Image Image Image Image Image Image Image Image Image

Squam Lakes Financial Advisors Blog |

What is Fiduciary Duty?

January 15, 2020 | By | No Comments

A Fiduciary Duty” is an obligation to act in the best interest of another party. A “Fiduciary” is a person acting in a fiduciary capacity and is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.

In the world of financial planning, we are fortunate, in most circumstances, to have professionals who put forth a fiduciary duty to their clients. This is not necessarily uncommon, but it is critical to a client to know that the recommendation being made by the planner/advisor, are free of conflicts of interest.

In and of themselves, conflicts of interest are not necessarily bad. They become bad when there is a failure to disclose the nature of the conflict. As a very vivid example, I am a fee-only financial advisor who sells no product and receives no referral fees. Is it possible that I could have conflicts of interest? The answer of course is yes, but the key to the regulations are intended to be sure that the advisor discloses those conflicts so the client can make an intelligent decision as to what’s best for them, not the advisor.

A good example might be a sales-professional who has convinced the client she needs $1 million of term life insurance. One insurance company may pay her a 10% commission, another company pay a 15% commission and let’s say another pays a 25% commission. Let’s go one step further and assume for the moment that the quality of the insurance product is the same in each and every case.

Does the sales professional have an obligation to disclose that the commissions differ by the company selected? I truly believe the answer is yes and once the client understands that the policies have the same level of quality, the client and the sales professional can decide as to how to proceed from there.

As noted above, a conflict of interest, may or may not exist when the recommendation made by an advisor provides an undisclosed financial incentive to the advisor. Regardless of whether proportional to the recommendation made to the client, it is something that needs to be disclosed.

The brokerage industry has fought this definition for years and continues to do so. Thanks to the NAPFA (National Association of Personal Financial Advisors), the CFP Board of standards and other organizations who claim to represent the client, we have attempted to warn the general public to specifically request from any advisor any conflicts of interest that may exist before implementing any recommendation

This leads to what I believe is how recommendations are developed. In our world, where products are not sold by me or other members of NAPFA, we begin with a written plan. What’s interesting about a comprehensive financial plan is that it will identify the need for product. Since we don’t sell product, we will then turn to the client and their professionals or recommend other professionals who have served our client’s needs in the past.

Most financial plans cannot be completed without the sale of product, with rare exception. Product in and of itself is not bad. In fact, it is necessary in probably 90% of the situations in which I’ve been involved both in financial planning and pre-and post-retirement planning.

Begin with a written plan. Before you buy any product to protect your family or implement a plan, ask the advisor if they have any conflicts of interest. If you are already beyond that point, weather it is life insurance, long-term care insurance, annuities or investments, etc. ask the advisor how he/she arrived at his/her recommendation.

If it fits in with your own thinking and has been justified to your satisfaction, then go ahead and purchase the product.

Why Doctors Shouldn’t Buy Insurance Without a Plan

January 15, 2018 | By | No Comments

Within the financial service industry, there is no higher form of achievement than sales to medical practitioners during and after their years in residency. The insurance and financial industry have understood for years that graduates from medical school, regardless of their chosen field of expertise, have a potential for significant income over their lifetime.

The starting point for any decision regarding the purchase of financial products by anyone, not just medical professionals, should begin with a written financial plan and analysis of personal cash flow.

Why Insurance Agents and Brokers Want Doctors as Clients
In today’s environment, a more general form of medical expertise is as a hospitalist. The going rate for a hospitalist, at least in rural areas, begins at about $200,000 in base compensation. This number may not even include signing bonuses and other forms of deferred compensation that might be available to the medical practitioner.

With these entry-level salaries, insurance and brokerage companies attempt to make deep inroads into these practitioners, before their big earning years begin. This typically takes place during residency. More specifically, these doctors are approached during their years in residency, when they are making in the range of $45,000 to $50,000 annually, and may be offered 100% financing by banks in the form of mortgages and access to insurance products that most people could not qualify for.

The goal in many cases is to bring products, which the agents know will be required at some future point, to the client for the protection of the practitioners and their families. In and of itself, this is not necessarily a terrible thing. It is a fact that younger people are typically in better health and may qualify for preferred rates that may not be available as they get older. There are many optional benefits that can be obtained today with future options that may truly be worth their weight in gold.

Buying Financial Products Without a Plan
Unfortunately, in many cases, the financial products are being sold to medical practitioners without a long-term written plan, and they not only benefit the practitioner, but benefit the salesman in the form of commissions. The question is, who is benefiting the most from these sales? Doctors will need life insurance, disability insurance and long-term care insurance during their lifetime. However, the remaining issue is how much they will need at various points during their careers and thereafter.

Doctors are coming out of medical school with significant levels of loans to repay during their working years. Loans in the amount of $50,000 to $400,000 are not uncommon and will take years to pay off. While these loans are outstanding, it makes sense to carry life insurance and disability insurance in the event of a personal catastrophe. Not only will loans need to be repaid, but lifestyles that have been developed may be covered through adequate disability income policies. It would not be unusual and fairly easy to justify a life insurance purchase of $1,000,000 to $2,500,000 early in their careers.

