Originally Aired: January 12, 2011
Topic: How the New Tax Laws Affect Wills and Trusts with Martin Shenkman
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of Martin Shenkman, CPA, Author and Estate Planner
- Change Exempts $5 Million on Estate, Gift and Gifting Transfer Taxes
- Update Your Estate Plan at Least Once a Year
- $5 Million Exemption Is a Huge Opportunity for Non-Married Partners
- A Trust Allows You Minimize State Estate Taxes
- Estate Planning Is Far More Than Getting a Will, Saving on Taxes
- Estate Planning Is About Integrating Myriad Issues and Possibilities
- ‘Wealth Shifting’ Strategies Can Offset Future Income Tax Hikes
- Will Gives Surviving Partner the Flexibility to Accept Assets Directly
- Trusts Can Be Structured to Provide Both Control and Protection
- Delaware, South Dakota, Alaska, Nevada Are Best States to Base Trusts
Welcome to The Lange Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
1. Introduction of Martin Shenkman, CPA, Author and Estate Planner
Nicole DeMartino: Hello and welcome to The Lange Money Hour. We are talking smart money tonight with retirement and estate planning expert Jim Lange, who is also the author of two editions of Retire Secure! and The Roth Revolution. Tonight, he’s joined by Martin Shenkman. Martin is also a CPA/attorney and estate planning expert. Besides being a regular source for the Wall Street Journal, Fortune and Money magazine, he’s also a regular guest on the Today show, CNN and the NBC Evening News. He has written an astounding 34 books and 700 articles. His newest book, which we will be talking about throughout the show, is Estate Planning After the 2010 Tax Act, very appropriate because that is what we’re talking about tonight. So, before I turn it over to Jim, the show is live. Please feel free to give us a call. That number is (412) 333-9385.
Jim Lange: And before we get into the content, I will just say that Marty’s one of these estate attorneys who is just so highly respected. He very often teaches at Heckerling, which is kind of like where the gurus of estate planning meet in Miami after Christmas every year, and he’s just widely recognized. Go to almost any estate attorney and you say, “Hey, Marty Shenkman says this,” they’ll know who he is, and he’s just come out with two new books, one on his own —we’ll give you contact information — and another one with Steve Akers, who is also perhaps one of the giants. So, anyway, Marty, thank you so much for agreeing to be on the show.
Martin Shenkman: No, my pleasure, Jim. Not meaning to give you a hard time when we start, but I’ve never spoken at Heckerling. It’s the one place I haven’t spoken, so let’s just be honest with your audience. But thank you for all of the other flattering, kind words.
Jim Lange: Oh, OK. I actually took a jump there because in your book, you quote something from Heckerling, so I just assumed that you were there.
Martin Shenkman: Yeah, no, no, that’s fine, that’s fine. By the way, the people should know also that there are two books out and the proceeds go to charity from the professional version of the book, which is available from AICPA, www.cpa2biz.com, and all of the proceeds go to charity. We make nothing on it, and Steve Akers was really a kind gentleman to agree to give all the royalties that will come from that to charity. So, they shouldn’t think of us as shameless promoters for our book, so OK?
Jim Lange: Well, yeah, as a matter of fact, I actually checked on that earlier today, and it takes a little bit to get to it. If you go to www.cpa2biz.com, you can’t type in your name. You actually have to type in the name of the book.
Martin Shenkman: I’ll call and give them a hard time.
Jim Lange: I would! And they say it’s not available until January 31st …
Martin Shenkman: It’s actually available today. It came into the warehouse today.
Jim Lange: All right, well, that is important because I know that we have a lot of financial professionals. But anyway, I was able to get in by typing in “Estate Planning After the 2010 Tax Act.” You were good enough to email that to me, and I think it is a great book, and the other thing that I liked about it is that it actually had specific advice for different people in different situations that we’ll cover later on. But one of the things that I wanted to talk about a little bit, Marty, is when I first called you and I had asked you to be on the show, you said, “Hey, you know, this is a brand new ballgame. This is the biggest change that we’ve ever had, and this is just kind of a sea change,” and I was wondering if you could tell our listeners why you think that, you know, a lot of times, hey, there’s a change in the tax law, OK, it’s a nice thing to know what the changes are, but listening to you, you put on a fairly convincing case that this is a really big deal, and I thought that before we get into the nitty gritty that you could just lay out the big picture of why you think that the most recent change is such a big deal? And I guess I should also ask you to tell people the most important parts of it, and you can take it in any order you like.
