Lead Article Title: Cheap Tricks

Cheap tricks (and we don’t mean the rock band from the 70’s) can be used to
accomplish some pretty significant estate and other planning goals. Here’s a
survey of some cheap steps you can take that might just save you a bundle:

529 Plans:

These popular college savings plans have shortcomings that don’t get
talked about (hey they might detract a broker from making a sale). In many
states contributions to the plan are state-income tax deductible, and earnings
from the account are federal income tax free when used for higher-education
purposes. Educational purposes include tuition, books and even room & board.
When you set up a plan you have to designate the “account holder”. This is
the person who can make investment decisions and pull money out of the
plan.

Few people bother designating a successor account holder, and the
consequences can be costly and problematic. If you set up a 529 Plan for, say, a
grandchild and die, here’s what might happen: The ownership of your account
will pass on your death to the executor of your estate. Think about that if
you’re an OB-GYN worried about malpractice claims, or a lawyer being sued.
From your estate, the account will pass by bequest or operation of law. Not what
you had planned. Cheap Trick: Designate a successor account owner. You avoid
the complexity, administrative costs, and potentially worse problems, while
still getting the desired results. The beneficiary can even be changed so long
as the money is used for educational purposes.

Elderly or Ailing Family:

Keeping an eye on an ailing parent or other family member is time consuming
and potentially costly to both yourself and your family. While ensuring the
well being of your loved ones is of utmost importance, you still have to secure both
their, and your financial stability. Consider using personal emergency response
systems, sensors to monitor sleep patterns, stoves, etc. (see
www.quietcare.com) to help monitor your loved ones. Video online chat has
become common (see www.get.live.com) as a way to constantly be able to see a
sick family member, and medication reminder products and services are growing
in popularity (see www.epill.com). What about financing the ill one’s finances?
Cheap Trick: To help keep an eye on an elderly parent’s finances, consolidate
all accounts to one major institution or wealth manager, and then have a
duplicate copy of each month’s statement mailed to you. At no cost, you can
quickly eyeball each month’s activity to be sure nothing untoward is
happening.

Keeping Your Agent Honest:

If your capacity is diminishing, you may have to rely on Junior to handle
your finances as an agent under your power of attorney. We know junior is a
good boy and would never use your bank account for his own benefit, but abuses
abound, and my mom always taught me that you’re better off “safe than
sorry.” Cheap Trick: Use the same trick mentioned above to help protect you.
Have a close friend who is not an agent under your power of attorney to get a
duplicate monthly statement. That will enable the friend to keep tabs on you
and inform you if an issue arises. It will also enable your friend to keep tabs
on Junior if he takes over your accounts as your agent as she’ll see all his
activities. You probably should mandate in your power of attorney that the
agent must continue to send the friend (or a named successor) duplicate copies
of each monthly statement. If Junior decides to buy a new fully decked out
Hummer (necessary to drive errands for you!), it will likely be a large enough
withdrawal on your account that your friend can blow the whistle on Junior and
inform you about what is happening.

Custodian Accounts:

Why people continue to set up custodian accounts is not really clear. Trusts
give you much better control. Custodian accounts are similar to trusts in that
both pass property and assets from an adult to a minor. Trusts though provide
more protection and greater flexibility. 529 Plans give you much better tax
breaks (especially now that the Kiddie Tax applies until a child is over age
18) than custodial accounts do. But if you still have custodian accounts for
your heirs be aware that if you are the named custodian, on your death the
entire account balance is included in your estate. Ouch! Cheap Trick: Name a
different custodian and remove your name. No cost. Estate tax problem solved
and the intended heir will still receive her inheritance.

Home Equity Lines:

Getting in place a large unused home equity line is a great way to assure
another source of cash in an emergency. It’s a commonly recommended planning
step. But if you’re disabled, will the bank let your agent draw down on the
line? Probably not. Cheap Trick: Arrange a home equity line that has a
checkbook so your agent can write checks without having to go back to the
lender for approval that won’t be forthcoming. Have your power of attorney
expressly grant the agent rights to draw down on the line of credit and
indemnify the bank. A less cheap trick would be to have your house held by a
revocable living trust (maybe not a bad idea for other reasons) and have the
line of credit, in the name of the trust. That way, the successor trustees
won’t need any different approval since they will be acting on behalf of the
trust.