Lack of Financial Knowledge
Unfortunately, young doctors were never taught the fundamentals of cash management.

This lack of financial literacy is extremely common among medical practitioners. While completing their residency requirements comes with an increase in income, it does not necessarily come with a plan. New cars, homes, vacations and other expenses appear to be something they are entitled to, especially after the sacrifices they have made and the number of years of education completed to obtain the title of doctor. (For related reading, see: Why Doctors Can’t Manage Money.)

The majority of sales professional are extremely honest and trustworthy. The way you find this type of individual is most often through referrals, not from phonebooks or advertisements that may skew your view of their expertise and their credentials. It’s hard to place a value on experience, but I can assure you, this is one area where paying a fee to complete a written financial plan is in your best interest before various products are purchased.

Any insurance agent, lawyer, accountant and financial advisor can throw numbers around, but numbers should be based on facts and not guesswork. It is not necessarily a challenging task to calculate the need for life insurance or disability insurance and common sense says these items are going to be needed early in life to cover any number of unforeseen circumstances that may arise in one’s career. (For related reading, see: 5 Insurance Policies Everyone Should Have.)

How Insurance Can Help
This is where life insurance plays a key role, when there is a shortage of capital, as it takes investment capital to generate income. Also, disability insurance plays a role where there is a loss of income and bills that need to be paid. In every case that we’ve outlined, the center point is cash flow.

With positive cash flow, we can pay our bills and save for the future. This provides a very pleasant environment in which to live and raise a family. With negative cash flow, creditors will take your house, your car. Although this may sound a little dramatic, we’re dealing with reality where creditors have little faith in promises and only respond to payments.

If the deceased or disabled parent is the breadwinner, then insurance is critical. It has the potential to replace financial losses and hopefully assist in dealing with some of the psychological issues following the death of a family member, but nothing should be purchased without a written financial plan.

(For more from this author, see: Estate Planning for Beginners, Part One.)

22 Jul


How Financial Plans Differ For Women In Transition

July 22, 2017 | By |

As a young trust officer, and during my subsequent 30+ years practicing financial planning, a sizable portion of the female population’s role included raising children and maintaining the family’s homestead. This situation, although traditional in the past, has evolved and now is changing the world in dramatic ways, as women today have taken charge of not only the family, but also, in many cases, the family’s finances.

I’ve spent most of my professional career catering to the needs of women in transition. This includes those women who unfortunately may have lost a spouse to death and those who may have dumped one through the process of divorce.

Women of today are much better formally educated than their forbearers, and fortunately, they have the capability of standing on their own when push comes to shove. They’re very often the breadwinner of their family, and, in so doing, have had to educate themselves in areas in which their mothers and grandmothers may not have been involved.

My role as a professional fee-only financial advisor has been one of an educator, filling in areas of expertise where required or requested. In addition, I’ve been teaching estate planning and cash flow management to financial advisors for more than 30 years within the National Association of Personal Financial Advisors, otherwise known as NAPFA. In 1983, I was one of the founding members of NAPFA, whose mission was to promote the services of “Fee-Only” financial planning by providing our clients their own personal fiduciary.

Our goal at NAPFA was to offer advice that was free of conflicts of interest. If the financial plan required the need for life insurance, for example, our role was/is to assist our client in finding a qualified agent or company who may serve in that solo capacity. However, long before we retained the services of the agent, we had already determined the needs of our client, and the agent’s role became one of providing the expertise and best product to fill in this missing gap for the client and her family.

Life Insurance

The use of insurance products and investments was determined by the written financial plan, and once completed, the current needs of our client became abundantly clear. We discovered that in some cases, clients had been sold products either prematurely or that benefited the salesperson more than our client.

The same principle applied to investment management. Our role was to identify and then assess the needs of our client and identify a competent asset manager whose compensation was derived from fees, rather than from commissions, ensuring the manager’s interests were aligned with those of our clients.

We also developed a long-term spending plan (a 25-year projection) that became a blueprint for the future and allowed for changes to be made along the way. Life can take some interesting twists, but a written plan ensured it would be easier to clearly understand and adapt to these changes.

Prenuptial Agreement

A very good example comes in the form of a second marriage. Can our client afford the possibility that this marriage may not work? Can she put her assets at risk and still assure herself of financial security or will the use of a pre-nuptual agreement provide the protections that allow her to sleep nights under most if not all conditions?

What about her minor children? How are they to be protected in the event of her death or disability? This is where the prenuptial agreement and a well drafted will and revocable trust will lay the foundation for the protection of her family. The selection of her executor, trustees, health care agent and guardians for her children can be laid out well in advance of any unforeseen set of circumstances.

Unlike their male counterparts, women we worked with wanted to be educated, rather than sold. We found the process was no different from any other form of education, and when our client was comfortable with her alternatives, we then became responsible for implementing those recommendations she felt comfortable with for herself and her family. Very often, the financial plan included planning for her children, and possibly grandchildren, to pass family assets to their chosen beneficiaries under the umbrella of “creditor protection” using Trusts.

