Morningstar Advisor - October/November 2010 - 36

Spotlight

Tips for Common Family Situations
By Laura Lallos

Every family presents its own set of estate-planning challenges. We asked experts to give us some tips on how to handle estate planning for clients in a variety of family situations.

Ordinary Middle-Class Couples
Many people who never gave the estate tax a second thought may suddenly be subject to it, if the exemption reverts back to $1 million in 2011. Attorney Colby Green considers that amount “absurdly low for any family who has some money in a 401(k) and a house—whatever that’s worth anymore. The killer is the life insurance. It is easy when you are young to buy a lot of life insurance for little money.” Granted, you can pass an unlimited amount of assets to a spouse without incurring an estate tax. But if you do, you waste the exemption of the first spouse to die. Say a married couple has $2 million in assets and the husband dies. The wife gets $2 million taxfree, but her estate will later owe taxes on $1 million. On the other hand, the husband could put $1 million in a trust that would not be part of her estate. Each would take full advantage of the exemption, and no estate taxes would be owed when the wife died. “It takes a little planning,” Green says, “but nothing too clever. Set up a bypass trust, and once the first spouse dies, use the estate-tax exemption to fund the trust—if you don’t use it, you lose it.” The key is to make

sure each spouse has assets in separate names, which can be used to fund a trust. “Wealthy couples likely have that covered, but middleclass couples may not.” Irrevocable life-insurance trusts shelter the proceeds from estate taxes, but they involve considerable expense and administration (see “Prepare for the Worst,” Page 32). Such a trust is probably overkill for ordinary couples. Attorney Thomas Clark suggests an alternative that makes use of a simple bypass trust. “People who are taking out life insurance simply to support the surviving spouse, which is most people, should name the spouse as the first beneficiary, then the policyholder’s trust as the second. Depending on the size of the estate and the tax laws when the policyholder dies, the spouse may choose to decline the life insurance and have it go to the trust. The same strategy can be used with retirement accounts. The key is not to make a claim until you talk to an attorney and decide what needs to go into the trust.”

Bresette’s practice, trusts for such clients’ children are almost always funded in an amount corresponding to the estate-tax exemption. The rest is then put in a trust for the surviving spouse. To accommodate changing tax laws, a specific dollar amount is not usually mentioned. “You might create a basic trust and allocate the ‘federal exemption amount’ to the children of the donor,” Bresette says. “But this year, that basically disinherits the children.” Attorney Thomas Abendroth agrees that the absence of an estate tax may distort the estate plans of many blended families. That’s because earmarking assets exempt from the tax for children of the first marriage is a convenient way to “keep the interests of the second spouse completely separate from the interests of the children,” which is often a goal. “We spent a lot of time this year going back over such plans and asking, ‘Does it still work?’ “ Because of the inherent conflict in blended families, attorneys may need to be counselors in every sense of the word. Clark encourages clients to disclose their plans to their children. “A husband or wife often plans to take care of a spouse first [in a trust] and then pass the money to children. I’m not sure the kids are expecting that. I offer to be a mediating source beforehand, to avoid an uncomfortable situation after someone dies.”

Blended Families
Families with second marriages and stepchildren are the biggest bugbear for estate attorneys this year. At attorney Matthew

36 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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