Klenk Law

Innovative Estate Planning Strategies

Posted on Mon Jun 17, 2013, on Estate Planning

Crafting an estate plan for a client means listening to what the client wants, explaining options to the client and then drafting a plan to meet the option selected. At times, a client’s circumstances require imaginative ideas. Here are some examples of imaginative estate planning that Klenk Law has utilized recently.

1. Protectors:
It remains a mystery to me why more estate planning attorneys do not use Protectors. A Protector is a person or persons you appoint to oversee a trustee with the power to fire and replace the trustee without the need of an attorney or a court hearing. No court hearing or attorney is necessary? Perhaps that is the reason why estate planning lawyers don’t use them? I use them in almost every trust. Even the most trusted person or bank can have problems, and if these problems negatively affect the trust, the Protector can “protect” the beneficiary without months of litigation.

2. Non-Reciprocal Spousal Trusts: For Retirement:
A Non-Reciprocal Spousal Trust is a wonderful estate planning tool in which you can place the money that you would otherwise have in your own name for retirement or would place in your 401k (or other retirement account). A retirement like an IRA or 401k limits your investments, while the Non-Reciprocal Spousal Trust allows you to invest in anything; real estate, closely held companies, foreign companies or even in precious metals.

3. Non-Reciprocal Spousal Trusts: For Asset Protection:
Similar value can be provided by using Spousal Trusts for asset protection in your estate plan. Under the rules for 2013, Non-Reciprocal Spousal Trusts allow married couples to shelter up to $10,500,000 from creditors. An additional advantage is that all the growth in value on those assets over the years avoids the federal estate and gift tax and, if the person is a resident of Pennsylvania, after one year the assets in the trust avoid the Pennsylvania Inheritance Tax.

4. Life Insurance to Avoid Inheritance Taxes for LGBT Couples:
The Pennsylvania Inheritance Tax rates for giving a same sex partner cash at your death is 15%, but there is no tax on giving a same sex partner the same amount of money in the form of life insurance. A little imagination in estate planning for LGBT couples can save a huge amount in taxes.

5. Selecting the Right Assets to Make Charitable Gifts:
If you plan to give money to charity at your death as part of your estate plan, what type of money you leave can make a huge difference in tax dollars saved. For example, a client in Gloucester County, New Jersey wishes to leave $50,000.00 to her church, the remainder to her niece. If she gives $50,000.00 in cash to the church and $50,000 in an IRA to her niece, the estate pays New Jersey Inheritance Tax on the niece’s $50,000 gift at the client’s death and the niece pays income tax on liquidating the IRA. If instead the client gave the IRA to the charity, the church pays no income tax on liquidating the IRA and the gift to the niece pays Inheritance Tax, but receives the cash income tax free. Everyone, except the taxman, wins.

6. Wealth Replacement Trusts:
Many clients have accumulated large qualified plans during their lifetimes. These qualified plans come in many shapes and sizes, including IRAs, 401ks, SEPs, and TIAA-CREF accounts. The plans can serve as a wonderful retirement planning device during your lifetime as you can transfer pretax income into the account and essentially borrow the IRS’ money and invest it for your retirement.

You cannot defer this income forever, though, and upon reaching age 70-1/2, everyone must start taking out “required minimum distributions” from the plan. You then pay income tax on what you take out of the plan. At your death, if the plan is liquidated, all the income tax becomes due. For example, a client in Bucks County Pennsylvania dies naming her son as the beneficiary of her IRA. The IRA is subject to the Pennsylvania Inheritance Tax, the Federal Estate Tax AND the entire amount is subject to Pennsylvania Income Tax and Federal Income Tax.

That large IRA can shrink to a very small amount of cash that her son will actually receive. Instead, the client can use the required minimum distribution to pay the annual premium on a life insurance policy held in an Irrevocable Life Insurance Trust (“ILIT”) as part of their estate planning. At her death, the son will receive the life insurance, tax-free (no estate tax, no inheritance tax and no income tax). The IRA can also pass to charity, tax free. Depending on the insurability of the client, the son can receive an amount equal to the amount in the IRA, the charity gets money it never would have received and she completely avoids the Pennsylvania Inheritance Tax, the Federal Estate Tax, the Pennsylvania Income Tax and the Federal Income Tax. Everyone wins but the taxman.

