Featured Article: Healthy and Wealthy but to be Wise


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Featured Article: Healthy and Wealthy but to be Wise By: Louis S. Shuntich, J.D., LL.M. Technical Director, Advanced Consulting Group Nationwide Financial Who would not want to enjoy health and wealth? Yet for the lack of wisdom some of the more fortunate among us place their health and wealth at risk. The ones I am referring to are those who have not come to terms with how they should deal with their potential estate tax liabilities and the possible need for long term care. There is a way, however, for the wise to simultaneously and efficiently fund their long term care while creating estate tax liquidity. This may be accomplished by establishing an Irrevocable Life Insurance Trust or “ILIT” to hold a no-lapse guarantee universal life product with a long term care rider. Better yet, the ILIT can be drafted with extraordinary flexibility to give the prospect the ability to deal with changes in their circumstances through indirect access to policy values while they are alive. The problems with tax planning As many know, the increase in the federal estate tax applicable exclusion to $5.34 million in 2014 has dramatically reduced the number of estates that will be subject to tax. Nonetheless, there are still more than 330,000 American families with a net worth in excess of $10 million and a potential estate tax exposure.1 The problem is that while there are a number of legitimate estate tax saving techniques that may be employed to reduce or eliminate that exposure they all have two features in common. First, the individual must change how they own or manage their property. Secondly, they must be willing to make substantial estate reducing gifts to subsequent generations. The problem with these requirements is that as people get older they do not like change and are resistant to making large transfers of property that leave them feeling financially vulnerable. Consequently, what is needed is a palatable alternative that does not require

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LSI Estate Planning newsletter # 1729 (December 13, 2010) at http://www.leimbergservices.com.

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them to change their lives or leave them feeling at risk financially. That alternative is life insurance purchased through an ILIT. A palatable alternative First and foremost, the prospect does not have to change their life. They need only go to their lawyer to have an ILIT drafted at relatively moderate cost. Then, they can make more affordable gifts to the trust with which the trustee can purchase life insurance to cover potential estate tax liabilities. In any case, all of the uncertainty over the future of the federal estate tax raises the question of why anyone would want to make gifts of cash to a trust that they cannot get back, to buy life insurance that they cannot control, to pay an estate tax that may not exist. The answer is that while the 2012 Tax Act was billed as “permanent” estate tax reform in the real world there is no such concept as permanent tax reform. That’s because it’s only permanent until the political fortunes change and eventually they always do. The best evidence of this is that the President’s budget proposal following the 2012 Act showed an intention to tax the wealthy more heavily. That being the case, what do the wise among us do when faced with uncertainty? The answer is that they hedge their bets and in the world of estate and tax planning it means putting something in place that will deal with any potential estate tax exposure that may develop. Again, that hedge is a life insurance funded ILIT. The best of all worlds So how do you deal with a wealthy prospect that is disinclined to purchase life insurance through an ILIT that they cannot control in an uncertain world? The answer is for the lawyer drafting the trust to create flexibility in one or both of two ways. The first is to give a family member a “special” power of appointment to direct the Trustee to make a distribution to other family members who may need funds. That gives the family the power to get funds out of the trust if needed while the grantor is still alive. In addition, should the Grantor need funds the Trustee may be authorized to lend money to the Grantor at interest. As long as the transaction is properly documented this should not result in the death proceeds being included in the grantor’s gross estate. 2The icing on the cake, however, is that the Grantor may make additional gifts to the trust with which the Trustee could purchase a long term care rider. Then, if the Grantor ever needs and qualifies for long term care benefits, the Trustee can receive those funds and use them to loan money to the Grantor to help cover the

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Drafting Flexible Life Insurance Trusts, Julius H. Giamarco, Esq.,http:www.wealthstrategiesjournal.com/articles/2009/06

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cost of care. (Such loans should bear interest and be properly documented and collateralized.) A word of caution Here it should be noted that it is preferable for the long term care rider to be of the indemnity type rather than the reimbursement type. The reason is that with a reimbursement rider the insurer pays the care provider directly and that could be seen as a payment on behalf of the insured. Since this might constitute an incident of ownership it could cause the entire trust to be included in the insured’s gross estate. On the other hand, with an indemnity type of rider the benefits are paid to the Trustee rather than the care provider and should not be interpreted as an incident of ownership held by the insured.3 The bottom line is that the Grantor would have access to policy cash values and long term care benefits while they are alive through loans from the trust. Further, any death proceeds that were not offset because of payment under the long term care rider could be made available to the Grantor’s Executor for the payment of estate taxes through loans or purchases of assets from the Grantor’s estate. Finally, any loans made to the Grantor to cover the cost of long term care or other needs would have to be repaid by the Grantor or their estate and that would serve to reduce the size of the Grantor’s estate and corresponding estate tax liability. Summary Individuals can protect their health and wealth by establishing an ILIT to hold a life insurance policy with a long term care rider. This will give them the best of all worlds because with the ability to borrow from the trust they will have indirect access to funds for estate tax liabilities, long term care needs and changes in their financial circumstances.

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Today’s Long -term Care Coverage: Understanding the Fine Print, Celeste Moya, AALU Quarterly, Summer 2013, PP 36-37.

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