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Economic Turmoil Planning: Taking Steps to Take Control

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Failure to review, reassess and adjust planning to reflect current economic realities may serve to multiply financial hardships many times over and for years to come. Changes in asset values and interest rates resulting from the economic downturn may present a perfect opportunity to meet with clients to review the status of their planning in light of the changed circumstances. It may also afford a chance to review the client’s current life insurance program. With your help, clients may take the right steps to keep on course both in their short and long term planning.

Step 1: Will Review

Chances are the value of specific assets bequeathed to the client’s beneficiaries has decreased. Clients may need to review and rebalance their wills based upon new asset values.

Step 2: Trust Review

Like the assets passing by will, the value of assets held in trust has most likely diminished. Depending upon the terms of the trust, this could have negative and unintended results. Trusts need to be reviewed to help ensure that the purpose of the trust will be realized and that the client’s family remains protected.

Step 3: Estate Planning

Given the uncertainty surrounding the estate tax rate and exemption amount–will tax rates and the exemption equivalent go up or down or freeze in 2009 at a $3.5 million exemption equivalent with a top tax rate of 45%?–attention to other reasons for estate planning is important. Comprehensive estate planning goes far beyond tax planning. It ensures the right assets are transferred, when desired, and to the correct recipient. Proper estate planning provides for family needs and allows benevolent goals to be readily met.

Step 4: Gift Planning

Existing gifting programs should be reviewed for adequacy and value of assets to gift. Current gifting plans may have to be deferred due to general asset devaluation. Consideration may be given to long term gift planning using life insurance for the benefit of family and favorite charities. Alternatively, gifts of assets may be advantageous now because of the generally lower asset values for gift tax purposes.

Step 5: Charitable Giving

Clients need to determine whether and to what extent they will continue to make outright gifts to charities. Consideration should be given to making deferred gifts under the client’s will, which may be amended over time based on changing circumstances. Or the client may consider income-producing charitable gifting strategies like charitable gift annuities or charitable remainder trusts.

Step 6: Sales to IDGTs

Clients should consider speaking to their advisor about selling devalued assets to an intentionally defective grantor trust for a promissory note. The interest rate on the note is fixed upon the execution of the note and is the applicable federal rate for the term of the loan term selected. The lower the sale price and the interest rate are, the lower is the amount included in the client’s taxable estate and the higher is the value in the trust for the beneficiaries.

Use of an IDGT can remove the asset and the future accretion from the client’s taxable estate. And no tax on gain, if any, is triggered upon the sale to the trust. If the client has an IDGT, trust cash flow should be reviewed and payment options assessed to ensure there are adequate funds available long before payments are due. If full payments cannot be made, a distribution of corpus may be necessary.

Step 7: GRATs

Grantor retained annuity trusts (GRATS) should be considered as a strategy to remove market recovery from the client’s estate at the current lowered gift value. The gift tax to be paid on the value of the trust remainder to be transferred to the beneficiaries is set at the time the transfer to the trust is made. When the beneficiaries receive the GRAT remainder interest, it will include the market recovery, if any, thereby maximizing the transfer of future asset appreciation at a lowered transfer cost.

GRATs are most effective as leveraged wealth transfer tools when the property held in trust appreciates at a rate higher than the government section 7520 rate used to calculate the annuity paid to the Grantor. The lower is the section 7520 rate, the lower is the gift tax value, and the greater is the remainder interest for the beneficiaries.

A qualified personal residence trust is a type of GRAT used specifically for qualified personal residences and is codified in Internal Revenue Code Section 2702. Like other GRATs, QPRTs for depressed value personal residences should be considered to remove market recovery from the client’s estate at the lowered gift value.

Step 8: Split-Dollar Loan Treatment

Split-dollar loan treatment has replaced the old equity split-dollar arrangements typically offered as employee benefits. The employer makes loans to the employee for the purchase of a life insurance policy. The employee is entitled to the equity in the policy after repayment of loans and interest.

In the current interest rate environment, the employee benefits from receiving loans at a lower interest rate. Split-dollar loans may also be made between family members or to an irrevocable life insurance trust for estate planning purposes. For both private and employment-related split dollar loan arrangements, the premium loans bear interest at the appropriate applicable federal rate, depending upon the length of the loan term. The lower is the AFR, the lower is the cost of the loans being made.

Now is a critical time to meet with clients to review all aspects of their planning. No matter how good the plan was when completed, no one could have anticipated the current economic environment. Since interest rates and asset values are bound to go up at some future point, and since that point cannot be predicted, moving the client to action now may help the client take advantage of the planning opportunities while protecting the client from unintended results.

Janice A. Forgays, Esq., CLU, is vice president of estate and business planning at MassMutual Financial Group

Springfield, Mass. You can e-mail her at [email protected]


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