Living Abroad with a U.S. Will:

So you’re a United States citizen, but you live abroad and all of your
assets are abroad. You’re still subject to U.S. estate tax on your assets
(its part of the love our government shows all it citizens). So you have a will
prepared by your estate planner. Which state has authority to probate that
will? You might not have any connections to a particular state (especially if
you don’t have a pied-a-terre here). Cheap Trick: Open a bank account in the
state in which you believe probate should occur, and state in your will your
intent for the laws of that state to govern and probate to be addressed in that
state. Pick a state with a simpler probate process. Check state law first, a
bank account may not be enough in some states.

Insurance Trusts:

Irrevocable Life Insurance Trusts (ILITs) are commonly used to own insurance
policies to protect the proceeds from tax, misuse and other risks. If you own
an existing policy and transfer it to an ILIT you establish, if you die within
three years of the transfer, the insurance proceeds will be included in your
estate. However, you might be able to offset some of this by arguing that to
the extent that insurance premiums were paid by the trust after the policy was
transferred in, and that payment triggers a rule that the amount included in your
taxable estate is only a pro-rata portion of what would otherwise be included
(IRC Section 2042). The amount included would be argued to be based on the
pro-rata portion of the total premiums paid. Cheap Trick: If you transfer a
policy hoping you will live for three years (3 year rule), leverage the
strategy by having the trust repay you as the transferor of the policy for some
or all of the premiums you previously paid. This will increase the portion of
premiums paid by the trust as compared to you and arguably remove more of the
insurance proceeds from your taxable estate. No new legal documents or fees,
just a check written by the trustee to you.

Guardians:

Naming a guardian is probably the toughest and one of the most important in
your estate planning decisions. In many cases you may prefer that your child be
raised in an intact home, so you’ll name your sister and her husband, Jane and
Attila, as guardians. But if Attila runs off to besiege Constantinople, who is
the guardian? Your original intentions of simply sending your youngsters to an
intact home could possibly cause a huge legal battle between former husband and
wife. Cheap Trick: Don’t name a couple as guardians. Instead, name Jane, so
long as she is married to Attila on the date of your death. If they are
divorced, the next named guardian will come into play. You also avoid the issue
of a legal battle between Jane and Attila as to who should be the guardian.

Grandchildren Gifts:

To make large gifts to grandchildren raises a host of complex tax issues.
Gifts in excess of $12,000 per year, or direct payments for tuition and medical
expenses, are subject to gift and generation skipping transfer (“GST”) tax.
Once the $1 million gift tax exclusion is used up the costs are significant. If
your GST exemption were used up, the costs would be confiscatory. Thus, to make
larger gifts to grandchildren (and even for the annual $12,000 gifts to protect
them), many grandparents opt for trusts. However, trusts also raise a number of
complexities. Gifts to trusts cannot qualify for the annual GST exclusion
merely by using the Crummey powers that are so commonly used to qualify gifts
to trusts for the annual gift tax exclusion. There are several additional
requirements that must be met to qualify for the GST annual exclusion. The
trust should be for only one beneficiary, and if the beneficiary dies, the trust
assets must be included in the grandchild’s estate. Cheap Trick: Make advanced
payments of tuition for all your grandchildren and great grandchildren for all
future years. If they’re all in private schools, the amount you can transfer
is huge. No tax. No legal fees. Simple. There are a few catches to make this
work. You must pay the tuition directly to the schools, and the schools must be
qualified educational institutions (IRC 170(b)(1)(A)(ii)). Also, you must have
an agreement with the schools that the tuition payments cannot be refunded. If
Junior goes AWOL, you loose the tuition prepayments. LTR 200602002. The impact
of this is huge. If grandma has a $2.5 million estate, a series of gifts to the
schools for all her grandchildren and great-grandchildren could solve her
entire estate tax problem and even avoid the need to file an estate tax return.
The only ones that loose out in this deal are grandma’s attorney and
accountant.