2. Change Exempts $5 Million on Estate, Gift and Gifting Transfer Taxes
Martin Shenkman: I’m going to give you an answer that’s unexpected for you and the readers that I think is really the most critical impact of it. In a real nutshell, what the tax bill did is the gift, estate and generations gifting transfer tax — and we’ll hopefully have time to explain all of that — there’s a $5 million exemption, which means until you give away, at death or during life, $5 million, there’s no tax law. If you have a spouse, and on your spouse’s death, he or she doesn’t use his or her exclusion, you, as the surviving spouse, can use what’s called portability and get their unused exclusion, and then, in effect, double up and give away $10 million. We’ll go through a lot of that because none of it is nearly as simple as it says and there’s a lot of very creative planning for people with a lot less money. So, if anybody out there listening doesn’t think they will ever, barring winning a huge lottery, have $10 million, don’t hang up on the show, because this is a huge opportunity for lots of different types of people that aren’t that rich. It’s not only about wealth. But here’s where I think the biggest game changer is: I heard a fascinating statistic a week or two ago that 39 percent of Americans believe they are or will be, before they die, in the wealthiest 1 percent. We’re still the land of wishful thinking and opportunity, which is wonderful, very optimistic, but those people drove the estate planning industry, because even people that didn’t have an estate tax issue, or not one of significance, still may have done planning before because they wanted to be protected in case they got to that wealthy strata. I think that fear factor that drove so many people to do estate planning is now gone. So, here’s where it’s a game changer: There are huge opportunities for people even with far less wealth to plan because of what this law did, but I think the biggest danger to the people out there that are the non-professionals is that they may very well be lulled into thinking, “Gee, I don’t have to worry about estate planning,” and I’m using that phrase intentionally, estate planning. “My estate will never hit $10 million. I don’t have to worry. I’ll get a cheap will online or go to the attorney that did my house closing and let him or her do a $100 will.”
That will be devastating to lots of people because estate planning has nothing to do primarily with taxes. Estate tax planning is only a component of estate planning, and everything else that you as a financial planner, the accountants, the attorneys, insurance consultants, everything provided to their clients as part of what is estate planning, all that still remains vital even if the estate tax planning doesn’t apply to somebody. And that’s the game-changer, and I think for professionals because you said you have some financial planners in the audience, the toughest job for a professional is to get that message across to clients. The consumer needs to be educated to understand when you go online and do a will for $79.95, you’re not getting the decades of experience of a professional, whether it’s your attorney, your accountant, your insurance consultant, your pension consultant, to help guide you, and there’s a lot of value in that. Hopefully, that’s a message we can bring across throughout the show. So, I think that’s the biggest game-changer and not what people expect. They expect that your tax issue is the biggest game-changer. That’s the biggest game-changer.
Jim Lange: All right, well, how do you think that this will impact most of our listeners? Let’s say somebody has an old will from 10 or 15 years ago, or even five years ago, and let’s assume that we’re talking about a less than a 2 or 3 million dollar estate. What are you recommending to your clients that are in that situation?
3. Update Your Estate Plan at Least Once a Year
Martin Shenkman: The first mistake those clients have made, those consumers, you need to see your estate planner really every year. You really do. Even if it’s an hour meeting or a half-hour meeting, there are always loose ends. There are always new planning issues. It’s not just about your will, it’s not just about tax issues. There’s a range of different things, and one of the most important lessons that people that got hurt bad financially in the recent recession, or in the recession we’re still getting out of, depending on your view, but that’s a different expert for a different day, is if you had an estate or financial planning team where your financial advisor, your accountant, your attorney, if they simply made one 10-minute, 15 -minute conference call, which is no big deal to do and you don’t have to be a Rockefeller to afford it, and you get all your advisors on the same page and you have everyone looking after each other and after you, you will get a much safer and better result and you will avoid a lot of the traps, the improper diversification, the over-reliance on aggressive alternative strategies, all the stuff people got into trouble with, much of that could be avoided if you simply patched together your estate and financial planning teams and had them communicate. So, that’s the first message.
Let me tell you three things that that listener with the couple million dollar, three million dollar estate and the old will, should do. First, you got to get stuff revised. All the formulas, all the language, all the provisions in most documents were done when the law was different. Second, when you revise that document, you need to contemplate the wide range of possibilities of what might happen. The $10 million for spousal may not be available to a lot of people because portability is far from perfect. The $5 million and the $10 million with portability, those things are only in the law for two years. In 2013, if Congress doesn’t act, it plummets to a million dollars and a 55 percent tax rate. That’s what’s on the books. So, all the confusion that everybody was put through over the last year not knowing what the law is going to be? We’re going through it again. So, one possibility, whether you make it a 5-10-50 percent likelihood in your mind, it’s a possibility that the law is on the books, a million exclusion, 55 percent tax rate. So, the person with the two or three million dollar estate could potentially face a million, million-and-a-half dollar tax cost if they do nothing and die in 2013. In 2013, we may continue the same $5 million we have now. It could go back to the 3 and a half million, 45 percent rate that everyone thought we were going to get this year. It could go down to the point of being completely repealed because so few people are paying the tax. It could be anything in between. So, people need to evaluate how their planning and their documents work regardless of which of those possible scenarios comes out. If you’re not doing that, you’re not building in enough flexibility, you could have a problem. So, you need to revise everything.
But I think there’s some very interesting and valuable planning opportunities for that client to think about today. So, for example, if that client were a physician and worried about malpractice, a business owner worried about lawsuits, someone that’s retired and sitting on various boards of directors and worried about potential liability, the change in the tax law to a $5 million exclusion, or exemption if you want to call it that, in 2011, this year, even though you’re below the $5 million, don’t focus on that. Focus on what it does for your asset protection planning. That huge exclusion now permits people to transfer large amounts of wealth out of their name, subject to fraudulent conveyance and other rules and issues, in a way that they never could do before. The person with the $3 million estate, if they wanted to have transferred $2 million into an irrevocable trust to protect it from claimants or creditors or divorce or whatever it was, and I’m not going through all the issues with that, but assuming you’ve passed those hurdles, you had a major problem up until last year, even in 2010, because of the million-dollar gift exclusion. That was it. Everything over that, there was a huge tax to pay. This year, those wealthy people that are not wealthy enough to worry about the tax can use this as a golden opportunity to protect their asset, a huge opportunity.
