Simple Planning: Is That What You Really Want?

Simplicity!

Simple is best! The KISS principle
(Keep It Simple Stupid) is supposedly a goal of many. Is simplicity itself
really an appropriate goal? A simple document or plan may sound admirable, but
what you really want is simplicity in result. Document: A short will may
be simple, but might create a myriad of problems if the unexpected occurs. On
the other hand, a comprehensive will requires more time to prepare, discuss and
understand. But if the unexpected occurs and the situation is dealt with adequately,
simplicity in result occurs. Plan: One dimensional planning might be
simple, but can often fail to achieve your goals.

Disability Planning More than
Insurance:

Disability insurance can be a great
planning technique, but never the entire answer.  To address business
issues created by disability, evaluate business disability buyout insurance,
business interruption insurance and disability provisions in shareholders
agreements. Personal disability insurance waiting periods can be coordinated
with salary continuation provisions contained in an employment or shareholders’
agreement. To address personal problems created by prolonged illness implement
powers of attorney and health care proxy to address decision making if
disabled. A revocable living trust is a tremendous technique for disability
planning. Having a home equity line and margin account in place can facilitate
meeting short term cash flow needs through an emergency. Simple?

Offbeat Ways to Finance a Retirement Home:

The simple way to finance a
retirement home is to use savings to pay for it or take out a mortgage. In some
instances, something more unusual may fit the bill.

o Life Insurance: Retirement is a
time to re-evaluate all aspects of your planning, including life insurance. If
you have life insurance you no longer need nor want, even in an irrevocable
life insurance trust (ILIT), its value might be put to better use.
Example:  Husband has insurance on his life owned by an ILIT. Wife is a
co-trustee and beneficiary of the ILIT. Husband recently sold his business and
they are living in retirement on the investment returns from the
proceeds.  The primary and secondary needs for life insurance; namely, to
replace his earnings if he died and to deal with the illiquidity of the family
business, no longer exist. The only possible benefit of the life insurance is
to address the estate tax. But, with a $5 million estate, a current federal
estate tax exclusion of $2 million each, and an expectation of spending assets
down, you may opt to cash in (or sell) the insurance.  The trustee can
terminate or sell the policy and distribute the cash proceeds to Wife who uses
it to buy the retirement home. Before cancelling or selling a policy, however,
review all options first:  Keep the existing policy and trust; Keep the
existing policy and trust but use various options to modify the coverage and or
trust;  1035 exchange or buy a new policy to better meet your new needs;
Cancel the policy and use the proceeds as above; Sell the policy.

o Rental: Evaluate converting your
existing home into a rental property. Its not only a cash flow and income tax
analysis. There may be lots of estate tax bang to the plan too if you look at
it as part of an overall estate plan. Convert your New York house to a rental
and contribute  it to a limited liability company (Realty LLC).  Then
purchase your  Florida retirement home and use the rental income (LLC
distributions)  to pay for your expenses.  Transfer Rental LLC to
another limited liability company that can own marketable securities and other
investments (Investment LLC).  Thus, Investment LLC owns Realty LLC (like
a subsidiary). Ownership of Investment LLC can be given to heirs and
irrevocable trusts to reduce gift and estate taxes, and protect assets from
malpractice and other claims. The inclusion of the rental property may support
larger valuation discounts to leverage the gift and estate tax benefits. If the
rental property is worth $1M and the securities $1M a 10% interest may be
valued at $150,000, not its pro-rata $200,000 value.  The  rental
property is a key to the entire plan because it is truly a non-liquid,
non-marketable asset that creates real business purpose and discounts for the
Investment LLC (it differentiates their facts from many of the recent tax court
cases ruling against taxpayers on these techniques). You extra mileage out of
the plan: cash flow for your retirement home, avoiding ancillary probate
because the New York property is held by an LLC (assuming you become a Florida
domiciliary), gift/estate tax benefits, asset protection benefits, and a cool
plan! You get everything but simplicity.

o QPRT: You may have given your
primary residence into a qualified personal residence trust (QPRT) to transfer
it to your heirs at a substantially reduced value for gift taxes. Your QPRT can
sell your primary residence and purchase a new home in the area you want to
move following retirement.  Same plan, new house. Different, but
simple.  When the trust ends, your heirs own the retirement home and you
can rent the retirement home from their kids.  This is a great way to
reduce estate taxes by transferring more money to your heirs as rent.

Selling A Closely Held Business:

Selling a closely held business can
be viewed from a simple perspective: sell the stock and report a capital gain.
Invest the proceeds. But there are many more planning techniques that might
help you achieve an array of goals: income tax savings, gift/estate tax
savings, charitable goals, and more. Usually some combination of techniques, while
more complex than a single plan, can help you better tailor the results to meet
your overall goals:

o Gift part of the business interests to
a charitable remainder trust (CRT) before the sale. Use the
charitable contribution deduction to offset some of the gain on sale. The CRT
can provide cash flow for your life, and the life of your
spouse.
Most CRTs are structured as CRATs making a fixed annuity payment but if you’ll rely on the cash flow for a long period use a
CRUT —  the annual payment you receive, a unitrust payment, is a percentage of the trust value each year, so it can increase over time as your portfolio grows.

o An insurance trust (ILIT) might
be used to replace the stock value given to the CRT. Some planners call this a
“wealth replacement trust”.
Set up an ILIT. It buys insurance on your life. On death, your heirs receive
the insurance in lieu of the value of the business given to charity using a
CRT.

o Simple sale for part of the transaction. Often, it’s advisable to leave a portion
of the sale unencumbered by planning so that
you have unfettered use of the money.
While a CRT offers benefits, you cannot access more money in any year than the
CRT formula provides for.

o Gift shares of stock to trusts for
heirs well before the sale strategy is pursued. This can sometimes
be done at a lower value, and further reduced by discounts. Use
trusts for these gifts to assure control over the stock and to protect the
gifts from divorce, etc.

o “Fancier”
leveraged gifts of stock using Grantor Retained Annuity Trusts, note sales to
defective grantor dynasty trusts, and other sophisticated techniques can also be explored.