Alternative Approaches

Recognizing that there is more than one way to solve a problem, we often present alternative approaches for solving a family issue. Once each of these alternatives are explored for their pros and cons, our client is in a better position to determine which approach is right for her. It’s at this point that we offer to implement the process to its conclusion as and when requested.

Over the past eight years, or more specifically since 2009, “Federal” estate taxes no longer play a primary role in most estate planning situations. This is because as of January 1, 2017, an individual can pass $5,490,000, and a married couple can pass $11,980,000 of assets to named beneficiaries without any “Federal” estate taxation. However, planning and the use of trusts play a significant role in minimizing these taxes. In addition, we must consider that 15 states and the District of Columbia impose their own estate tax or inheritance tax, which must be factored in, even though the “Federal” tax will be zero.

23 Mar


Estate Planning for Beginners – Part 1

March 23, 2017 | By |

Where do we begin with estate planning? At the beginning, of course, which is the probate process.  What is probate?  Probate takes one of two forms.  The first is where a will is presented to the Probate Court and the second is where there is no will and the court is asked to appoint an Administrator to “probate” the assets of the estate.

In situation number one, the will is presented to the probate or surrogates court for proof.  Proof of what you may ask?  The will needs to be validated and confirmed as valid by the probate judge.  Once this is completed, the judge looks to the will to see who the deceased named as Executor and possibly Trustee and under normal circumstances, formally appoints these individuals or entities to act as Executor as provided in the will.

At a minimum, what should be included in the will? Consider the following:

1). Distribution of tangible assets (your car, boat, jewelry, clothing and other personal effects).

2)  Directions to pay all debts and taxes that may be due as of the date of death.

3). Distribution of real estate.

4). Specific bequests of money to named individuals or charities, if applicable.

5). The distribution of all of the “Rest, Residue and Remainder” of the assets

5). The appointment of the “Guardian” for any minor children.

6). The appointment of the Executor or Executors

7). The appointment of Trustees, if applicable.

The role of the named executor is to execute the terms of the will for the benefit of the named beneficiaries and report back to the probate judge for approval of the planned distributions, as outlined in the will.

To get to this point, the executor is required to notify the public that the deceased individual has passed away and that creditors have a limited amount of time to make claims against the estate.  Once all claims have been satisfied including federal and state income taxes and estate taxes, if applicable, the executor presents a plan to the court for the ultimate distribution of the assets.

If minor children are involved, the will typically names the individual or individuals who will be the guardian of the child/children.

Assuming the judge approves all that has taken place, the beneficiaries are asked to approve the plan of distribution and sign off on this plan.  It is at this point in the settlement of the estate that the assets are finally distributed to the beneficiaries and the estate is eventually closed.

But what if there is no will?  In this situation, the laws of the state take over under what is call the “Intestate Distributions “.  “Intestate” means to die without a will.

In this situation, the intestate rules (under State statutes) provides a formal plan of distribution that the deceased neglected to do themselves and believe me, this plan may leave family beneficiaries very unhappy.  Each state may be very different and these rules should be reviewed but NEVER depended upon.

In my own experience, I can outline a number of situations where dying without a will was a nightmare to settle and may rip families apart.

In our next piece, we will cover the subject of “intestate” distributions.

(For more, see: Estate Planning for Beginners, Part 2)

Please feel  free to share comments.  

23 Mar


Estate Planning for Beginners – Part 2

March 23, 2017 | By |

It may surprise a lot of people to discover how many individuals actually die without a will. Most recently, Prince. How about Michael Jackson, Howard Hughes, Abraham Lincoln, Salvatore Phillip “Sonny” Bono and Jimi Hendrix—just to name a few?

When this happens, we have to turn state statutes to determine who will inherit the assets that have no clear path to a beneficiary or heir. These assets are controlled by the state, but what does this mean? (For more, see: Estate Planning for Beginners, Part One)

How Assets Are Passed

  1. Assets may be in joint names such as:
    1. Joint tenants with rights of survivorship (JTWROS) (non-probate) or,
    2. Joint tenants as tenants by the entirety (non-probate & limited to spouses).
  2. Assets that have beneficiary designations such as:
    1. Life insurance
    2. Retirement plans
    3. Annuities
    4. POD (payable on death) on bank or other accounts

In each of the above cases, the assets pass outside of the estate for p purposes but not for tax purposes. In other words, regardless of whether one dies with or without a will, the form of ownership or the beneficiary designation may dictate how the asset will pass and to whom. It is the remaining assets, in the sole name of the deceased, that are subject to distributions by the terms of the will or if there is no will, under the intestate provisions of state statute.

Let’s take a look at two situations in my home state of New Hampshire. In situation No. 1, there is a husband and wife in their first marriage with two children ages 6 and 8. In situation No. 2, the husband and wife are in their second marriage with each having a child from a previous marriage. The husband’s daughter is 6 years old and the wife son is 8. Let’s disregard who should have owned the assets and concentrate on how they are actually owned. In both cases, the husband has a house in his name worth $200,000 and investments of $500,000 in his name with $250,000 of life insurance payable to the wife. In both cases, the wife has her own assets.

