Gumby Estate Planning

Summary:

Gumby, that loveable dark green humanoid, known for
its being able to be bent into almost any direction or shape, has become the
new mascot for estate planning.  The
tremendous uncertainty about the future of the estate tax, and the economy,
requires similar flexibility to keep options open regardless of what happens
next. Here’s some ideas to Gumby-ize your planning.

Disclaimers.

You can structure a
document with disclaimers so that your heirs have the flexibility shift assets
where it is appropriate based on the law when you die. For example, you can
leave assets outright to your spouse and give him or her the right to disclaim
(file a legal document saying that he or she doesn’t want those assets).  Those assets will then pass to the next
named heir (which can be a trust) under the will or other governing document.
Similarly, you can name a spouse as beneficiary if an IRA and he or she can
disclaim so that the next named beneficiary (which could be a trust of which
the spouse is a beneficiary or children). Disclaimers sound seductively simple
to deal with uncertainty, and they are quite flexible, but the reality is that
too often a surviving spouse is reluctant to give up control, or some benefit
has been accepted from the assets making it impossible to disclaim. To make a
disclaimer more likely to work involve the heirs who may make the disclaimer in
the planning process so that they understand what is involved.

Grantor Trusts Toggle.

You can set up a trust for
a child or other heir as a grantor trust. A grantor trust is taxed to the
grantor for income tax purposes. Paying income tax on trust income will result
in more value being transferred to the heir. However, if estate tax repeal
happens, or the exclusion is raised substantially, turn off grantor trust
status to eliminate this additional wealth transfer. This can be done, for
example, by having a trust protector terminate the power provided in the trust
that characterizes it as a grantor trust.

Power of Attorney.

Obtain a good
comprehensive durable power of attorney with a well crafted gift provision.
This way you can avoid making large estate tax planning transfers today but
still have the ability to move assets at later stage outside your estate even
if disabled. A gift power should address a number of key issues *Who can
receive gifts? Children only? Grandchildren? Spouses? Partners of children? *
Should gifts be equally by child family line? * Can gifts be made to 529
college savings plans? Can those gifts be front-loaded (the law lets you give 5
years worth at one time, but should your agent be permitted to do this?). * How
much can be given? Should it be limited to the annual gift exclusion (currently
$12,000/year/donee)? Consider including broad rights to change beneficiary
designations of retirement plans and insurance. These mechanisms may provide
flexibility to change planning in the event of changes in the estate tax occur
but at that time you don’t have the competency to modify your plan yourself.

Make Trusts Flexible.

If you need to set up an
irrevocable trust (cannot be changed) build in flexibility to deal with future
uncertainty. Name a person (trust protector) that can change trustees, the
location of the trust, and other factors to add more flexibility. Give more
discretionary authority to make distributions since the future is unknown.
Example: In a bypass trust under your will (the trust used to protect the
estate tax exclusion amount, currently $2 million) consider naming your
surviving spouse and all heirs and giving the trustee the right to “sprinkle”
funds to whoever they determine.

Use a Marital Trust
instead of an Outright Transfer.

Instead of bequeathing
assets outright to your surviving spouse use a marital trust that provides more
flexibility to determine how the assets should be characterized for tax
purposes after death.

Buy Life Insurance.

You can purchase life
insurance (or better have a trust do it so the insurance is protected and
outside your estate) and then take a wait and see approach with the estate tax
developments. Caution: If you do this consider purchasing a permanent policy
that is structured to minimize premiums in the first years or a term policy
with conversion features. Many people do this with term coverage but if you
develop a health problem and the tax laws become more unfavorable the term
insurance may not be renewable when you need it.

529 Plans.

Front loan five years of
gifts to a college savings plan and remain the account owner. This permits you
to gift away $60,000 now but since you are the account owner you can take the
money back (yes, with taxes and a penalty) in the future. Caution: If you die
within five years part of the gift may be pulled back into your estate. Using
529 plans and annual gifts is a simple and inexpensive way to move assets out
of your estate that you can reclaim if future changes require it.

GRATs.

A complex trust planning
technique lets you shift the growth in a portion of your stock portfolio or
other assets out of your estate (i.e. growth over a federally mandated rate of
return you must keep, currently about 3.84%). This can move some growth out of
your estate but keep your principal so you can evaluate re-using the technique
each year as circumstances change. This is a great way to get some planning
into play that can be monitored and tweaked as circumstances warrant. Caution:
If Congress repeals the technique, re using (rolling) the GRATs in future years
may not be possible.

Self Funded Trusts.
You can set up a trust in anyone of more than a dozen states, the most popular
being Delaware or Alaska, and gift large assets to the trust (or use more
esoteric techniques to transfer even greater amounts of value). Since these
states let you remain a discretionary beneficiary of the trust you can still
benefit from trust assets should you need them in the future. If successful,
you can remove substantial assets from your estate yet still benefit from them
if you need.

Revocable Living Trust.
Set up a revocable trust and transfer substantial assets to the trust (a funded
trust).  You can be your own
current trustee (or co-trustee) and designate trusted persons to succeed if you
become disabled. Give the successor trustees broad power to change your estate
plan in the event circumstances change. This can provide flexibility to deal
with the uncertainty even if you are disabled and cannot change your plan
yourself.

It Ain’t Just About
Taxes.

Don’t forget that estate
planning is never just about taxes. Taxes should never be the only or even the
primary focus. Tax savings should only be pursued if consistent with other
important personal goals. Asset protection, business succession planning,
addressing disability concerns, income tax planning, protecting loved ones and
a myriad of other issues are vital to address. Don’t let the tax tail wag your
estate planning dog! Repeal, no repeal, you need comprehensive planning.