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Dear Friend,
I'm excited that we can visit a little every month via this newsletter. I have so much to share with you. Each month I will touch on just a few of the "secrets of wealth preservation" I have discovered over the 30+ years I have been practicing as an Estate Planning Attorney.
This Month’s Secret :
What’s not quite so simple as A• B •C —
but could make you (or yours) a couple million dollars? The A/B Trust! Read on . . .
Say, this is fun. I’m sitting here at the desk in my hotel room in Paris, looking out the window at the Eiffel Tower! What a beautiful view. Okay, it’s not Paris, France, but the Paris Hotel in Las Vegas, Nevada. And so, out the window I see not only the tower, but I also have a good look at the ostentatious Bellagio Hotel and grand Caesar’s Palace. My hotel pool is directly below my window. With the magnificent architecture, the beautiful gardens, and captivating statuary, it’s all stunning.
I’m here with my wife, Linda, and daughter, Wendi Lee. Wendi is a professional photographer. Each year there is an important (to photographers) convention in Las Vegas. My wife loves taking the photography classes together with Wendi, and they both love to have me come along to pay the bills. And I love the escape from daily routine.
But now for the story. It’s a short story, but crammed with meaning and good ideas. Last week two different clients came to see me for a review of their estates. One came in the morning and the other came in the afternoon. It was a surprising coincidence that the condition of their estates was so similar.
Both ladies are widows. They have both been longtime clients who came to see me for the first time when their husbands were still alive. At that time, both couples established revocable living trusts for the protection of their families. Each couple had an estate significantly over the maximum allowable estate tax exemption, which at that time was $600,000. (Did you know it’s now $1,500,000?) So, those many years ago, I helped those two couples with their estate planning. For each couple, I prepared a trust. Each trust contained the provision to split the trust into two trust shares upon the death of either spouse, thus providing up to the maximum allowable estate tax exemption for each trust share. For each couple, this doubled the amount which could be sheltered from the burdensome estate tax. This type of trust is sometimes referred to as an A/B Trust.
The “A” portion of the trust is referred to as the “Survivor’s Share,” while the “B” portion is referred to as the “Decedent’s Share.” Each trust share retains the federal exemption amount for estate tax purposes. Upon the death of either spouse, the trust assets are divided based upon the wishes of the surviving spouse, with some assets allocated to Share A and the remainder to Share B. The portion placed in Share B is less than the exemption amount and so is not subject to estate tax. Share B is now considered a separate irrevocable trust which does not exceed the tax exemption, so no tax is due. Share A is still a revocable trust and not yet subject to estate tax, and won’t be until the second spouse dies.
Years before this recent visit, when the husband in each couple passed away, each widow came to counsel with me, and we invoked the trust article which allowed us to make the A/B split. Neither of the widows needed the income from Share B—the Decedent’s Share of the trust—to maintain a comfortable lifestyle. Both had simply allowed the income to continue to grow within Share B. No matter how large the estate grows, it will never be assessed an estate tax. Although there will be no more estate tax on Share B, there will be an income tax assessed on any income created. Now, I hope you are following all this. It gets better.
I asked both widows, separately, if they would like to quit paying the income tax that was accruing on the Decedent’s Share, and, instead of leaving $1,000,000 tax-free to their respective children, would they like to leave approximately $4,000,000 tax-free to their respective (and now respectful) children?
Guess what? They both thought that sounded like a great idea. And it seemed like a no-brainer to me, too. So that’s what I arranged for both widows.
How did we do that, you ask? We did it with life insurance. I know many of you don’t really think you like life insurance . . . but hear me out. It’s a cheap way to leverage the amount of the estate that you leave to your heirs.
The assets in Share B of each of the trusts are now being liquidated. The liquidated funds are being used to purchase a single premium life insurance policy on each respective widow. Since Share B is irrevocable, it still remains exempt from any estate tax, no matter what the liquidated value. Upon the death of each widow, the named beneficiaries of Share B (the children) will receive the death benefit of the insurance policy—tax-free. Yes, the children thought this was a great idea, too! For one widow, the funds created from the liquidation of Share B allowed for a policy to be purchased (pending the health exam)in the amount of approximately four times the liquidated value of Share B—or $4,000,000. (Since Share B is no longer generating income, the widow no longer has to pay income tax on Share B, and it was income she wasn’t using anyway.)
As I sit here looking at the faux Eiffel Tower, I wonder if the children of these two widows will someday be looking at the real Eiffel Tower . . . enjoying the extra proceeds from their father’s inheritance, due to the cleverness of their mothers. What would you do with all that money?
I invite you to come in for a free evaluation to see if something similar can be done for your estate. Or perhaps I can show you a different idea for wealth preservation. It certainly doesn’t hurt to find out.
I hope this has been helpful to you and that you now know a little more about the importance of proper estate planning. Be sure to watch for next months "Secrets of Wealth Preservation."
Until next time,
Steven W. Allen
Legal Awareness Series, Inc.
1550 E. McKellips Road, Ste. 111
Mesa, AZ 85203
info@legalawareness.com
1-800-733-LAWS (5297)