Now, remember in this assumption, the husband dies without a will.

In situation No .1, the wife gets $250,000 of assets and half of the balance. Their two minor children inherit the other half equally and these assets will remain under the jurisdiction of the probate court for years until the children reach the age of majority. In other words, the wife will have to account to the probate court annually as to how she has handled the children’s assets. How exactly are these assets allocated?

First, the life insurance is easy and the $250,000 goes to the wife (due to the beneficiary designation). The life insurance is not a probate asset and not subject to the intestate rules as it passes outside of the probate estate. Of the remaining balance of $700,000 (the house and investments), the wife gets the first $250,000. This may consist of the house ($200,000) and an additional $50,000 of investments. That leaves $450,000 to be divided between the spouse and the children, or about $225,000 to the spouse and $112,500 to each of the children. Is this what the husband would have done had he had a will? Probably not, and the complexity of having assets subject to probate court jurisdiction could have been avoided. Don’t underestimate the formalities and costs of having to deal with the court, annually.

Why It’s Important to Leave a Will

Now let’s look at situation No. 2—same assets and same ownership, still in New Hampshire. (Second marriage with children from prior marriages.) If the surviving spouse has a child who is not the decedent’s child, the surviving spouse receives the first $100,000 and one-half of the balance of the estate if the decedent left children who are not children of the surviving spouse.

As mentioned above, this happens much more often than clients or professional financial advisors would suspect. In fact, I believe that this is the reason why probate courts have such a terrible reputation and this is simply because the testator (the husband in this example) never took the time to put in writing exactly who he wanted to leave money to and in what amounts. Regardless of whether the property consists of real estate, life insurance, annuities, IRAs, closely held business interests and/or personal property, it makes an awful lot a sense to put together a will at a bare minimum.

As a professional financial advisor, I may not think the assets as noted above are as substantial as the size of this estate, which probably represents 10% to 15% of the estates in this country. In the first scenario, with the first marriage and children of that marriage, it would not be unusual to have a will that leaves everything outright to the surviving spouse. In addition, and noting the age of the children, it would also be very likely that the will would provide for a testamentary trust at the very least for the benefit of the children until they reach a certain age. (

In my way of thinking, the selection of the age should be at least just beyond the completion of four years of postsecondary education and I typically use age 25 as a starting point. My past experience as a trust officer includes a number of situations where a child received money much too early, in some cases as early as age 18, and squandered it before they were 25. It is for this reason that I believe in split distributions for children such as 10% at age 25, half the balance at age 30 and the remaining balance at age 35. I would also recommend that if any document calls for actual distributions, I’d speak to the family and attorney and instead of mandating distributions, allow a percentage of the funds to vest in each child as the funds are available for distributions.

In this way, the child will have the unrestricted right to draw a certain percentage at given ages but if things are going well, the child can leave the funds in the trust and take them out at any time. In addition, if you think about this carefully, you’re actually providing a quasi-will for each of your children as long as they don’t take the funds out as you typically direct that if the child were to die, the funds would continue on for their children and if there aren’t any children, onto the client’s surviving children, per stirpes.

In the many years that I taught estate planning at NAPFA, I always expressed the opinion that when a new client comes through the door and you discover they have no wills or trusts, this should be the very first thing we take on as a challenge. Under normal circumstances, everything else can wait its turn. It is my belief that dying without a will is a completely disrespectful way to treat your family at the time of your death. We, as players in this soap opera, need to spearhead these efforts as quickly as possible.

(For more, see: Estate Planning for Beginners, Part 3)


05 Dec


Estate Planning for Beginners- Part 3

December 5, 2016 | By |

Previously we have looked at what makes up a will and how assets can be transferred when the time comes. In this article we’ll talk more in-depth about certain trusts that can be useful when making your estate plans.

In the process of estate planning, one of the key decisions to be made is between establishing a revocable trust or a will, which provides for a fairly simple disposition of assets of a deceased person after the payment of all debts and taxes, if applicable. But what exactly is a trust, which in the simplest of terms also, like a will, lays out instructions for the distributions of assets?

In my experience, the most common use of a trust is for minor children followed by a spouse and lineal descendants. When minor children are involved or where there may be some assets including life insurance proceeds, the testator may want to include a trust for the benefit of their minor children. In addition, a trust can be used for other individuals, whether they be a spouse and/or aging parents.

One of the primary purposes of most trusts is to provide a time table for the distributions of the assets of the trust where, for any number of reasons, an outright distribution at the death of the testator (you) may not be warranted. (For more, see: Estate Planning for Beginners, Part One

The Testamentary Trust

When the use of a trust is warranted, the testator has two choices. The first is to include a trust or trusts within the body of the will. If this is the approach to be taken, the trust(s) are referred to as testamentary trusts or, stated another way, coming from within the will.

When the trust is within the will, the probate court/judge will have jurisdiction over the assets of the trust after your death, as well as all actions of any trustee until the trust terminates by its terms. The oversight by the court/judge may last anywhere from one year to 70 years or more and the court will most often require formal accountings each year, annual fees for its oversight and may even question the actions of the then-serving trustee.

