Background Earl– Occupation – Electronic Engineer Mary – Occupation – Clinical Psychologist Earl’sAge – 65 MaryAge – 65 Earl’s Assets – Gross Estate ‐ $2,000,000 Mary’s Assets – Gross Estate ‐ $1,500,000 Joint Assets ‐ $2,500,000 Earl is winding down a successful career with a nationally knows electronic manufacturing company in the Boston area. Earl holds several patents on his work and expects to receive substantial royalty payments for several years. In addition he has a large stock position in the company he helped to found. He is fortunate to have no long term debt.
Mary is a practicing Psychologist. For the last several years she has been reducing her case load and now restricts her practice to 50 clients. She hopes to close her practice totally in 4 years.
They have two married children but no grandchildren as yet. Estate planning has not been on their planning agenda. All of their time has been spent on repositioning assets for retirement. As a result of the media press reports about the estate tax changes, they have starting thinking about legacy giving and efficient transfer of property to their children and potential grandchildren. Earl and Mary are asking for your help! Do they really need to be concerned about estate taxes? Because of their financial success, is life insurance really needed anymore? How about gifting strategies?
This situation is perfect for an educational tool that conceptually explains how estate taxes work and introduces some basic understanding of trusts. This case calls for PlanLab Estate Tax Concepts software.
Questions to Answer
‐ What are three major reasons to be concerned about estate planning? ‐ How does the 2010 Tax Act change the playing field for high net worth clients? ‐ How can you model the future for your clients without getting stuck in time consuming data collection and
number confusion?
Impact Case Study – Estate Tax Concepts – Finding the Sale
Estate Tax Concepts Requires Very Little Client Data
Entering the program will open this electronic representation of the paper based fact finder designed for use in the field. There is so little data required to run an ETC report that frequently good estimates can be made over a lunch interview or on the phone with your client.
Data Details 1. How much do you have?The number to use for the current estate should be a net after the debt has been
removed. This should also be an estimate of current value not future value. ETC will project future values based on the assumed growth rate. The purpose of ETC is to present estate planning concept at a high level. This data is not specific to the first person to die. This number should include all property including jointly held assets and individually held assets.
2. How much life insurance do you have? Again this is a total number and should cover the amount of insurance in‐force on both lives.
3. How many years should be projected into the future? This is really a life expectancy assumption. ETC assumes that both clients tragically die in the same year. The nature of compound interest is that long time horizon
Five Key Questions:
1. How much do you have? 2. How much Life Insurance do
you have now? 3. How many years should be
projected into the future? 4. What conservative growth rate
projections produce unrealistic numbers. Projections past 20 years should be avoided if possible. In this example the clients are 65 years old. Using a 20 year projection brings reasonable expectations of life expectancy into the report.
4. What conservative growth rate should be used? The program will grow the values into the future based on the rate specified. This growth rate should be easy to defend. Caution: There is no internal cap on the growth rate.
5. What conservative assumption should be made about Transfer Costs? Examples of transfer costs include: a. Short Term Debt b. State Death Taxes c. Funeral expenses d. Probate Fees e. Legal and Administrative Fees f. Federal and State Income Taxes
Caution: Transfer costs are based on a percentage of the estate value at death. Use conservative estimates like 1% or 2%.
6. Have you made any gifts? These fields are important if large gifts have been made in the past and/or if gift taxes have been paid when making these gifts. The current gift tax exclusion for gifts of a present interest is $13,000 per person. If gifts were made that exceeded that amount they should be noted here. Gifts of a present interest are those that have no strings attached. The gift value is unconditionally transferred to someone else. As an example, if Earl gave $13,000 in cash to his daughter and she could do anything with the gift; it is a gift of present interest. If Earl gave $13,000 in cash to his daughter Alexandria with specific directions on how it must be spent and when it must be spent, it is not a gift of present interest and does not qualify for the annual gift exclusion.
Print Options ETC contains several types of pages. These pages will be reviewed in great detail later in this Case Study. However, not all clients need to always see all of the potential pages. The Social Style of the client, your familiarity with estate
planning issues and a general movement toward “green” reports all drive which pages should be used with each client. Clicking on each box will determine the printed content of the report.
