Morningstar Advisor - October/November 2010 - 34

Spotlight

to maximize their giving this year. The grantor, or donor, irrevocably transfers assets into a trust but receives an annuity payment for a specified number of years. Gifts to such a trust do not qualify for the annual gift-tax exclusion, but because the beneficiary only receives the remainder at the end of the period, the taxable value of the gift is minimized: It equals the value of the original contribution, minus the present value of the grantor’s future stream of income. The IRS requires the grantor to take a certain percentage each year, referred to as the section 7520 rate—and that rate is currently a very low 3.2%. Bresette says that anyone who owns a security that is expected to appreciate more than that should consider a GRAT, because that appreciation would be removed from the donor’s estate. “Here’s a real example, from the depths of the economic crisis,” he says. “Ford F was trading in the single digits. Someone who had a huge holding and was confident it would really improve, as it did, could have established the perfect example of a great GRAT.” GRATs of only several years’ duration have an obvious appeal when assets are expected to appreciate quickly. Legislative proposals on the table suggest that Congress will limit this tool. “At the very least,” Bresette says, “you won’t be able to set up a GRAT with a term of less than 10 years. That will take out some of the real opportunities out there.” For such GRATs, it may be now or never.
Commit to an Irrevocable Life Insurance Trust

life insurance trust with the child as a beneficiary and used to pay the life insurance premiums.” There is a kicker, though. The trust must be irrevocable—that is, the money must belong to the beneficiaries outright or it does not count as a gift for tax purposes. “If a child exercises withdrawal rights, the trust is in a bind because it can’t pay the premiums. But the children usually realize that they are better off down the road with several million dollars in life insurance.” There is another caveat, says Thomas Clark, a sole practitioner in Oak Park, Ill. “There is a lot of administration that goes along with this, and it must be done right to get the benefits.” Beneficiaries must be alerted by so-called “Crummey notices” that they have the right to take a distribution whenever the donor makes a contribution to the trust. “Almost every time I meet a new client with one of these trusts, the Crummey letters were never done,” Clark says. It may require extra effort, but a properly managed life-insurance trust can be the best way to pay estate taxes on other assets, Clark says. “Clients with a family business, real estate, or a farm might otherwise have to sell or take out loans to pay estate taxes. It could be hard to raise the money in this economic environment.”
Make an Estate Plan Ready for Anything

But they don’t work when there is no estate tax at all. “This year has caused a lot of anxiety for estate planners,” Hamilton says, “because when there is no estate tax, the formulas work in ways that no one anticipated or desired.” If one can leave everything to one’s children without triggering an estate tax, then a spouse might be unintentionally disinherited. Most clients may not be concerned about the possibility of dying before the end of the year, but Hamilton is planning for further uncertainty. “I still think Congress will do something to increase the exemption, perhaps at the very end of the year or the beginning of next year. But who’s to say we won’t end up going into next year with a congressional action that extends the current landscape?” If you are writing or amending an estate plan right now, you can include a section that provides an alternative to the formula should there be no estate-tax exemption to plug in. As the end of the year approaches, it may be easier to act with certainty. Bresette has been telling most clients, except for blended families (see “Tips for Common Family Situations,” Page 36), not to do anything right now. “Winter is always busy for estate planners, with gifts and charitable donations to be made before the end of the year,” he says. “This will be the busiest winter season we’ve ever seen, however, because when we are down to the wire we’ll have more clarity on whether Congress will take action. There are so many moving parts right now; the best advice for anyone is to make sure they seek experienced legal advice.” K
Laura Lallos is a former Morningstar analyst and editor and frequent contributor to the magazine.

Clients can buy a lot of life insurance with, say, a premium of $26,000 a year. And if they set up the policy to benefit a life insurance trust, the premiums can count as annual tax-free gifts, their heirs will never pay taxes on the payout, and they won’t have to use up a dime of their gift- or estate-tax exemption. Hamilton explains how it works. “A married couple can make an annual tax-free gift of $26,000 to a child. That gift can be put into a

“One of the best things financial planners can do for clients is encourage them to have their estate plans looked at, pronto,” Neiburger says. That’s because an estate plan that worked well for a decade may wreak havoc if the client dies in a year like 2010. It is common to formulate instructions such as “leave the largest amount to my children that is possible without an estate tax, with the remainder to my spouse.” Because spouses enjoy an unlimited marital exemption, no estate tax is owed. What’s more, the instructions work whether the exemption is $1 million or $3.5 million.