Before we go any further, note that it is very rare where we will recommend the use of a testamentary trust with the exception of young singles and married couples with few assets.

The Living Trusts

The second option is the use of a living trust. The primary types of living trusts consist of the revocable trust and/or the irrevocable trust. Although there are a number of other forms of living trusts, they are highly specialized. Our discussion today will be limited to the revocable trust.

Unlike placing the terms of the trust within the body of the will as in a testamentary trust, a revocable trust is a separate standalone document independent of the will. A revocable trust does not eliminate the need for a will; it serves with the will to complete the estate plan. The revocable trust will have two major sections. The first happens during the life of the settlor (you) and the second occurs after the death of the settlor.

During your lifetime, you typically name yourself as trustee and possibly your spouse as co-trustee. Since the trust is revocable, anything you place in the trust can be taken out at any time during your lifetime. But suppose you are in an accident and cannot act on your own behalf. Your named co-trustee or successor trustee can step in. The trust allows for distributions to you during your lifetime for your care and support and is much more flexible than if you depend upon a durable power of attorney or if a court were to appoint a conservator of your assets.

Because you took the time to establish a standalone trust when you were competent, your chosen co-trustee or successor trustee steps in to manage the trust and pay your bills. (A testamentary trust has none of these advantages since it only comes into existence at your death.) Also unlike a testamentary trust, at the death of the testator (you again), the assets in the trust plus any assets it receives from the will are no longer subject to probate court oversight or jurisdiction.

Mandatory accountings are not required although they are recommended to be presented to the beneficiaries or their representatives (assuming they are minors) rather than any court. We refer to this as the ability to avoid probate and although many attorneys do not place a significant value on this issue, I believe that whenever possible, the elimination of the probate court is desirable and worth the effort to avoid. In the rare situation where the family expects trouble among the beneficiaries after the death of the parents, probate court jurisdiction may be warranted. (For more, see: Estate Planning for Beginners, Part Two.)

For many people, privacy is very important. When all of the provisions are included in a will, all of the accountings are available to the general public for all to see—including the will itself. On the other hand, if all of your assets are in your revocable trust at the time of your death or come over from your will, there is no need for any formal accounting and your assets and the terms of the trust never become public.

As far as the selection of trustees are concerned, you can name an individual or a corporate trustee or both. If you name an individual or two individuals as trustees, at least one of them should be a family member. You might even consider naming the guardian of your children if applicable as one of the trustees. The other should have some background in finances or investments. You then have to consider that a trustee(s) is entitled to a fee which is typically charged quarterly or annually. Typically, a fee of up to 1% annually is considered reasonable for individual trustees. You may want to limit the fees (be careful here) by stating that the individual trustee may charge no more than 1% plus any out-of-pocket expenses. If there is more than one trustee, be sure to settle if they are to share the fee or if they are both entitled to a full fee.

If a corporate trustee is desirable, then I would also name a family trustee with financial experience to serve as co-trustee. The advantage of a corporate trustee, such as a bank or independent trust company, is that they do not die and will likely always be there. The disadvantage is that you will never know who (which trust officer) will be assigned to the trust at the time of your death. In the alternative, you can give your individual or family trustee the power to appoint a corporate trustee, which I believe may be a better option than naming one today.

Regardless of who or what is named a trustee, you want to provide the individual co-trustee or a special trustee with the power to remove and replace the corporate trustee if necessary or desirable.

Terms of the Trust

Depending on the amount of money involved, I typically recommend split distributions from the trust. As an example, the terms may read as follows (and this is merely an example for illustration; it’s not meant to be legal advice). “The trustee may pay to or for the benefit of the children, in equal or unequal shares, as much of the income and/or principal as the trustee shall determine in its discretion for the maintenance, education, support and health of the children until such time as the youngest child reaches the age 25.

When the youngest child reaches the age of 25 or has completed four years of post-secondary education, whichever comes first, the trust is to be split into as many shares as there are children surviving plus one share for any child who has died leaving children surviving. For any child who has reached the age of 25, they shall ‘vest’ in an amount equal to 20% and the remaining 80% shall vest at age 30.”  You can pick whatever ages and percentages that you like.

Most attorneys that I deal with are still using outright distributions rather than vesting. Vesting allows for the beneficiary to defer taking funds out of the trust if all is going well knowing full well she/he can access the vested funds at any time. Another major advantage is that you as the grantor of the trust provided for a line of succession by stating that if the beneficiary were to die with assets in the trust, the assets shall go as you previously directed.

Why split distributions you may ask? This is to cover the possibility that if the child blows through the distribution at age 25, then they have another chance at age 30 when they are hopefully better prepared to handle the remaining funds.

An example may help. Suppose there is a car accident and a husband and his wife are killed leaving two minor children, Tommy who is 7, and Barbara who is 4 years old. We discover that the parents had received some good advice and had a testamentary trust in their wills leaving everything to each other or in trust for their children. If any child is under the age of 25, the assets are to be held in trust until the youngest child has reaches the age of 25. When the youngest gets there, the assets are to be split into as many equal shares as there are children surviving, plus one share for any child who has died leaving children surviving, otherwise to the surviving children of the grantor, per stirpes.