7. Premium Financing:
Some clients face a large Federal Estate Tax bill at their deaths and wish to fund a life insurance policy held by an Irrevocable Life Insurance Trust (“ILIT”) to provide the liquid assets to pay the tax, but they do not have the liquid assets available to pay the premiums. This is often due to investments being held in real estate or in low basis assets which they do not wish to sell during their lifetime. Some banking organizations will work with clients to provide the financing to pay the premiums with the repayment being made from assets sold after the client’s death from the insurance payout or from assets sold after the “step up in basis” erases the capital gains tax.

8. Estate Planning and The Second Spouse:
Second marriages are becoming a common event, but the potential conflict between the second spouse and the children of the first marriage is not a new story. Whenever possible in your estate plan, try to avoid having your children wait for your second spouse’s death in order to inherit.

Commonly, the second marriage includes a house in which the second spouse has lived and with which the second spouse has an emotional attachment. Further, often there are assets that the second spouse helped accumulate that the second spouse is counting on for retirement. Give these to the second spouse in trust to provide asset protection, but if possible form an ILIT which holds a life insurance policy on the remarried spouse. At that spouse’s death, the life insurance is for the children; tax free, creditor free and completely apart from the other assets which are for the surviving spouse.

The second spouse receives all the other assets, tax free. The second spouse and the children are free to go their separate ways or to remain friends, but the conflict of money no longer exists. Certainly the life insurance premiums must be paid, but the surviving spouse and the children will likely agree that it was a great investment.

9. Estate Planning When You Are Married to the “In-law”:
Most clients want to leave their children their inheritance in protective trusts, sheltered from divorce, creditors and further estate and inheritance taxes. These trusts also usually have a clause that requires any remaining assets to pass to grandchildren, disinheriting the son or daughter-in-law.

The client in most cases likes the “in-law”, but if the client’s child dies they want the money to stay in the family rather than potentially going to the in-law’s next spouse. If you are the child, and your spouse and you depend on distributions from a trust your parent set up for you, then planning is necessary for your spouse in case you are the first to die. One option is to use a portion of the trust’s distributions to pay the premium on a life insurance policy in an Irrevocable Life Insurance Trust (“ILIT”) for your spouse. If you die first, the trust your
parent created passes to your children, but the life insurance policy pays out to the ILIT available to your spouse free of creditors and Inheritance or Estate taxes.

10. Putting “Trust” in Divorce
When a divorce happens, trust between the divorcing couple is usually low. Often, one of the requirements in the divorce is that the income earner must purchase life insurance to help guarantee child support. This purchase is often not given much thought, which is a mistake.

Over the years when the policy is supposed to be in place, the insured spouse likely controls the policy and all information. The dependent spouse cannot easily find out if the policy is still in force, if premiums are being paid or if the insured spouse has changed the beneficiary designation to “the new spouse”. These matters can once again end up in court.

Instead, the divorcing couple can have an estate planning attorney draft an Irrevocable Life Insurance Trust to own the policy and over which both the husband and wife serve as co-trustees. Because the trust owns the policy, either trustee at any time can call up the insurance company to verify that the insured spouse has paid the policy. Further, the beneficiary designation cannot be changed without both trustees’ signature, so the dependent spouse can rest assured that if the insured spouse remarries, that the insurance remains in place and that the children will still be protected should the insured spouse die. The trust owning the policy reduces the potential for conflict, which is good for everyone.

Throughout our website, klenklaw.com, you may find more information about Estate Planning and Estate Planning tools Our firm focuses exclusively in the area of estate planning, probate, and the litigation surrounding estate planning and probate including Will Contests and Will Challenges. If you have estate planning questions, please call one of our Experienced Estate Planning Lawyers for a free consultation. Estate Planning is all our Will drafting lawyers do!

The Law Offices of Peter Klenk has Will drafting attorneys licensed in New York, Pennsylvania, New Jersey, Florida and Minnesota.


Charitable Gifts, Divorce, Estate Plan, Estate Planning, Financing, LGBT, Life Insurance, Non-Reciprocal, Probate, Retirement, Spousal Trusts, Trusts, Wills

Let us put our expertise to work for you.

Free consultation within 24 hours.