From the January 2008 issue of Boomer Market Advisor • Subscribe!

Estate planning without a map

A funny thing happened on the way to completing this story. It began as a search for what advisors are doing in light of recent regulatory changes. What it turned into was a running conversation about what strategies and tactics they are implementing in the face of uncertainty: the kind of uncertainty that can come only from our decision-makers in Washington, D.C. The uncertain future of the estate tax is what has advisors talking.

They are fairly certain the estate tax isn't going to disappear forever (and even 2010 is still up for debate). There seems to be near consensus on that. Three things about all of the uncertainty bother them the most:

1. At what level will it be set?
2. What will be the top tax rate?
3. Will the level be indexed for inflation?

Boomer advisors aren't about to let these uncertainties bother them, however. They have a job to do, and they intend to do it, so they are creating strategies that will work no matter what regulations come out of Congress. It's amazing what a few tweaks on old stand-bys can accomplish.

Feeling charitable

Advisors with boomer clients whose estates are large enough to exceed any anticipated estate tax exemption have a couple of weapons in their planning arsenal to minimize or eliminate the tax hit, especially if the clients are philanthropically inclined. And both of them appeal to the wishes of many boomers to see their money go to causes and charities they believe in.

Charitable family foundations are not new, but they are tools many advisors have not used, particularly in conjunction with donor advised funds, a strategy Johnne Syverson, CFP, AEP, CAP, uses to great effect. He likes the strategy because it allows for time between the contribution and the distribution.

"It disconnects the timing of the donation and the tax exemption from the distribution," says Syverson, a partner in Syverson Strege & Co. ( ) in West Des Moines, Iowa. "From a planner's perspective, this is wonderful. Clients can put money in a donor advised fund now and decide who it goes to later."

Syverson, who also is the president of the International Association of Advisors in Philanthropy, likes using community foundations, like the American Endowment Foundation, because they provide flexible ways to manage charitable giving, and many will allow advisors to manage the assets within a DAF, giving clients the peace of mind that the advisor they trust is still in charge of their money. And the money goes where boomers choose.

"[It] accommodates boomer wishes for directed charity," Syverson says. "It lets them do research on who to donate to."

Also, using DAFs makes charitable giving more accessible to average boomers than using a private charitable family foundation. It's a tool advisors can use with many of their charity-minded clients, not just those who exceed any estate tax exemption limit.


Another estate planning tool Syverson uses is one that Jacqueline Kennedy Onassis used for her estate: the testamentary charitable lead annuity trust, TCLAT. Syverson calls it a "solution to zero out the estate tax no matter where it ends up." Now, that doesn't happen without some precise planning, but with proper implementation and adherence to a couple of IRS code sections, beneficiaries can enjoy a deferred tax-free gift. (The former first lady's children chose not to use the trust as it was set up. They took the money and paid hefty taxes on it.)

When suitably set up, the trust, at the taxpayer's death, makes annual payments to charity for a period of time determined by the payout rate and the applicable IRS Code Section 7520 rate. The executor, Syverson says, can determine how to use the trust, or not to use it at all, as in the case of the Kennedy children. At the end of that timeframe, the decedent's children or grandchildren receive a sizeable bequest, as they inherit the remainder of the trust.

"The TCLAT is the most underutilized tool in the estate planner's toolbox," Syverson says. "Advisors just aren't familiar with it."

Perhaps the most important fact to know about the TCLAT is that it must be in the decedent's estate documents. Such a trust cannot be set up after the estate owner's death. Advisors unfamiliar with the tool may want to consult with an attorney or another advisor who specializes in charitable planning.

ILIT twist

While the uncertainty remains for estate planners, most seem comfortable with the assumption that the exemption level, once settled upon--probably in 2009, after the '08 elections-- likely will fall between $2 million and $5 million, double that for a couple. That's going to exempt all but the wealthiest estates from any federal estate tax. At the state level, it depends on where clients live. So even the most optimistic assumptions see the most affluent estates being subject to taxes. And if that's the case, one advisor-academic says only one thing will do.

"You can't do anything better if you have a lot of money than give it away," says Ted Kurlowicz, JD, LLM, professor of taxation at The American College ( ) in Bryn Mawr, Pa. "Not too fast, though, so you can preserve the estate while you're alive."

He says for people with estates in the $4 million to $10 million range, an irrevocable life insurance trust is the best vehicle. Boomers give away money as life insurance premiums, which can be sheltered under the annual gift tax exclusion. Kurlowicz isn't alone in being a fan of ILITs; advisors have been using them for a long time to help wealthy clients minimize their taxable estates. But what is an advisor to do when concerned clients ask about the estate tax's uncertain future?

One man says a small tweak to the ILIT can assuage some client concerns. Don Ingram, CFP, AEP, MSFS, uses a different kind of life insurance to provide utmost flexibility within the estate plan. If, after equalizing the estate and using a credit shelter trust, there is still a taxable estate, he will implement an ILIT using second-to-die term life insurance instead of permanent life insurance.

"We have a concern about Congress," says Ingram, president of Winter Haven, Fla.-based Ingram Financial Group ( ). "So we want to build in maximum flexibility in anticipation that Congress eventually will do something."

Ingram concedes that the second-to-die version of the ILIT isn't an estate planning panacea. What is in this planning climate? He says, quite matter-of-factly, that he is "buying time for clients"--as is any planner trying to get boomers to do the right thing in a time of uncertainty and hostile debate.

And so the conversation continues. What is going to happen to the estate tax? Yes, it's true that boomers are going to live long and enjoy lengthy retirements, but that doesn't mean Congress should wait years to make up its mind about the level and rate at which boomer estates will be taxed. Until they do decide, however, boomer advisors are doing their best to use the tools at their disposal--with a few well-placed tweaks aimed at flexibility--to minimize the effects politicians will have on their clients' future financial happiness.

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