(For more, see: Estate Planning for Beginners, Part 4)


08 Nov


Estate Planning for Beginners- Part 4

November 8, 2016 | By |

Unbeknownst to most financial advisors is the value of a disclaimer trust. Just what is a disclaimer trust? In the world of estate planning documents, it is a form of a credit shelter trust (CST). Instead of the CST being a trust that will be funded (mandatorily) at the death of a testator, it is set up to be used as an “optional” plan where its use may not be known until after the death of the testator.

In other words, it will be drafted today as any other CST, but whether it will be funded will not be determined until the surviving spouse makes an affirmative decision that he/she desires that it be utilized. Stated another way, its funding will be optional and the final decision does not have to be made until nine months after the death of the testator. During this nine-month period, it will be very important to advise the surviving spouse not to “taint” any of the assets that may be disclaimed. More on this later. (For more, see: Estate Planning for Beginners, Part One.)

Estate Tax Exemption

For those of you too young to remember, the estate tax exemption at one time was less than $600,000. In those days the funding of a credit shelter trust was used as a tool to eliminate or at least minimize the estate tax in the estate of the second spouse to die. If the surviving spouse died with an estate in excess of $600,000, there would be a federal estate tax due.

Compare that with today’s federal exemption of $5,490,000 per person in 2017 and combined with “portability,” the surviving spouse can leave a total of $10,980,000 before any federal estate tax (not counting state taxes), if any is due. And all of this without the need for a credit shelter trust.

My experience over the past few years with some experienced estate planning attorneys indicate that they are using the ongoing increase in the estate tax exemption as a reason to bypass the need or desire for the use of a credit shelter trust. Personally, I think this “may” be a big mistake and misses the more important reasons a CST has value to clients and their families.

Competent estate planning attorneys may use language that limits the funding of the CST to the state limits and others may want to use disclaimer trusts and allow the surviving spouse the option to make decisions based upon her circumstances at the death of the first spouse.

Advantages of Credit Shelter Trusts

So you might ask, what are the advantages of a credit shelter trust? I’m glad you asked and I will touch briefly on the topic here with more to follow in our next piece. Let’s begin with the estate tax advantages. As we get into this, let’s keep in mind that there are potentially two sets of estate taxes. The first is the federal estate tax and then there may be a state estate or inheritance tax in the state of your residency. (For more, see: Estate Planning for Beginners, Part Two.)

It should be clear that at the federal level, we have an exemption of $5,490,000 during 2017 and this amount is now being indexed annually for inflation. Unbeknownst to many people, there are a number of states that also have an estate tax. As a side note, let’s not place too much confidence in our elected politicians. During the election process, Hillary Clinton had proposed reducing the current federal exemption back to $3,500,000 while Donald Trump suggested he would do away with estate taxes.

I reside in New Hampshire. We have no state estate tax and this becomes very attractive to retirees in New England and elsewhere as an ideal place to retire if you can deal with our winters and shortly thereafter, mud season. In addition, we have no income tax or sale tax.

But suppose you live in New Jersey where the exemption, for years, has only been $675,000 or Massachusetts where the exemption is $1 million or Vermont where the exemption is $2,750,000. Estate planning and the use of trusts may become more important at the state level. In these cases, we may want to leave a credit shelter trust up to the limits of the state tax exemption to avoid some state estate taxes in the estate of the second spouse to die. Keep in mind that laws are constantly changing and a qualified estate planning attorney can take this into consideration during the drafting of the will and trust agreement.

Avoiding Estate Taxes

What we often want, in the long run, is to avoid any and all estate taxes whenever possible. This is easy in New Hampshire, especially for estates up to $5,490,000 for a single individual and $10,980,000 for a married couple. However, for those in a state where the state exemption is $1 million like Massachusetts, we may want to leave $1 million to a credit shelter trust so that this first million is exempt from taxation in the estate of the second spouse to die.

For families who have been fortunate enough to have accumulated assets of substance, these limited exemptions at the state level are one of the many reasons that in retirement couples move to New Hampshire or Florida where the state does not impose an estate or inheritance tax. (For more, see: Estate Planning for Beginners: Part Three.)

Since the laws are constantly changing, we are using more and more disclaimer trusts for our clients. This eliminates the credit shelter trust from being mandatory and instead, allows the surviving spouse an option to use this trust if his/her circumstances warrant its use at the death of the first spouse.

The major disadvantage of the use of a disclaimer trust is that the surviving spouse may elect not to take advantage of this planning opportunity. Once provided with the option, the surviving spouse can then turn to his or her financial advisor and/or estate planning attorney for guidance as to whether the disclaimer trust is worth considering, and then he or she has nine months to make a formal decision.

In all cases with a disclaimer trust, the assets are directed to be distributed to the surviving spouse outright. However, it is the option to disclaim that has value and the decision does not have to be made when the documents are being drafted. Competent estate planning attorneys may use language that limits the funding of the CST to the state limits and others may want to use disclaimer trusts and allow the surviving spouse the option to make decisions based upon circumstances at the death of the first spouse.