34 Morningstar Advisor October/November 2010



Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010

Morningstar Advisor - October/November 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What estate-planning strategies are you and your clients doing before the end of the year?
Next Steps for ETFs
Investment Briefs
Taking It Personal
A Model Practice
Find the Right Fit
Will REITs Put You in the Penthouse?
Prepare for the Worst
Tips for Common Family Situations
Might Makes Right
Built to Last
Four Picks for the Present
Tactical Strategies Miss Their Mark
Time to Hop on the Commodities Bandwagon?
Retailers Balance Caution and Catalysts
In Search of … Recession Survivors
Turmoil-Tested Small-Cap Funds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Rise in Second Quarter
The Third Rail
Morningstar Advisor - October/November 2010 - Intro
Morningstar Advisor - October/November 2010 - Morningstar Advisor - October/November 2010
Morningstar Advisor - October/November 2010 - Cover2
Morningstar Advisor - October/November 2010 - 1
Morningstar Advisor - October/November 2010 - 2
Morningstar Advisor - October/November 2010 - Contents
Morningstar Advisor - October/November 2010 - 4
Morningstar Advisor - October/November 2010 - 5
Morningstar Advisor - October/November 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2010 - 7
Morningstar Advisor - October/November 2010 - Contributors
Morningstar Advisor - October/November 2010 - Letter From the Editor
Morningstar Advisor - October/November 2010 - What estate-planning strategies are you and your clients doing before the end of the year?
Morningstar Advisor - October/November 2010 - 11
Morningstar Advisor - October/November 2010 - Next Steps for ETFs
Morningstar Advisor - October/November 2010 - 13
Morningstar Advisor - October/November 2010 - Investment Briefs
Morningstar Advisor - October/November 2010 - 15
Morningstar Advisor - October/November 2010 - 16
Morningstar Advisor - October/November 2010 - 17
Morningstar Advisor - October/November 2010 - Taking It Personal
Morningstar Advisor - October/November 2010 - 19
Morningstar Advisor - October/November 2010 - A Model Practice
Morningstar Advisor - October/November 2010 - 21
Morningstar Advisor - October/November 2010 - Find the Right Fit
Morningstar Advisor - October/November 2010 - 23
Morningstar Advisor - October/November 2010 - 24
Morningstar Advisor - October/November 2010 - 25
Morningstar Advisor - October/November 2010 - Will REITs Put You in the Penthouse?
Morningstar Advisor - October/November 2010 - 27
Morningstar Advisor - October/November 2010 - 28
Morningstar Advisor - October/November 2010 - 29
Morningstar Advisor - October/November 2010 - 30
Morningstar Advisor - October/November 2010 - 31
Morningstar Advisor - October/November 2010 - Prepare for the Worst
Morningstar Advisor - October/November 2010 - 33
Morningstar Advisor - October/November 2010 - 34
Morningstar Advisor - October/November 2010 - 35
Morningstar Advisor - October/November 2010 - Tips for Common Family Situations
Morningstar Advisor - October/November 2010 - 37
Morningstar Advisor - October/November 2010 - Might Makes Right
Morningstar Advisor - October/November 2010 - 39
Morningstar Advisor - October/November 2010 - 40
Morningstar Advisor - October/November 2010 - 41
Morningstar Advisor - October/November 2010 - 42
Morningstar Advisor - October/November 2010 - 43
Morningstar Advisor - October/November 2010 - 44
Morningstar Advisor - October/November 2010 - 45
Morningstar Advisor - October/November 2010 - Built to Last
Morningstar Advisor - October/November 2010 - 47
Morningstar Advisor - October/November 2010 - 48
Morningstar Advisor - October/November 2010 - 49
Morningstar Advisor - October/November 2010 - Four Picks for the Present
Morningstar Advisor - October/November 2010 - 51
Morningstar Advisor - October/November 2010 - Tactical Strategies Miss Their Mark
Morningstar Advisor - October/November 2010 - 53
Morningstar Advisor - October/November 2010 - 54
Morningstar Advisor - October/November 2010 - 55
Morningstar Advisor - October/November 2010 - 56
Morningstar Advisor - October/November 2010 - 57
Morningstar Advisor - October/November 2010 - Time to Hop on the Commodities Bandwagon?
Morningstar Advisor - October/November 2010 - 59
Morningstar Advisor - October/November 2010 - 60
Morningstar Advisor - October/November 2010 - Retailers Balance Caution and Catalysts
Morningstar Advisor - October/November 2010 - 62
Morningstar Advisor - October/November 2010 - 63
Morningstar Advisor - October/November 2010 - 64
Morningstar Advisor - October/November 2010 - 65
Morningstar Advisor - October/November 2010 - In Search of … Recession Survivors
Morningstar Advisor - October/November 2010 - 67
Morningstar Advisor - October/November 2010 - Turmoil-Tested Small-Cap Funds
Morningstar Advisor - October/November 2010 - 69
Morningstar Advisor - October/November 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2010 - 71
Morningstar Advisor - October/November 2010 - 72
Morningstar Advisor - October/November 2010 - 73
Morningstar Advisor - October/November 2010 - 50 Most Popular ETFs
Morningstar Advisor - October/November 2010 - 75
Morningstar Advisor - October/November 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - October/November 2010 - 77
Morningstar Advisor - October/November 2010 - VA Sales Rise in Second Quarter
Morningstar Advisor - October/November 2010 - 79
Morningstar Advisor - October/November 2010 - The Third Rail
Morningstar Advisor - October/November 2010 - Cover3
Morningstar Advisor - October/November 2010 - Cover4
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