Lead Article Title: Cheap Tricks

Lead Article Title: Cheap Tricks

By: Martin M. Shenkman, CPA, MBA, JD

Cheap tricks (and we don't mean the rock band from the 70's) can be used to accomplish some pretty significant estate and other planning goals. Here's a survey of some cheap steps you can take that might just save you a bundle:

529 Plans:

These popular college savings plans have shortcomings that don't get talked about (hey they might detract a broker from making a sale). In many states contributions to the plan are state-income tax deductible, and earnings from the account are federal income tax free when used for higher-education purposes. Educational purposes include tuition, books and even room & board. When you set up a plan you have to designate the "account holder". This is the person who can make investment decisions and pull money out of the plan.

Few people bother designating a successor account holder, and the consequences can be costly and problematic. If you set up a 529 Plan for, say, a grandchild and die, here's what might happen: The ownership of your account will pass on your death to the executor of your estate. Think about that if you're an OB-GYN worried about malpractice claims, or a lawyer being sued. From your estate, the account will pass by bequest or operation of law. Not what you had planned. Cheap Trick: Designate a successor account owner. You avoid the complexity, administrative costs, and potentially worse problems, while still getting the desired results. The beneficiary can even be changed so long as the money is used for educational purposes.

Elderly or Ailing Family:

Keeping an eye on an ailing parent or other family member is time consuming and potentially costly to both yourself and your family. While ensuring the well being of your loved ones is of utmost importance, you still have to secure both their, and your financial stability. Consider using personal emergency response systems, sensors to monitor sleep patterns, stoves, etc. (see www.quietcare.com) to help monitor your loved ones. Video online chat has become common (see www.get.live.com) as a way to constantly be able to see a sick family member, and medication reminder products and services are growing in popularity (see www.epill.com). What about financing the ill one's finances? Cheap Trick: To help keep an eye on an elderly parent's finances, consolidate all accounts to one major institution or wealth manager, and then have a duplicate copy of each month's statement mailed to you. At no cost, you can quickly eyeball each month's activity to be sure nothing untoward is happening.

Keeping Your Agent Honest:

If your capacity is diminishing, you may have to rely on Junior to handle your finances as an agent under your power of attorney. We know junior is a good boy and would never use your bank account for his own benefit, but abuses abound, and my mom always taught me that you're better off "safe than sorry." Cheap Trick: Use the same trick mentioned above to help protect you. Have a close friend who is not an agent under your power of attorney to get a duplicate monthly statement. That will enable the friend to keep tabs on you and inform you if an issue arises. It will also enable your friend to keep tabs on Junior if he takes over your accounts as your agent as she'll see all his activities. You probably should mandate in your power of attorney that the agent must continue to send the friend (or a named successor) duplicate copies of each monthly statement. If Junior decides to buy a new fully decked out Hummer (necessary to drive errands for you!), it will likely be a large enough withdrawal on your account that your friend can blow the whistle on Junior and inform you about what is happening.

Custodian Accounts:

Why people continue to set up custodian accounts is not really clear. Trusts give you much better control. Custodian accounts are similar to trusts in that both pass property and assets from an adult to a minor. Trusts though provide more protection and greater flexibility. 529 Plans give you much better tax breaks (especially now that the Kiddie Tax applies until a child is over age 18) than custodial accounts do. But if you still have custodian accounts for your heirs be aware that if you are the named custodian, on your death the entire account balance is included in your estate. Ouch! Cheap Trick: Name a different custodian and remove your name. No cost. Estate tax problem solved and the intended heir will still receive her inheritance.

Home Equity Lines:

Getting in place a large unused home equity line is a great way to assure another source of cash in an emergency. It's a commonly recommended planning step. But if you're disabled, will the bank let your agent draw down on the line? Probably not. Cheap Trick: Arrange a home equity line that has a checkbook so your agent can write checks without having to go back to the lender for approval that won't be forthcoming. Have your power of attorney expressly grant the agent rights to draw down on the line of credit and indemnify the bank. A less cheap trick would be to have your house held by a revocable living trust (maybe not a bad idea for other reasons) and have the line of credit, in the name of the trust. That way, the successor trustees won't need any different approval since they will be acting on behalf of the trust.