Further Estate Planning Issues

There are two issues I would like to leave you with:

Tainting the assets: For the surviving spouse to disclaim an asset during the nine-month period following the death of the first spouse, the asset or the account cannot be touched for any reason prior to the formal “disclaimer” being executed. An example may help: Husband has a $50,000 saving account in his name alone that credits interest ever quarter. Each quarter the surviving spouse removes the interest to live on and does not touch the original $50,000. This account has now been “tainted” and is no longer eligible to “disclaim.”

An exception to this rule is a jointly-owned home and yes, the spouse can continue to live in it and if necessary, disclaim the husband’s 1/2 interest. Anyone inheriting an asset may disclaim the asset. However, only a spouse can disclaim an asset and still be the beneficiary of the disclaimed property passing into a trust for her benefit.
We will continue with the advantages of credit shelter trusts in our next piece.

(For more, see: Estate Planning for Beginners, Part 5)

24 Jun


Estate Planning for Beginners- Part 5

June 24, 2016 | By |

The Credit Shelter Trust

This all began as a discussion of wills, intestate distributions, types of trusts and then moved onto “Disclaimer” trusts. In summary, the trusts we have touched on all take the form of a “Credit Shelter Trust” (CST). The “Disclaimer” trust is unique. Rather than being funded mandatorily at the death of the first spouse, the surviving spouse has nine months to decide if the trust has value “at that time”. In other words, its future funding is optional and left in the hands of the surviving spouse based upon circumstances as they exist at the death of the first spouse.

IMPORTANT NOTE of distinction at this point:
Anyone who is left money may “disclaim” but only a spouse can disclaim and still be the beneficiary of the disclaimed assets (more on this in another piece)

So let’s begin with the advantages of a “CST” and then it uses.

The advantages include, among other things, the following:

1) Creditor Protections
2) Assets are guaranteed to go to named beneficiaries, if anything is left at death of primary beneficiary.
3) Incredible Income tax planning tool for the survivors named as beneficiaries when “Sprinkling” provisions are available
4) Eliminate the need for a court appointed “Conservator” or Guardianship.
5) In some cases, estate tax savings at both the Federal and State levels.
6) Future appreciation not taxed in the estate of the surviving spouse (This is a two-edged sword—more on this in the future)
7) Potential limitation on the jurisdiction of the Probate Courts

Creditor Protections

The asset in the CST are owned by the trust and not the surviving spouse. Assuming careful drafting, the assets are shielded from creditor claims while held in the trust. Bankruptcy courts, divorcing spouses and general creditors cannot get at these assets.

As a financial advisor, we will always recommend that property and casualty insurance be obtained to cover the spouse’s autos, home and then we will add an umbrella policy to back up all of the underlining policies. Our policy is a minimum of $2,000,000 for an umbrella policy but never less than total net worth.

As example of how this works.

Our surviving spouse is driving home one night, stone sober. She falls asleep at the wheel and kills two people. There will be a lawsuit and her personal assets are first backed up by the auto policy up to the limits of her liability coverage, let’s assume $500,000. If the claim exceeds that amount, the umbrella (let’s assume $2,000,000 of coverage) is next to cover losses to its limits. (assuming she has an “umbrella” policy) This provides a combined coverage of $2,500,000. What if this is not enough? Then her personal assets are next to go. If the lawyers or creditors then try to reach for the assets in the Credit Shelter Trust, they should be out of luck with proper drafting.

In summary, the assets of the CST left for the lifetime of the surviving spouse’s benefit and possibly her children will not be accessible to these claims and may be the only assets left for the family to depend upon.

Guaranteed to go to Named Beneficiaries

When assets are left outright to a surviving spouse, their future distribution is in the hands of the owner, in this case, the surviving spouse. Under normal circumstances, this would be just fine as your children would be the primary beneficiaries of both the husband and wife, especially in a first marriage. And on this subject, what legal rights that the second spouse have in this case to the husband’s assets, some of which came from the deceased first spouse?

Suppose, the wife dies first at a young age leaving her spouse and young children surviving. How likely is it that her husband may remarry? If he does remarry, how then are her children protected, possibly to the benefit of the second spouse?

The CST provides a virtual guarantee that a portion of her assets will remain in trust and at the death of the surviving spouse, the remaining assets go to her/their children. We may do this by placing some restrictions on the ability to distribute principal of the trust to the husband, especially if he remarries.

It may not be obvious but the language of the trust will be critical in not only managing the assets, but will determine the level of access the surviving spouse and or the trustees may have in providing for the wellbeing of the spouse and in many cases, their children through the use of “sprinkling” provisions.

