From the January 2007 issue of Boomer Market Advisor • Subscribe!

January 1, 2007

Strategies to create a lasting boomer legacy

Lee Pelko, 45, a Certified Financial Planner with Rodgers and Associates in Pennsylvania, and her husband Anthony, 48, are in the process of finalizing their wills. Married last June, Anthony, brings two children to the marriage, which precipitated a need for comprehensive estate planning.

Since this is her first marriage and his third, they've been careful about commingling their assets, largely due to child support laws in the state in which they reside. However, both are in the process of selling their homes and buying another one together. They each contributed 10 percent to the down payment and expect to pay off their 30-year mortgage in 15 years. Lee says her new marriage has brought many changes like this, and because of their ages, assets, and responsibilities, estate planning is essential -- and increasingly complex.

"We went to an attorney... and we had the wills done," she says. "And we had the powers of attorney, which included the financial powers and medical powers. It's important to have both powers given in the power of attorney. But there are special rules now, especially in Pennsylvania, about medical privacy acts and you have to have specific language that says you are able to talk to doctors and make medical decisions. Just a general power won't pierce those walls -- at least not in Pennsylvania. The big thing I think we all need to be aware of, with respect to federal estate planning, is this moving target of the federal exemption."

According to Camp Winn, an advisor with Colonial Group Inc. in Spartanburg, S.C., boomer estate plans are most influenced by this low and often unpredictable nature of estate tax exemptions. And now that Democrats have taken control of Congress, the probability of higher limits is reduced significantly.

"Their [Democratic] base has little interest is higher estate tax exemptions, making legislation a low priority for the next two years," he says. "This creates a scenario where individuals must plan without the benefit of knowing the future rules. To mitigate this risk, we recommend drafting an estate plan assuming the status quo. This means developing an estate plan based on these lower exemption limits."

"With the estate tax situation more uncertain than ever," adds Stuart Welch, founder of The Welch Group in Birmingham, Ala., and author of J.K. Lasser's "Estate Planning for Baby Boomers and Retirees: A Comprehensive Guide to Estate Planning." "We are recommending that clients take an 'option' on estate liquidity -- where liquidity is needed -- by purchasing five- to 10-year convertible term life insurance instead of the much more expensive second-to-die insurance. They can save a ton of money in premiums but still have the option to convert to permanent insurance if needed."

Like most aspects of the boomer generation, their estate planning needs often are unique. For advisors who cater to high-net-worth boomer clients with complex family structures, Winn offers a number of strategies to help.

Marital and credit shelter trust -- Any boomer couple with assets above the exemption limits should adopt a Marital and Credit Shelter Trust strategy to ensure that both spouses take full advantage of their exemption This is a simple planning technique where couples ensure that both spouses are able to use their full exemption amount. In 2006, the exemption is $2 million and a properly drafted Marital and Credit Shelter Trust can transfer $4 million from a couple to heirs without estate taxes. A simple will does not accomplish this goal because it would transfer the assets of the decedent to the surviving spouse, wasting the exemption of the first to die.

Qualified Terminal Interest Property Trust -- Split families that occur as a result remarriages, particularly when sizable assets and children are involved, should consider a Qualified Terminal Interest Property Trust, which provides assets for a surviving spouse while ensuring assets are eventually transferred to heirs. A type of Marital Trust, this allows the decedent to control the final distribution of assets. This is particularly attractive for a wealthy individual with children who remarries. For example, assume a man with two children from a prior marriage were to remarry later in life. He could establish a QTIP trust that would ensure his second wife was supported after his death and the assets would be transferred to his children at her death. This ensures that he controls the final distribution of his estate.

Irrevocable Life Insurance Trust -- Boomers with private businesses, real estate holdings or rare assets have a need for liquidity at the death. An ILIT is a common strategy for increasing liquidity at death without increasing the value of the estate. Individuals with valuable illiquid assets can have a trust purchase life insurance, while following specific rules, and the proceeds of the life insurance are not part of the estate. If a boomer has a $5 million real estate portfolio, her heirs may be forced to liquidate real estate to pay estate taxes. A properly structured ILIT with a $3 million death benefit would result in a trust with $3 million free of estate taxes. This $3 million could then be used to buy real estate from the estate - providing the estate cash to pay taxes and preventing a fire sale of an illiquid asset.

Asset protection -- There are a number of estate planning techniques that can be used to protect assets from creditors. Boomers with children who may be sued because of their profession, like physicians, or boomers whose parents have significant assets, may prefer an estate plan that protects those assets in trust for the benefit of their children. And a trust can always be used protect wayward children from themselves.

Ultimately, it's critical to ensure clients have something in place, and that the documents are current and valid. Milestones -- like a marriage -- present golden opportunities to address the issue with clients.

"I don't think anyone is ever really excited to do this," Pelko says. "It's not something you look forward to. We did it mainly because of understanding the different landscape once we got married and the financial implications if we didn't do it."

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