In the estate planner’s tool chest of legal devices, perhaps none is more handy than the trust protector: A person or corporation who, depending on the terms of the trust, can swing into action to fix document errors or ambiguities, revise language to conform to changes in the tax law or mediate disputes among warring parties. In the year ahead, expect to see more of these handymen work their magic.
“There is now broad use of trust protectors,” says Raymond Benton, a certified financial planner and principal of Benton & Co., Denver, Colo. “This tool is part of an ongoing search for more flexible ways of doing estate planning.”
That search, say experts contacted by National Underwriter, has helped to bolster the use of a range of other innovative techniques in estate planning. Among them: The qualifying terminable interest property (QTIP) trust, which, when established with an A/B bypass trust, permits a surviving spouse to use trust property tax-free; the durable power of attorney, which may be employed in the event of a principal’s illness or disability to sign necessary legal documents; and universal and variable universal life policies to flexibly fund wealth replacement trusts.
Underpinning the pursuit of adaptable estate planning strategies is uncertain over the final disposition of the estate tax. Since passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, Congress has made repeated attempts to repeal or reform the legislation’s quirky estate, gift and generation-skipping transfer tax provisions. Among other things, EGTRRA calls for an increase in the estate tax unified credit exclusion (now $2 million) to $3.5 million in 2009, followed by a one-year repeal of the tax in 2010 and–absent further legislation–reinstatement of the pre-2001 tax regime in 2011.
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Sources say the uncertain fate of the estate tax has to some extent shifted the focus of estate planning from tax avoidance to equally important financial objectives. Chief among these are providing for the welfare of a surviving spouse, controlling the disposition of assets to be passed to heirs and protecting assets from creditors.
But advisors say they and their clients don’t expect the estate tax to go away. The consensus among those surveyed is that Congress will likely settle on a unified credit at or near the $3.5 million lifetime exemption that takes effect next year.
Says Benton: “It would be a great thing if [Congress] froze the exemption at the 2009 level. We’d know what we’d have to work with. And the amount is politically sellable. Both Democrats and Republicans would likely accept it.”
“Particularly during the past couple of years, people are beginning to realize that they should go ahead and plan,” adds Deborah O’Neil, vice president of AXA advanced markets at AXA-Equitable, New York. “And they need to make sure [the planning] incorporates the flexibility needed to address changes in the tax environment based on the laws Congress may pass.”
Whatever figure Washington decides on, however, may not be enough to spur the estate planning-challenged to action. If a 2004 survey by Pittsburgh, Pa.-based PNC Financial Services Group is any guide, that’s still a sizeable number. Of 792 affluent individuals polled (including 500 with more than $1 million in investable assets), 40% didn’t have a will and two-thirds didn’t have a professionally prepared estate plan. Additionally, 37% of those with $10 million or more had not taken any action to prepare for their financial futures.
What is more, most individuals who have implemented estate plans give heirs unfettered access to their money. Of 1,223 affluent people surveyed in a May 2007 report from PNC, just 30% instruct beneficiaries to meet specific requirements to receive bequests.
Interest in such “incentive trusts,” however, rises in tandem with wealth. More than half (57%) of those with $10 million-plus in assets and more than 4 in 10 (42%) with between $5 million and $10 million in assets require heirs to satisfy certain terms such as age, education or maintaining a satisfactory job before they are allowed to access their inheritance.
Financial professionals emphasize that such shortcomings can be fixed by building flexibility into the estate plan; and can be avoided altogether by taking a holistic approach to planning generally. That means supplementing an estate plan–often the final phase of the planning process–with a roadmap that fulfills other financial goals, such as charitable, retirement and business succession objectives.
David Sebastian, a certified financial planner and founder of The Physicians Wealth Management Group, a Parsippany, N.J.-based division of Summit Financial Resources, says legacy planning is only one component of a comprehensive wealth management solution he offers clients, most of whom are doctors. A top concern of many of these physicians, he says, is protecting their assets from creditors.