Planning Potpourri


Prudent Executors:

Most executors make one of two (or sometimes a combination of both) errors: [1] Liquidate most estate assets leaving the proceeds in a checking and/or money market account; [2] Hold onto securities under the mistaken belief that they can do so without exposure since the decedent died holding them. While liquidity is important in many estates, and some heirs want distributions in kind (or the securities the decedent owned actually constitute a reasonable portfolio for the estate to continue to hold), the recommended approach is for the executor to hire an investment adviser evaluate the relevant factors affecting the estate and beneficiaries, develop a written investment policy statement (IPS) and act in accordance with the Prudent Investor Act. Thanks Gary.


Graegin Loans can Sell Life Insurance: So many readers loved the recent checklist column on reasons to buy life insurance, here's an encore (yeah, they were probably all insurance agents, but so what!).  Here's a creative technique that can be used for estate planning with insurance. It can help advisers that sell insurance close a transaction. Most large life insurance policies are structured to be owned by insurance trusts (ILITs) to avoid taxation in the decedent's estate. When the insured dies the ILIT cannot pay estate taxes directly so the ILIT can loan funds to the estate, or buy assets from the estate. Either approach provides the estate with the use of the cash received from the insurance proceeds. If the ILIT loans the estate the money, and the note mandates that the loan cannot be repaid or accelerated, so that the estate must in all events pay all the interest required under the note, the estate may qualify to deduct as an expense all of the interest to be paid back to the ILIT as an administrative expense. This special type of loan is called a "Graegin Loan" after the court case that first sanctioned it. So not only can the insurance proceeds be used to pay estate tax on the family business (don't try this with a securities FLP), it  may also generate a huge estate tax deduction thereby reducing the estate tax it is helping to pay! This can be a grand-slam in planning and close and insurance sale (if you're an agent you should J). Planning pointers: Read the footnotes to the Graegin case when planning the transaction, the forms used by some planners are dangerously deficient. Carefully craft default provisions to simultaneously provide protection, yet not void the mandate that the interest be paid. Consider usury issues in the event of a default.

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