4. $5 Million Exemption Is a Huge Opportunity for Non-Married Partners
There’s another category, completely different, of people that can have a huge benefit from this that also may never have to worry about the estate tax. If you have non-married partners, in the past, they faced a very negative tax system because the estate tax did not recognize the non-married partner relationship, and you could not make, as a married couple could, an unlimited transfer to a spouse because a spouse and a partner were not equated. The new law is just as biased against non-married partners. This anti-portability concept that hopefully we’ll talk about more and warn people of the dangers of how much is lacking in it, it’s not available to a non-married partner. So, for non-married partners, why is this a golden opportunity? If one partner has much more wealth than the other, which is very common, it was very costly, prohibitively costly in the past, even to transfer half of a house to the other partner to equalize or to bequeath on death an expensive home or a vacation home or both to a non-married partner. With the $5 million exclusion, this is a golden opportunity to transfer wealth between non-married partners, and those consumers should not lose this opportunity, just like the doctors and others that want to do asset protection should not lose the opportunity, because it’s very possible in 2013 the gift exclusion will drop to a million dollars. So, for everybody out there, you got to redo all your documents because you have to go over, with your lawyer in your state in your area, what these changes mean, and in many cases, I think in most cases, you have to rethink the formulas and replace them. Second, if you fit into a unique category, worried about asset protection and lawsuits, which is an awful lot of people — non-married partners, which is a substantial number of people — this is a golden planning opportunity. Don’t lose it because you don’t know what’s coming down the pike.
Jim Lange: Well, let’s focus on your idea of transferring assets or even making a gift, and when you’re referring to, let’s say, same-sex partners or even just unmarried partners, do you anticipate having a direct gift to the other partner, or are you anticipating a gift to a trust that can provide income or principle to both partners?
Martin Shenkman: Jim, I’m going to prove to all your listeners that I’m really a lawyer. Are you ready for the answer to the question?
Jim Lange: It depends!
Martin Shenkman: It depends!
Jim Lange: Fair enough.
Martin Shenkman: It depends. Now, is that a good lawyer answer or what?
Jim Lange: That’s the perfect lawyer answer.
Martin Shenkman: I answered it directly and gave no relevant information. It proves I’m a lawyer.
Jim Lange: It sure does.
5. A Trust Allows You Minimize State Estate Taxes
Martin Shenkman: Yeah. I’m a big fan of trust, and not just because I’m a lawyer and make a living doing trusts for people. Most of your listeners are probably in Pennsylvania, I assume? Certainly, a chunk of them, so I’m not going to help them anyhow, and you have people all over the country, so they’re going to need to go to a lawyer in their state. But the reason a trust is so much more powerful is if you give assets to a partner, same-sex, whatever, we’re talking the whole broad category, if the relationship breaks up, what happens? Those assets are gone. Now, maybe that’s OK; maybe it’s not. If you give assets to a partner, and that partner and you live in a state like New York that only has a million-dollar exclusion, or New Jersey with $675,000, and someone told me, I think, Ohio or Illinois had even less than that, you’re going to create potentially a state estate tax on death. So, if you put it in a trust, you can minimize state estate tax, and that has not gone away, and that’s something people still need to consider, and it does not address the asset protection issue. So, if a give a partner or a spouse, anybody, assets in a trust, if they get sued, those assets might very well be protected. If I give it to them outright, I could lose half of my assets that I just gave them.
Jim Lange: And I should also mention, in Pennsylvania, there is no exclusion. So, the first dime is taxed in Pennsylvania, and there are different rates, depending on your relationship, and a non-married partner is the most expensive rate.
Martin Shenkman: Wow.
Jim Lange: So, there’s an unlimited marital deduction in Pennsylvania, meaning that you can leave as much money as you want to your spouse, and then the next most favorable is lineal heirs, that is, children and grandchildren, and then there’s stepchildren, but the non-relationship is the worst at 15 percent, and I’m afraid that we have to take a short break.
Nicole DeMartino: We do have to take a short break. You’re listening to Martin Shenkman and Jim Lange on The Lange Money Hour, Where Smart Money Talks.
Nicole DeMartino: Welcome back to The Lange Money Hour. We are here with Martin Shenkman tonight, and, of course, Jim Lange.
Jim Lange: By the way, if you did hear the commercial, it said, “Well, gee, maybe too much money is going into these trusts,” and Marty’s saying, “Hey, I like the protection of these trusts,” and that’s very interesting because Marty, in his example, said, “Well, maybe you are a physician, or maybe you sit on some boards,” and he gave some very good examples of people where I think trusts were very appropriate. On the other hand, I’m probably a little bit less trust-oriented and more for, let’s call it, the average couple that doesn’t have any obvious tort liability. I tend to keep things simpler. So, as much respect as I have for Marty and the work that he does, in my own practice, for people who don’t have some of the asset protection issues, or obvious asset protection issues, I might take a slightly different course. Although, frankly, really, and I think that Marty and I would agree with this, that it’s really up to the client. It’s not up to the attorney to determine the client’s fate.
