Gumby Estate Planning

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
are some ideas to Gumby-ize your planning.

Disclaimers

You can structure a document with disclaimers so
that your heirs have the flexibility to 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 does not 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 in favor of 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

The newest tax dance since the twist is called the
“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

Establish 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 distributed
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 do not 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 that the insurance is protected and outside your estate) and
then take a wait and see what approach to take 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.

Grantor retained annuity trusts, a complex trust
planning technique known as a GRAT, 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 that 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 it (known as 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.

Do not 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, the addressing of
disability concerns, income tax planning, protection of loved ones and a myriad
of other issues are vital to address. Do not let the tax tail wag your estate
planning dog! Repeal, no repeal, you need comprehensive planning.