Living Abroad with a U.S. Will:

So you're a United States citizen, but you live abroad and all of your assets are abroad. You're still subject to U.S. estate tax on your assets (its part of the love our government shows all it citizens). So you have a will prepared by your estate planner. Which state has authority to probate that will? You might not have any connections to a particular state (especially if you don't have a pied-a-terre here). Cheap Trick: Open a bank account in the state in which you believe probate should occur, and state in your will your intent for the laws of that state to govern and probate to be addressed in that state. Pick a state with a simpler probate process. Check state law first, a bank account may not be enough in some states.

Insurance Trusts:

Irrevocable Life Insurance Trusts (ILITs) are commonly used to own insurance policies to protect the proceeds from tax, misuse and other risks. If you own an existing policy and transfer it to an ILIT you establish, if you die within three years of the transfer, the insurance proceeds will be included in your estate. However, you might be able to offset some of this by arguing that to the extent that insurance premiums were paid by the trust after the policy was transferred in, and that payment triggers a rule that the amount included in your taxable estate is only a pro-rata portion of what would otherwise be included (IRC Section 2042). The amount included would be argued to be based on the pro-rata portion of the total premiums paid. Cheap Trick: If you transfer a policy hoping you will live for three years (3 year rule), leverage the strategy by having the trust repay you as the transferor of the policy for some or all of the premiums you previously paid. This will increase the portion of premiums paid by the trust as compared to you and arguably remove more of the insurance proceeds from your taxable estate. No new legal documents or fees, just a check written by the trustee to you.


Naming a guardian is probably the toughest and one of the most important in your estate planning decisions. In many cases you may prefer that your child be raised in an intact home, so you'll name your sister and her husband, Jane and Attila, as guardians. But if Attila runs off to besiege Constantinople, who is the guardian? Your original intentions of simply sending your youngsters to an intact home could possibly cause a huge legal battle between former husband and wife. Cheap Trick: Don't name a couple as guardians. Instead, name Jane, so long as she is married to Attila on the date of your death. If they are divorced, the next named guardian will come into play. You also avoid the issue of a legal battle between Jane and Attila as to who should be the guardian.

Grandchildren Gifts:

To make large gifts to grandchildren raises a host of complex tax issues. Gifts in excess of $12,000 per year, or direct payments for tuition and medical expenses, are subject to gift and generation skipping transfer ("GST") tax. Once the $1 million gift tax exclusion is used up the costs are significant. If your GST exemption were used up, the costs would be confiscatory. Thus, to make larger gifts to grandchildren (and even for the annual $12,000 gifts to protect them), many grandparents opt for trusts. However, trusts also raise a number of complexities. Gifts to trusts cannot qualify for the annual GST exclusion merely by using the Crummey powers that are so commonly used to qualify gifts to trusts for the annual gift tax exclusion. There are several additional requirements that must be met to qualify for the GST annual exclusion. The trust should be for only one beneficiary, and if the beneficiary dies, the trust assets must be included in the grandchild's estate. Cheap Trick: Make advanced payments of tuition for all your grandchildren and great grandchildren for all future years. If they're all in private schools, the amount you can transfer is huge. No tax. No legal fees. Simple. There are a few catches to make this work. You must pay the tuition directly to the schools, and the schools must be qualified educational institutions (IRC 170(b)(1)(A)(ii)). Also, you must have an agreement with the schools that the tuition payments cannot be refunded. If Junior goes AWOL, you loose the tuition prepayments. LTR 200602002. The impact of this is huge. If grandma has a $2.5 million estate, a series of gifts to the schools for all her grandchildren and great-grandchildren could solve her entire estate tax problem and even avoid the need to file an estate tax return. The only ones that loose out in this deal are grandma's attorney and accountant.

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