Martin Shenkman: I think that the discussion that you just had, Jim … and I’ll convert you because I don’t agree, but the discussion you just had, and also I want to go back to the ad that you just played while we were on hold on your Roth conversion. The whole point of estate planning is for that consumer to sit down with their advisors and get a coordinated plan with their attorney, their accountant, their financial planner, their insurance people, and sometimes one person may wear more than one hat, but to get your advisory team, get their input and come up with a cohesive plan. It’s more important that you go through the process of what Jim just discussed than which answer you come up with because the answer you come up with should be the right answer for you. Now, Jim and I have different views of it and if we were both your advisors, you would hear Jim’s view of simplicity and my view of be careful because you can’t fix it later, and then you’d make the decision that’s right, but then you’re the informed consumer. That’s what the process is about, and my fear, which is what I said what I thought the biggest sea change is, is because consumers no longer fear the evil death tax is going to decimate their estate. They’re not going to go through the process. So, instead of getting the education and the knowledge and the advice of different advisors, they’re going to get the quick, cheap answer, and that’s almost never going to be the right answer because you know what? You may opt for Jim’s incorrect approach of the non-trust, which I’ll forgive you for — we’re not going to discuss football teams …
Nicole DeMartino: Oh no!
Martin Shenkman: Don’t start!
Nicole DeMartino: Don’t you start!
Martin Shenkman: Don’t start! But you’re not going to necessarily address all the myriad of other things. What about a Roth conversion? Do you convert? Don’t you convert? Have you really analyzed it? It amazes me how many clients come to me, and I don’t sell any products, they’ve never looked at long-term care insurance and they’re in their 60s or 70s? They’ve never addressed it? Many people, a shocking number of people, I’d say most people that we see are all high wealth clients don’t have an umbrella or personal access liability policy. That kind of core planning, the Roth issues, the investing, all these things are part of your plan, and that’s what you need to go through in order to come to the right result for you, whatever that result is.
Jim Lange: Well, in that, we’re in perfect agreement. In fact, I actually can’t do an estate plan without a complete list of assets and we go through a fairly extensive fact finder to see where people are, and I almost can’t help myself in terms of wanting to make Roth IRA conversion recommendations, and now without the burden of worrying so much about gift and estate taxes, I think, in a way, that actually gives us more freedom and more choices in terms of making gifts.
Martin Shenkman: Absolutely, and I just hope that all of the advisors listening, and you and I can educate consumers, so instead of them adhering to the simplistic-minded advice of “Gee, you don’t have to worry,” which is dangerously wrong, you can get them to focus, and we can get them to focus on the myriad of other planning issues that are so vital for them.
Jim Lange: Well, let me tell you one pretty common one that I have been dealing with for years. I work with a lot of older clients, and a lot of them, who are doing quite well and not spending anywhere near what they could afford to spend, partly out of habit, partly out of, whether you want to call it “Depression-era mentality,” and partly out of the fact that they think that they are limited in their gifts to their children and grandchildren by $13,000 per year. So, some of them are in their 70s and 80s, and their kids are at the time in their lives when maybe they need a down payment on a home, maybe they need a down payment for a car, and some of these kids are really struggling, and, in a way, it doesn’t make sense for these kids to have to wait until they’re 60 before they inherit any money. But what’s happening right now is nothing; that is, the parent is holding on to it and they haven’t even considered the idea. Or, for example, if somebody’s interested in making charitable gifts while they are alive, and I think that taking a look at the big picture, both the asset value and what people want to do with their money and should they make a Roth IRA conversion and should they make gifts to their kids and should they make gifts to their grandkids and should they support their grandchildren’s education, et cetera. I think is really critical, and I guess, Marty, you and I are coming at it from a little bit of a different viewpoint because we’re both CPAs and we’re both somewhat quantitative, but I think that that’s some of the real juice in estate planning.
6. Estate Planning Is Far More Than Getting a Will, Saving on Taxes
Martin Shenkman: Oh absolutely, and the one thing I would add: Every person, every client, and I’m sure you’ll second this, everybody’s got some unique twist or nuance or personal issue that if they start to explore that “big picture,” as you described it, those personal issues, those unique circumstances for them will get addressed in the bigger picture context, and they’ll come away with really solid advice. Too many people have defined estate planning as being getting a will and saving tax, and not minimizing the importance of that, but that’s never been what it’s about, never at all.
Now, let me address one of the comments you raised because it’s an interesting twist with this new law. If you make a charitable contribution, which is very common for lots of clients and I always encourage clients, make a bequest under your will to charity. It’s a wonderful way, forget the tax issues and the legal issues and everything else, and it doesn’t even have to be a huge amount, but it’s a wonderful way to demonstrate to your heirs the importance of giving back to society. But now, because the exclusion is so high, and let’s leave aside state estate tax for a moment, you don’t get any charitable contribution benefit on the estate if your estate is not over the $5 million, or $10 million if you’re married and you have portability. So, for some clients, I would say a large number of clients, it may make more sense to put a provision in their durable power of attorney authorizing their agent to make a charitable bequest or gift before they die. For a lot of clients, it may be as simple as leaving a personal letter to their children: “Dear children, in order to help encourage you to be philanthropic and give back to society, I’d like you to write out a check for $25,000 to ABC charity. This is a non-binding request.” So, they simply receive the bequest under the will, and they have this non-binding letter that I would suspect most heirs would adhere to. They’ll make the gift. The difference now is they’re going to get an income tax deduction, and I would guess most income tax rates are going to go up at some point in the future to address some of the deficit issues. So, they’re going to get a big income tax deduction, whereas if you’d paid under your will, under the current scenario, if this law continues, you’ve got no deduction. So, a lot of little things like that will have to be rethought, and that’s all part of why it’s important for clients to sit down and review their documents with their planners.
