneficiary's taxable estate. If drafted properly, the beneficiary can be given control over investment of trust assets and broad rights to access the assets without losing the benefits.

Life Insurance Ownership

The death benefit from life insurance that you own is included in your taxable estate. However, the death benefit from life insurance on your life that is owned by others is not included in your taxable estate if properly structured. Next year, the federal and state combined tax rate is scheduled to be over 60% for estates above $1,000,000. If you or your clients have or will take out significant amounts of life insurance, you should consider creating a life insurance trust so the death benefit will be excluded from the taxable estate. This will save significant amounts of taxes and provide other benefits to your loved ones.



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