As an advanced sales attorney, one of my primary responsibilities is estate analysis. In a nutshell, estate analysis is the process of reviewing a client’s existing estate plan, performing a hypothetical probate and projecting tax exposure.
Properly performed, estate analysis is powerful because it often uncovers a variety of permanent life insurance needs. Today, more than ever, permanent life insurance is uniquely positioned to provide guaranteed benefits that most clients desperately need.
In celebration of my 750th estate analysis, here are 7 observations I consistently make:
1. Few married clients take advantage of credit shelter trusts.
Credit shelter trusts enable married couples to maximize estate tax savings. For instance, in 2009, a fully funded credit shelter trust would save your clients over $1.5 million in federal estate taxes versus simple wills. This is a slam dunk planning opportunity for wealthy couples. (See chart 1.)
Surprisingly, few of my clients have taken this relatively simple planning step. The individual of average net worth might get by with a simple will, but wealthy clients should discuss this extra planning step with their legal and tax advisors to achieve their goals as tax efficiently as possible. That’s better for you: As the federal estate tax exemption has risen to $3.5 million, the need for life insurance to fund these trusts has also increased. Your challenge is to point clients in the right direction.
2. Clients misunderstand the taxation of revocable living trusts.
Revocable living trusts provide many benefits including asset management, privacy, ease of estate administration, and probate avoidance. Many clients and advisers mistakenly add tax savings to the benefits list. In my opinion, this is one of the greatest “urban legends” of estate planning.
Transfers to a revocable trust are considered incomplete transfers for income, gift and estate tax purposes. Therefore, while revocable trusts offer powerful planning opportunities, tax savings are not among them. If a client desires an estate tax reduction, an irrevocable transfer, such as gifting to an irrevocable life insurance trust, might be appropriate.
3. State estate and inheritance taxes are usually overlooked.
With repeal of the state death tax credit in 2005, most states saw their state estate taxes eliminated. Faced with losing tax revenue, about half of these states (and counting) have “decoupled” from the federal estate tax system, instituting free-standing estate and inheritance taxes.
For married couples, decoupling has created a tax trap. A credit shelter trust in a decoupled state with a state estate tax exemption lower than the federal exemption could result in a state estate tax at the first death. (See chart 2.)
Paying modest state estate taxes at the first death might be better than paying significant federal estate taxes at the second death. Life insurance often plays a crucial role in leveraging the federal exemption.
There are 3 ways you can help clients address state estate and inheritance taxes: (1) advise clients to have their documents reviewed and updated; (2) provide clients with additional life insurance coverage where needed at the first death; and (3) keep abreast of legislative changes to make sure you and your clients are not blindsided by tax law changes.