Jim Lange: And that’s a very interesting point because up to now, I was actually not a big fan of leaving a bequest in your will. The way I used to do it, and still do, although now I have to relook at it, is I would try to take the charitable element as part of the IRA or the retirement plan on the theory that we want to give the after-tax dollars to the kids or grandkids and give the IRA or qualified money to the charity, so that way, the client never had to pay income tax on the IRA and the charity doesn’t have to pay income tax on the IRA.
Martin Shenkman: That was a great strategy until everyone converted to a Roth.
Jim Lange: Well, in fact, interestingly enough, I would always say even if the best thing for you to do is to convert everything, I would tell people to hold up on some of it to leave to charity, and with your idea is hey, for most people, they’re not going to have a federal estate tax anyway, might as well let their heirs get the tax deduction, and that probably even encourages Roth, and this isn’t going to be a Roth show, but I know that … actually, I don’t know, but I suspect that you are a fan of Roth IRA conversions.
Martin Shenkman: Of what, the Jets? Oh, I thought we were going to talk about the Jets, I’m sorry.
Jim Lange: You have to watch out here, this is Steeler Country! There are people crazy enough to drive to New Jersey.
Martin Shenkman: That’s why I’m carefully making the call from Jets territory here in New Jersey. I wouldn’t be brave enough to come there and say this stuff!
Jim Lange: Well, for whatever it’s worth, everybody in Pittsburgh was rooting for the Jets last week.
Nicole DeMartino: That’s true! Absolutely!
Jim Lange: We were all pretty ecstatic about it.
Nicole DeMartino: We were temporary Jets fans.
Jim Lange: And the reason is because we thought we had a much better shot at knocking off the Jets than losing in New England!
Martin Shenkman: Anyhow, there’s another concept like this that needs to be rethought. It was very common for us to always encourage clients to leave in their will, even if they said not to, the ability for executors to get paid their executor fees. A lot of times, if somebody was naming family, which is very common as an executor, they’d say, “Don’t write that they shouldn’t get a fee.” I never was a fan of not paying because it makes sense that if someone’s doing a lot of work, they should get something for it. But the other motive for it was when you had a 55 percent federal estate tax and maybe 60 percent when you counted the state, that was a huge number. So, even if the executor had to report this as income, getting it out at that estate tax deduction, you were having an arbitrage between the estate tax rate and the income tax rate. That’s gone. I think the comment about the charity and the executor fees and all these issues, it just shows the myriad of ripple effects that this new law has on what has been fairly standard planning. And again, that’s why it’s so vital for people to sort of sit down and rethink everything with their advisors because they may find yet other ripple effects that affect what they’re doing.
Jim Lange: And I’d love to go on, but it’s time for our second break.
Nicole DeMartino: It is time for our second break already. We’ll be right back. I want to remind everyone that we are live. If you have a question, we have the best two people here in the business, (412) 333-9385. Give us a call. We’ll be right back on The Lange Money Hour.
Nicole DeMartino: All righty, welcome back to The Lange Money Hour. We are here with Marty Shenkman and Jim Lange, and one thing I want to mention is, this show is so great that you may want to listen to it again. This show will be replayed on Sunday at 9 a.m. So, if you’re just sitting there waiting for the Steeler game, you could listen to us for an hour. We’re on from 9 until 10, and new in 2011, we’re actually on every Sunday, whereas before we were on every other Sunday. So, this year, we’re on every Sunday, 9 a.m. Eastern Standard Time, so tune in, and then, if for some reason, you miss that or you want to hear it again, you just jump on to www.paytaxeslater.com and it’ll show up there very, very shortly, so you can listen to it all the time.
Jim Lange: And sometimes at www.paytaxeslater.com, you don’t have problems with the signal, and it sometimes actually is a better listening experience.
Martin Shenkman: Jim, can you imagine if somebody listens to this show repeatedly just how fascinating they’d be at a cocktail party?
Jim Lange: Well, I actually think that this is fun stuff, and one of the challenges that I have, particularly when I get a guest like you, is to try to not get too technical, but try to bring it down so that everybody understands it. It’s a little bit easier in a workshop because there’s people there and you can look into their eyes and you can see …
Martin Shenkman: You can see when their eyes start to get glazed over.
Jim Lange: Right, and I can’t tell you that that’s never happened, although today, I did a teleseminar for about 80 ADCPAs, and that was another one where I really couldn’t gauge their interest. But actually, some of the material in your book was very helpful, and I’m very glad that I got it to you, and by the way, what’s going to happen — it always happens — is that we run out of time, so before we run out of time, I’m just going to put in a little plug for the one book that I read, which was … well, I didn’t read all of its 300-some pages word-for-word, but I went through the table of contents and read everything that I wanted, and this is more for financial professionals, although I think it’d be fine for a lot of sophisticated listeners. If you go to www.cpa2biz.com, where it says Search, type in “estate planning after the 2010 tax act.” It’s wonderful for professionals. First, it’s a great book, then you get a PowerPoint presentation that you could actually give to your clients, which I thought was very well done, and the only thing I didn’t get was the actual CD where you are actually making that presentation.