Once you have picked the pages, click on the Print Review button to display the report. After reviewing this report, click on the Final Client Print button. This will remove the sidebar water mark from the report and it will be ready to share with your client.
Presentation Tip:For printed reports that are going to be used with clients, always use 28 pound bright white presentation paper rather than regular 20 pound copy paper. Bind the report and make sure it will open so all the pages are flat on the table. Encourage your client to write on the report. They should circle numbers or draw arrows to highlight specific points. This is a working document, not a manuscript that will be saved someday in the archives of the National Gallery of Art.
This page is often company‐specific and may extend to two pages. Compliance departments all have unique needs for the Disclaimer page and its content can vary.
Notice: ETC has been updated for the changed required by the 2010 Tax Act.
ETC provides pages that support a dialogue with your client about estate tax planning. These are examples of support pages that do not change based on client data. These are static pages.
Estate taxes and estate planning issues in general are foreign to most people including high net worth clients. They have not died before!
These pages help them understand the estate tax issues and to create interest in possible solutions to problems that might exist for them.
The best way for clients to understand estate tax is to use a flow chart. The flow charts in ETC are client specific based on the numbers input to the system.
This is a baseline chart. It shows what will happen if no planning takes place.
Their assets will grow over time.
At the death of the surviving spouse, taxes will take their toll.
These flow chart pages all end with a summary distribution percentage. In this case the distribution to the family is less than ½ of what they had.
These calculations are based on current estate tax law and have been updated for the changes made by the 2010 Tax Act.
By studying these numbers it is clear to see why estate tax change is anticipated before 2013. Without change the estate tax is draconian. All assets over $1,000,000 become exposed to this tax. As one of the resource pages shows, the tax rates start at 41% and grow to 55%.
Important Tip: This chart can be used to generate an appointment. Approximate the numbers for your client and send a short report for their review.
No matter what happens to the estate tax rates in the future, these steps are prudent things to do now.
The use of gifts is a very viable planning tool. Today, gifts of present interest can be made up to $5,000,000 without being exposed to a gift tax. Prior to the 2010 Tax Act these gifts were limited to $1,000,000.
By using a gifting program and/or implementing a simple by‐pass trust can increase the amount of wealth being transferred to heirs from 48.7% to 53.7%.
The purpose of using multiple flow charts is to show how a client can transfer up to 100% of their wealth to heirs using planning, gifting, trusts and new life insurance.
Remember these numbers are based on the tax code as it exists today.
Sample Planning Page
The output of ETC helps explain complex subject in a clear and understandable way. Notice that all three flow charts are summarized on this chart to demonstrate the progressive effect of planning options.
If leaving 100% of the estate to heirs is important then new capital must be added to the plan. The easiest and most efficient way to add capital is with Life Insurance. Notice that if life insurance is added to the plan, it is added to a life insurance trust, keeping it out of the taxable estate.
As a result of adding capital, 100% of the estate is transferred to the heirs.
Often clients or their advisors (CPAs, attorney, etc.) will want to know the numbers behind the graphics.
Often these pages are not always a welcome addition to a report designed for a client who is interested in summary points and high level overviews. However, they can be very helpful for analytical clients who want to know the details behind the concepts.
Resource pages are not client specific. They are designed to educate the clients about issues that might affect their plans for the future.
Hint: Not all report should be generated using all the resource pages. Often a short more focused report has more meaning that one filled with non‐client specific pages that are generic in nature.
1. What are three major reasons to be concerned about estate planning a. Estate tax and transfer cost usually are paid before property is transferred to heirs. b. Federal estate tax is progressive. The larger the estate the higher the tax. c. Depending on where you live, state estate tax and probate fees can often be very large even if your
Federal Estate tax is low or zero. 2. How does the 2010 Tax Act change the playing field for high net worth clients?
a. The unification of the gift tax credit and the estate tax credit has added up to $4,000,000 of new gift giving opportunities for people who want to reduce the size of their estate.
b. If new gifts are made over the next two years it would be good to know what impact these gifts will make on a client’s retirement plan?
c. All estate plans written in 2009 or before should be reviewed to make sure that the new law has not created conflict with the original objectives of the clients.
3. How can you model the future for your clients without getting stuck in time consuming data collection and number confusion?
a. Use the PlanLab Estate Tax Concepts Program with your clients. It is easy and fun!
