From Our “Ask a Question” mailbag: “Innovative Estate Planning Strategies.”

Most recently updated on June 6th, 2018.

Estate Planning Attorney, Tatyana Gleyzer.

“I hear about many estate planning ideas, can you help explain some Innovative Estate Planning Strategies?”

Innovative Estate Planning Strategies Explained.

Crafting an estate plan for a client means listening to what the client wants, explaining options to the client and then drafting a plan to meet the option selected. At times, a client’s circumstances require imaginative ideas. Here are some examples of creative estate planning that Klenk Law has utilized recently.

1. Protectors:

It remains a mystery to me why more estate planning attorneys do not use Protectors. A Protector is a person or persons you appoint to oversee a trustee with the power to fire and replace the trustee without the need of an attorney or a court hearing. No court hearing or attorney is necessary? Perhaps that is the reason why estate planning lawyers don’t use them? I use them in almost every trust. Even the most trusted person or bank can have problems, and if these problems negatively affect the trust, the Protector can “protect” the beneficiary without months of litigation.

2. Non-Reciprocal Spousal Trusts: For Retirement:

A Non-Reciprocal Spousal Trust is a beautiful estate planning tool in which you can place the money that you would otherwise have in your name for retirement or would place in your 401k (or other retirement accounts). A retirement like an IRA or 401k limits your investments, while the Non-Reciprocal Spousal Trust allows you to invest in anything; real estate, closely held companies, foreign companies or even in precious metals.

3. Non-Reciprocal Spousal Trusts: For Asset Protection:

Similar value can be provided by using Spousal Trusts for asset protection in your estate plan. Under the rules for 2013, Non-Reciprocal Spousal Trusts allow married couples to shelter up to $10,500,000 from creditors. An additional advantage is that all the growth in value on those assets over the years avoids the federal estate and gift tax and, if the person is a resident of Pennsylvania, after one year the assets in the trust avoid the Pennsylvania Inheritance Tax.

4. Life Insurance to Avoid Inheritance Taxes for LGBT Couples:

The Pennsylvania Inheritance Tax rates for giving your same-sex partner cash at your death is 15%.  But there is no tax on providing a same-sex partner the same amount of money in the form of life insurance. A little imagination in estate planning for LGBT couples can save a considerable amount in taxes.

5. Selecting the Right Assets to Make Charitable Gifts:

Do you plan to give money to charity at your death as part of your estate plan? If so, what type of money you leave can make a huge difference in tax dollars saved. For example, a client in Gloucester County, New Jersey wishes to leave $50,000.00 to her church.  The remainder of the estate passes to her niece. If she gives $50,000.00 in cash to the church and $50,000 in an IRA to her niece, the estate pays New Jersey Inheritance Tax on the niece’s $50,000 gift at the client’s death and the niece pays income tax on liquidating the IRA. If instead, the client gave the IRA to the charity, the church pays no income tax on liquidating the IRA. Further, the gift to the niece pays Inheritance Tax but receives the cash income tax-free. Everyone, except the taxman, wins.

6. Wealth Replacement Trusts:

Many clients have accumulated large qualified plans during their lifetimes. These qualified plans come in many shapes and sizes, including IRAs, 401ks, SEPs, and TIAA-CREF accounts. The plans can serve as an excellent retirement planning device during your lifetime. You can transfer pretax income into the account and essentially borrow the IRS’ money and invest it for your retirement.

You cannot defer this income forever, though.  Upon reaching age 70-1/2, everyone must start taking out “required minimum distributions.” You then pay income tax on what you take out of the plan. At your death, if the plan is liquidated, all the income tax becomes due. For example, a client in Bucks County Pennsylvania dies naming her son as the beneficiary of her IRA. The IRA is subject to the Pennsylvania Inheritance Tax; the Federal Estate Tax AND the entire amount is subject to Pennsylvania Income Tax and Federal Income Tax.

That large IRA can shrink to a minimal amount of cash that her son will receive. Instead, the client can use the required minimum distribution to pay the annual premium on a life insurance policy held in an Irrevocable Life Insurance Trust (“ILIT”) as part of their estate planning. At her death, the son will receive the life insurance, tax-free (no estate tax, no inheritance tax, and no income tax). The IRA can also pass to charity, tax-free. Depending on the insurability of the client, the son can receive an amount equal to the amount in the IRA, the charity gets the money it would never have received, and she completely avoids the Pennsylvania Inheritance Tax, the Federal Estate Tax, the Pennsylvania Income Tax and the Federal Income Tax. Everyone wins but the taxman.