Martin Shenkman: You can get the whole thing to train your staff as well. And by the way, again, every penny goes to charity, so don’t feel we’re being selfless promoting our book here. There is another version for consumers that’s a fraction of that size that’s $9.95, a cheap 10-buck download on Amazon. If you just put in “the 2010 tax act” or “estate planning after 2010” or my name, “Shenkman,” you can get a cheap version for consumers on Amazon.
Jim Lange: Yeah, and you can download that right to your Kindle.
Martin Shenkman: Right.
Jim Lange: So, those are very good resources, and particularly for the professionals, you know, this is the kind of thing that you have. The other thing, I’ll put in one last shameless plug and then we’ll move on, you have a number of letters directed to clients in that package for the professionals that I thought were very good. So, you know, you have different examples of different types of clients and different messages that you want to present, and I think, for some people, that alone might be worth the cost of admission because I think the idea is, you’re trying to motivate people to get their clients to come in. Now, I have never been successful at getting clients to come in anywhere near once a year. In fact, sometimes on a first time will, a client will come in and I’ll say, “Oh, it says here that if something happens to both of you, little Johnny goes to Aunt Sue and Uncle Bill. By the way, how old is little Johnny?” “Oh, he’s 47.” So, sometimes, people don’t review it as accurately as they can.
7. Estate Planning Is About Integrating Myriad Issues and Possibilities
Martin Shenkman: But see, I think, Jim, if people would only understand the message that you and I have repeated a number of times, it’s not just about a will or taxes, it’s about integrating and addressing the myriad of different issues that we’ve talked about. They will understand that there’s a lot more to be gained and a lot of peace of mind, which is a very rewarding feeling if they know that all of these ducks are in a row.
Jim Lange: And the other thing is, there are some complications that frankly I didn’t know about with this law until I read your book, and one of the things that I thought was simple, and I am now convinced it’s far from simple, is the concept of portability, and I thought maybe if you spent a minute or two on that because I think a lot of people are thinking, “Oh, well, if it’s less than $10 million, I’m fine from a tax standpoint and I don’t have to do anything,” but that doesn’t appear to be accurate.
Martin Shenkman: It’s not at all accurate, and you’re 100 percent correct that that’s what people are hearing from the general media, and it’s very dangerous. Let me tell you first again what portability is just so everyone understands the new buzzword. If your spouse dies, you can use the amount of the $5 million basic exclusion that they didn’t use. So, it sounds simple. So, your spouse dies, you survive. On your death, if you did no other planning, you get to exempt $10 million from the estate tax. Some of the complications that make it far from simple, and I think it’s beyond what we can do today for the show, but the complex generation-skipping transfer tax, which many wealthy people use, and even people that are not so wealthy that want to protect assets going down multiple generations, you can’t use that with portability, so you lost that. Leaving assets outright to your spouse has none of the act of divorce, malpractice protection that leaving it in their trust would have. So, you lose all of that. The portable amount is inflation-indexed until your spouse dies, but once your spouse dies, it’s not. The average female in our country outlives the average male by, I think it’s about six years. So, if your husband dies and has a $5 million portable exemption, you live for six years, if the market runs up, you could be well beyond whatever it was. So, that’s another downside, and here’s the clinker to it all: This is supposed to simplify everything, and we haven’t even touched upon the rules and it’s probably sounding complicated already, but in addition to all of those twists and complications, and many that we didn’t go through, on your husband’s death, or the first spouse that dies death, you have to make sure that a tax return is filed for that person’s estate electing to give you the right to use the portable exclusion or you don’t get it. But if somebody has a million or $2 million estate, are they going to even think of doing this? Because they have no tax due. So, it’s really not the simplistic obvious answer that many think.
I believe what it really will be is that when anyone passes away, you want to make sure you get your accountant to file that tax return, but I think you really need to do proper planning to address all of the issues we’ve just talked about, and if something goes wrong and you didn’t get the planning right, at least you got this as a fallback, but I think it should probably be reviewed as more of a fall back than as an affirmative planning device. So, it’s unfortunate. It was supposed to simplify things, but it hasn’t.
Jim Lange: And I think the other thing is … another game-changer that I picture, and I’m not going to try to turn this into a Roth show — I did a lot of Roth shows last year — but I think that we are in the, let’s say, a new environment where income taxes are going to be much more important than estate or gift or transfer taxes, and people have to start thinking about income taxes. So, for example, let’s say that you are a high-income taxpayer, or even a medium-income taxpayer, which is probably what the majority of our listeners are, and now you find out, “Well, I probably don’t have an estate tax problem,” and let’s assume you have some highly appreciated assets, it might make sense to gift those assets to your children or grandchildren, have your children or grandchildren sell them, right now there’s a zero capital gains rate for people who are in the 15 percent or lower tax bracket. So, in effect, you can not only transfer them gift- and estate-tax free, but then you can also get rid of that capital gain that you would have had to have paid.
