Eagle Or Kiwi? It Matters To Your Clients

By

Honolulu

Psychological differences between financial services professionals can have a big impact on the planning they do for their clients, according to Robert Hales, senior partner of Hales, Hales & George, a law firm in Saratoga, Calif.

Speaking at a breakout session at this years Society of Financial Service Professionals annual educational forum, Hales used an analogy to explain the differences between two personality types.

He called one type the “kiwi,” after the kiwi bird of New Zealand. “The kiwi bird lives in the tall grasses of New Zealand, and heres the problem with the kiwi. When the kiwi bird looks at the world, all it sees are the blades of grass right in front of it,” he said.

Furthermore, he explained, when one of those blades of grass is crooked, the kiwis entire world is crooked. A professional example of this may be the CPA who is off by $2.50 on a balance sheet, but then spends four days trying to find it.

“Hes not going to be comfortable until he straightens out that blade of grass,” Hales said.

The other personality type is more like an “eagle,” according to Hales. The eagle flying above the world at 150 feet doesnt notice a crooked blade of grass, he explained, but notices that the field is on fire a mile and a half away.

Kiwis only notice that the field is on fire “when the blade of grass in front of them catches fire.”

Hales said it is the responsibility of planners to have that eagle view so they can point out what their clients have to look out for down the road.

He then took both of these personality types and drew comparisons to actual estate planning cases he has worked on.

The kiwi estate plan is looking at the blade of grass right in front, and the biggest blade of grass is the federal estate tax, he said.

“I have seen people do things to straighten out this crooked blade of grass that destroys the entire estate plan,” he explained.

“But with eagle planning there is a difference. The first part of eagle estate planning is distribution of the estate,” he explained. “The eagle says if the estate doesnt go where its supposed to go then you did not do estate planning.”

An example of a situation where the estate may not go where it was intended involves the use of the unlimited marital deduction. For instance, he said, consider a couple with four children and a large estate. The husband dies with the intention of leaving his estate to his wife, children and eventually his grandchildren. To avoid paying estate taxes at his death he gives all his assets to his wife under the unlimited marital deduction. Fifteen years later, his widow has remarried someone who his children may not approve of and the result is his estate may end up going to his spouses second husbands family.

“Now, take the eagle view and look at that situation 15 years from now,” he said.

One of the tools Hales successfully has used with clients to make sure their estate is passed on to the people originally intended is the QTIP (Qualified Terminable Interest in Property) trust.

Using a QTIP trust, he explained, a client can put his assets in a trust for a spouse and can provide for that spouse without giving her the power to distribute it, he said.

The trust can be set up so that all income from the trust will go to your spouse for the rest of her life, he said. “She is using my money, but she doesnt own my moneyso she cant leave it to anyone else,” is how he described the thinking behind this.

In the event the income isnt enough to support the spouse, the trust can be worded to give her access to “whatever principal is necessary, as long as its for her health, her education, her maintenance and her support in the manner to which shes accustomed,” he said.

At her death, the trust assets pass on to where they were intended to gothe children and the grandchildren, Hales said.

Ultimately, when death taxes are due, Hales explained that the best tool to use to pay for them is life insurance. When designing an estate plan Hales says he always asks the client, “Where do I get the money to pay for your estate taxes?”

“The eagles view says that someday somebody is going to have to write that check, and I dont want to have to ask this question 20 years from nowI want my client to hear this question today,” he said.

In one instance, Hales was working with a client who owned 60 units of real estate rentals. When the question was asked about where the money was going to come from to pay his estate tax, his client felt it could be raised by liquidating some of his real estate holdings. Hales gave him a printout of all 60 real estate holdings and told his client to pick out which units he wanted sold after his death.

“You bought the homes, you decide which ones you want to sell,” Hales told him.

His client started checking off a few units and finally asked how many would be needed. Hales told him he would have to sell 30 units to pay the estate tax at his death. But Hales also gave him the option of selling four units today to raise the capital that would be needed to fund a life insurance policy for the rest of his life.

“Estate planning is about the eagle viewing the entire process,” he said.

Another area where Hales has seen some problems in planners not taking the “eagle view” is in the area of second-to-die insurance planning.

A second-to-die life insurance policy will provide a benefit at the second of two deaths to pay estate taxes. But Hales said this is not always the best route to take.

For example, when one of Hales clients who had a $2 million estate died, he passed some assets into a bypass trust while placing the rest in a QTIP for his spouse. One of the assets that passed into the QTIP trust was a ranch his client owned. The property, which was valued at $1.4 million, was in an up and coming area. Hales advice was that if taxes were not paid at this time, they would have to be paid at the spouses death and the tax then would be based on what the property is worth at that time.

Ten years later, when the spouse died, the ranch was worth $8 million. “We paid taxes on it when it was worth $1.4 million,” he said.

“When you have something in an estate that has tremendous potential to appreciate, you dont wait until after the appreciation to pay the tax on that asset, you pay it before it appreciates,” he said.

And to pay those taxes at his first death, there was a life insurance policy, he said.

“The kiwi sees the death tax at the first death and immediately says dont pay it. The eagle says to look at the field down the road and ask are there any fires down there? If there are we dont buy second-to-die, we buy first-to-die,” he said.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.