7. Premium Financing:

Some clients face a large Federal Estate Tax bill at their deaths.  To pay this tax, the may wish to fund a life insurance policy held by an Irrevocable Life Insurance Trust (“ILIT”).  The policy provides the liquid assets to pay the tax. But what if they do not have the liquid assets available to pay the premiums? This is often due to investments being held in real estate or low basis assets. These are assets they do not wish to sell during their lifetime. Some banking organizations will work with clients to provide the financing to pay the premiums. Repayment is made from assets sold after the client’s death after the “step up in basis” erases the capital gains tax.

8. Estate Planning and The Second Spouse:

Second marriages are becoming a common event, but the potential conflict between the second spouse and the children of the first marriage is not a new story. Whenever possible in your estate plan, try to avoid having your children wait for your second spouse’s death to inherit.

Commonly, the second marriage includes a house in which the second spouse has lived and with which the second spouse has an emotional attachment. Further, often there are assets that the second spouse helped accumulate that the second spouse is counting on for retirement. Give these to the second spouse in trust to provide asset protection, but if possible form an ILIT which holds a life insurance policy on the remarried spouse. At that spouse’s death, the life insurance is for the children; tax-free, creditor free and completely apart from the other assets which are for the surviving spouse.

The second spouse receives all the other assets, tax-free. The second spouse and the children are free to go their separate ways or to remain friends, but the conflict of money no longer exists. Certainly, the life insurance premiums must be paid, but the surviving spouse and the children will likely agree that it was a great investment.

9. Estate Planning When You Are Married to the “In-law”:

Most clients want to leave their children their inheritance in protective trusts.  These trusts provide shelter from divorce, creditors and further estate and inheritance taxes. These trusts also usually have a clause that requires any remaining assets to pass to grandchildren.  This then disinherits the son or daughter-in-law.

The client in most cases likes the “in-law,” but if the client’s child dies, they want the money to stay in the family. If you are the child, and your spouse and you depend on distributions from a trust your parent set up for you, then planning is necessary for your spouse in case you are the first to die. One option is to use a portion of the trust’s distributions to pay the premium on a life insurance policy.  This can be in an Irrevocable Life Insurance Trust (“ILIT”) for your spouse. If you die first, the trust your
parent created passes to your children. But the life insurance policy pays out to the ILIT available to your spouse free of creditors and Inheritance or Estate taxes.

10. Putting “Trust” in Divorce:

When a divorce happens, trust between the divorcing couple is usually low. Often, one of the requirements in the divorce is that the income earner must purchase life insurance. Often this is done to help guarantee child support. This purchase is often not given much thought, which is a mistake.

Over the years when the policy is supposed to be in place, the insured spouse likely controls the policy. Also, controls all information. The dependent spouse cannot easily find out if the policy is still in force.  What if premiums are not paid or if the insured spouse changes the beneficiary designation to “the new spouse.” These matters can once again end up in court.

Instead, the divorcing couple can have an estate planning attorney draft an Irrevocable Life Insurance Trust.  The trust owns the policy, and both the husband and wife serve as co-trustees. Because the trust owns the policy, either trustee at any time can verify that the insured spouse has paid the policy. Further, the beneficiary designation cannot be changed without both trustees’ signature.  So the dependent spouse can rest assured that if the insured spouse remarries, that the insurance remains in place. Therefore, the children will still be protected should the insured spouse die. The trust owning the policy reduces the potential for conflict.  Reducing conflict between former spouses is good for everyone.

Throughout our website, klenklaw.com, you may find more information about Estate Planning and Estate Planning tools Our firm focuses exclusively in the area of estate planning, probate, and the litigation surrounding estate planning and probate including Will Contests and Will Challenges. If you have estate planning questions, please call one of our Experienced Estate Planning Lawyers for a free consultation. Estate Planning is all our Will drafting lawyers do!

More Estate Planning Questions?

If you have more estate planning questions, please read my more detailed article, Estate Planning, Everything You Need to Know.

In Conclusion: Innovative Estate Planning Strategies Explained.

In this article, I tried to explain some of the Innovative Estate Planning Strategies that exist today. Further, I included links to even more detailed information on my website. So, let me know how I did, comments and questions are welcome! I hope it helped! 

If you have more questions about wills and estate planning, let our Estate Planning Lawyers help walk you through the confusing process.  Our lawyers are ready to answer your questions. Feel free to contact our office for a free consultation. 

Wills, Trusts, Probate, and Estate Litigation, It’s All We Do!

Peter Klenk, Estate Planning Lawyer