8. ‘Wealth Shifting’ Strategies Can Offset Future Income Tax Hikes
Martin Shenkman: I 100 percent agree, and I would go a step further. That’s also why you need to plan, because what happens on death? You get a step-up in basis. Where is that going? What’s going to happen with the income tax in the future? If they don’t bring back the estate tax with a greater strength and a greater bite if you will, where are they going to raise money? Very likely from raising income taxes. So, a lot of the planning that’s going to be done is things like you just talked about, Jim, which is wealth shifting. In the old days before everyone was using a fancy technique called discounts for estate planning purposes, the common use of a family partnership was to shift income to lower bracket individuals, the concept you just discussed. Well, maybe the partnerships that people had used for obtaining discounts for estate tax purposes will just morph into partnerships that are designed to shift income. And again, I think this goes back to one of the themes of our discussion tonight, is that there’s lots and lots of unexpected implications that affect far more people than just those with $5 million estates, and I hope people that have even a million-dollar estate didn’t tune out because we’ve talked about a lot of issues that will affect them as well, and the income tax that you just brought up is another one.
Jim Lange: Yeah, and your example of a family limited partnership … and by the way, I am not averse to asset protection. In fact, I have clients, physicians, who have transferred most of their wealth to a family limited partnership, not for estate tax purposes or even income tax purposes, but for client protection, and now, though, let’s say that partnership and the provisions around it, and also in trusts that I have drafted that were meant to save estate taxes need to be reviewed, not necessarily for taxes, but for other purposes.
Martin Shenkman: I think that’s a very important point. Any existing plan and documents should be reviewed to see how they work now and what needs to be done. But unfortunately, because the law is only a two-year time frame, you have to be very careful what you do currently, but I think they all need to be looked at. For example, if somebody has an insurance trust, they may have bought survivorship insurance when the estate tax exclusion was a mere $600,000. Do they still need the coverage? I’d be very careful canceling it just yet because there may be lots of different reasons to keep the coverage, but they should evaluate it so at least they’re informed and understand why they’re keeping it.
Jim Lange: Well, I think that makes a lot of sense. One of the things that you have in your book is, you talk a little bit about disclaimers and the idea of flexibility in estate planning, and that’s something that I am a big fan of, and I thought maybe you could talk a little bit about how flexibility … and I’ll tell you what triggered that is when you said, “Hey, we don’t know what’s going to happen in 2013,” and ideally, again, somebody will come up with an appropriate estate plan and then, let’s say, review it in 2013, but to quote you, “We don’t want to sound like the boy who cried wolf,” when before we were saying, “Hey, it’s going to go back to a million dollars in 2010!” Well, no, we were wrong. There’s no estate tax in 2010.
Martin Shenkman: Which is a possibility.
Jim Lange: Yeah, which is a possibility. So, could you talk a little bit about the concept of flexible documents, and specifically, the doctrine of disclaimer?
Martin Shenkman: Let’s not explain all the complexity of how it may apply in 2010. Let’s talk about people that want to plan their estates now.
Jim Lange: Fine.
9. Will Gives Surviving Partner the Flexibility to Accept Assets Directly
Martin Shenkman: Let’s say somebody has a couple million dollar estate, or even less, and “Gee, why not just leave everything outright to my spouse, because I trust him or her, and there is no tax, and why worry?” Well, you don’t really know what the future’s going to bring, not only in terms of taxes, but in terms of liability issues, remarriage issues, there’s a whole raft of uncertainties, but you may not want to force that trust, and you’d like to preserve, as you said, Jim, flexibility. One approach that’s commonly used, and I admit, I’m not a fan of it and I’ll tell you why, too, so people have the full picture, but a simple concept is I leave everything outright to my wife and if she disclaims, which is another word for renounce or renunciation, she files certain documents with the court saying “I don’t want the money that Marty left me.” If she does so, then under the terms of the will, the assets I left her, instead of going outright to her, will go into a trust for her benefit. What it does is, with very little extra cost because it’s a fairly simple drafting technique, you’re creating a will that gives your wife, or surviving spouse, husband, or partner, you can use this in a partnership arrangement, the flexibility to decide after you pass away whether or not they should accept those assets directly, or whether they should put them in the trust, and the trust could then have some protected features to it, but you’re giving the surviving spouse the decision making authority with after-the-fact ability. It’s very rare in tax planning or in legal issues to be able to use after-the-fact hindsight to make a decision, but here’s one where it works, and they have within nine months of the date of death, so long as they didn’t accept any benefit from it, to execute a disclaimer and pass the assets into a trust for them. So, if right now you say, “Gee, with $5 million, I don’t want to burden my spouse. We’re retired, there’s no liability, I’m not worried about him or her remarrying. I’m going to leave it outright.” It doesn’t take much more to have the extra page in your will that gives the ability to fund a trust through a disclaimer. So, let’s say your surviving spouse thinks, “You know what? Maybe I will remarry.” Or maybe there’s a lawsuit pending because you were killed in a car accident. Let them disclaim and put it in a trust to protect it. You’re giving them an option.
Jim Lange: Yeah, I sometimes call it a free second look, and I would take it one step further. I would give them multiple levels of disclaimer, meaning that to draft in such a way that they could either accept the bequest, have the money go into a family trust, or even a trust now that might be a little bit less tax-motivated. It could go to the children or a trust for the children, and it could also go to grandchildren. So, I sometimes like to have multiple levels of disclaimer possibilities in documents.
Martin Shenkman: It’s a very flexible way to do it, and the consumer listeners, if they meet with their attorney, what Jim just described is very simple to do, and it’s very powerful because it gives you lots of options to deal with the “what if” that you may not be able to foresee now. The one negative, Jim, that has me trying to dissuade clients from relying on disclaimers, and your experience may be different, is that I find that most surviving spouses are very, very reluctant to give up any measure of control over assets, but if the trust that we structure has got a lot of flexibility in it, and it’s automatic because that’s what we’ve provided for, they kind of understand that the decision was made and they’re OK with it, and we end up with more protected estates by having trusts required to be funded by then giving the flexibility. And again, it’ll be different for each person, but I think consumers should weigh those pros and cons with their attorney and come up with a plan that they feel comfortable for their family and their circumstances.
Jim Lange: Well, by the way, Natalie Choate, who is one of the finest estate attorneys, particularly with an area of expertise in IRAs and retirement plans, has some of the same concerns, and that is it might be appropriate for the spouse not to keep everything, but the spouse is often reluctant to. I will say, in my planning, and again, we actually try to educate clients that it’s very important to really keep an open mind to disclaiming, we have not had what I would consider, other than maybe one time that I can remember, what I thought was an inappropriate decision to keep everything rather than having anything go to a trust for a child. One person didn’t do what frankly I expected them to, or their spouse probably expected them to, and that was kind of too bad because … although, actually, in the end, it might work out well anyway because it ended up being a $3 million estate and they chose not to protect anything. Maybe in retrospect, they’re going to be OK. But I have not had the problem of people inappropriately not disclaiming, and Natalie has probably had experience closer to yours.
10. Trusts Can Be Structured to Provide Both Control and Protection
Martin Shenkman: By the way, it’s important for people to understand, Jim, and if they’re willing to invest a little more time and perhaps a little more money, the trusts can be created with a fairly significant amount of control and flexibility and still achieve some of the protection. So, for example, you can name your surviving spouse as a co-trustee. You can name your surviving spouse as a co-trustee and give them the right to withdraw money to meet their standard of living. In tax jargon, it’s called an ascertainable standard. You could just make the surviving spouse even a discretionary beneficiary and not give them any direct right, but give them carte blanche to fire the institutional trustee and name a new trustee. If you have control over who has control over the purse strings, and as long as it’s an independent trustee like a bank, you could have a fairly significant measure of control over the trust and still accomplish these goals. But whichever end of the spectrum you end up on, trusts are not a canned product that all are the same. There’s lots and lots of different decisions, and if people will invest the time, the effort and the money to go through those, of all the different things you and I have talked about, they can pick and choose a lot of different options and tailor something that fits them perfectly.
Jim Lange: Yeah. So, just, for example, I like to include, in my trusts, the ability to distribute money for grandchildren’s education. I’m a big fan of 529 plans, I’m a big fan of straightforward gifts, but I’m also a fan of, if somebody does want to have money protected from creditors, or perhaps we need it for tax purposes, although, again, that’s changing, to give the grandparent the ability to take money from the trust and use it for their grandchildren’s education.
Martin Shenkman: All the good because it’s more flexible. By the way, another issue with trusts might be, especially if the trusts are formed while somebody is alive, there may be more flexibility to shift that trust to a lower tax state and potentially defer or save state-level income tax, but that’s yet another reason that we hadn’t talked about earlier.
Jim Lange: Well, in fact, the choice of state is important. Now, again, we have advisors from all over the country listening, but the local listeners are from Pennsylvania. I think we mentioned a little bit that Pennsylvania has no exemption from estate taxes, but Pennsylvania does not tax IRAs and retirement plans. So, Pennsylvania is not necessarily a bad state to retire in because Pennsylvania doesn’t tax proceeds from IRAs and it doesn’t tax Roth IRA conversions, and that’s something that you have to take into consideration. But maybe you have a couple thoughts on state residency? In fact, I know you do because I read them in your book.
11. Delaware, South Dakota, Alaska, Nevada Are Best States to Base Trusts
Martin Shenkman: I would suggest though that the four states that seem to be on the forefront of trusts and trust planning are Delaware, South Dakota, Alaska and Nevada, and for people that are really looking to do some good planning, they need to evaluate using the laws of one of those states and basing their trust in one of those states, but that’s way beyond what we can do, I think, tonight.
Jim Lange: Right, and we’re rapidly running out of time, so I just wanted to clarify that for people. That doesn’t mean you have to go move to one of those places; it means that it might make sense to establish a trust where one of those state’s laws applies and you use a trustee from one of those states.
Martin Shenkman: Exactly correct.
Nicole DeMartino: All righty, we’re at the end of our show, unfortunately. Marty, thank you so much. This was excellent.
Martin Shenkman: My pleasure. Other than the football issues, I think we did good!
Nicole DeMartino: I think so! I think we can get past that. Well, thank you again, and for those of you out there who want to hear this again, it will replay on Sunday morning at 9 a.m., and then you can find it on www.paytaxeslater.com, and it looks like the moral of this show was that if you don’t have a will, go and get one. If you have one, go see your estate planning attorney to make it’s in line with these new laws, and thank you for joining us tonight. You’ve been listening to The Lange Money Hour, Where Smart Money Talks.