Incredible Income Tax Planning Tool for the survivors named as Beneficiaries

Examples of language to be used: This is not intended to be legal advice as only a qualified estate planning attorney can offer legal advice)

Traditional Language for surviving spouse:

“All of the income from the trust “shall be” distributed to my spouse at least quarterly”. This language leaves no options. The trustee is “required” to distribute all of the income at least quarterly. As a young trust officer years ago, this was the language used most often. This type of CST is known as a “Simple” trust, one that requires that all income be paid out to the beneficiary at least annually

Optional Language we may use today:

“The income “may be” paid to a class of beneficiaries consisting of my spouse and/or our lineal descendants in equal or unequal proportions as the trustees may determine in their absolute discretion”. However, the needs and desires of my spouse shall always come first and foremost”. Any income that is not paid out each year shall be added too principal at least annually. (This is a guidance clause for the direction of the trustees). This type of CST is known as a “Complex” trust as it allows for the accumulation of income rather than required distributions./

Note the options presented to the trustee(s).

1) If the spouse needs all of the income, she can get it.
2) If a court or creditors asserts claims again the spouse, the trustee can hold back income distributions until a resolution can be reached, more favorable toward the wife.
3) If instead, there is a reason to pay the income directly to her daughter, the trustee has the power to do so.
a.Note: The surviving spouse can act as sole-trustee. However, if she does want to get income (sprinkle) to any other permissible beneficiary other than herself, she will need the power to name an “independent” co-trustee to do this properly.
4) A very similar clause can be used for the distribution of the Trust’s principal to or for the benefit of the spouse and/or Lineal Dependents.

Avoid the Need for a Court Appointed Conservator

Although this will be applicable to both a testamentary trust in a living trust, by pointing your named trustees to act on behalf of the beneficiary, there would be no need for a court appointed conservator or for a guardianship appointment as this has been taken care of through the use of these documents.

Future Appreciation of CST Assets are not Taxable in the Estate of the Second Spouse to Die

This can best be explained as follows. When assets coming from the first spouse to die are transferred into the CST, they are not the property and are not owned by the surviving spouse. What you are doing is giving the spouse “life use” of these assets rather than outright ownership. In this manner, at the death of the second spouse the assets pass on to the named beneficiaries at the CST cost basis either carried over from the date of death of the first spouse or for those assets that have been bought during the lifetime of the surviving spouse and owned by the CST, at their cost basis to the trust.

“Cost Basis” and “Carry Over Basis”, two very important subjects, will be covered in the future.

Estate Tax Savings

Although my clients see this as a major advantage of the use of a CST, I don’t necessarily place a lot of weight on this particular issue due to the size of the federal exemption and the ability to use such a trust when state estate taxes are an issue.

For those families with total assets of less than $5.43 million, you may remember that there will be no federal tax. We then look to the state and to the extent a state tax may be applicable, we try to fund the credit shelter trust up to a maximum of the state exemption to avoid some or all of the state, estate tax at the death of the second spouse. This is not very difficult does need careful drafting by a competent estate planning attorney.

For those “married” couples with combined assets of $10.86 million, our recommendation would be to fully fund the credit shelter trust at the death of the first spouse up to a maximum of $5.43 million with language that will increase this amount due to the permanent nature of the cost-of-living increases that have been passed by Congress. In this manner, the assets of the credit shelter trust will be exempt from federal estate taxes at the death of the second spouse and with a second full exemption for the surviving spouse, no federal estate taxes should be due if properly planned, at least at the federal level.

Jurisdiction of the Probate Court

As you may remember from prior discussions, the use of the “Living Trust “has the advantage of eliminating the need for probate court jurisdiction for the lifetime of the trust. This is not true when a “Testamentary Trust” is used as the trust remains under the jurisdiction of the court until the trust is terminated.

The take away to this discussion should be the value of using a Credit Shelter Trust as a tool in our planning bags of goodies. Does it play into every estate plan? Of course not. Should it be a consideration, absolutely. As planners, we need to understand when and where it “may be” appropriate.

My goal for the past 30 plus years has been to place the financial planning professional and our clients in a position of knowledge that the neither is never intimidated by a competent Estate Planning attorney.

(to read all 5 parts of this series from the beginning, CLICK HERE)

05 Jan


Increased in the Federal Estate Tax Exemption

January 5, 2016 | By |

Effective January 1st, 2016, the Federal Estate Tax Exemption has increased to $5,430,000 per individual for both estate tax and gift tax purposed. The “annual” gift tax exclusion will remain at $14,000 per individual. Both are now permanent and are subject to automatic CPI adjustments annually.

27 Oct


Is It Too Late To Invest In The Stock Market?

October 27, 2014 | By |

Is It Time To Invest In The Stock Market?That’s like asking is it too late to have a relationship—because the answer depends on where you are in life. And, just like having a successful relationship, investing requires knowing what you want, being willing to jump through some hoops, and giving yourself enough time to achieve it.

Yes, the stock market is at unparalleled levels, and with ominous geopolitical events, the Ebola virus, and the pending mid-term elections, anything could spook it, sending it tumbling a few hundred points. But that doesn’t mean you shouldn’t have equities in your portfolio, if you can put up with volatility.

How do you know if you can? That’s where financial planning comes in. Although less than a third of American families have one, a good financial plan is the formula for withstanding the ups and downs of investing, as well as making sure everything else in your financial life is in order.

It starts with an honest assessment of how you feel about risk—in hard dollars. For example, how would you react if your portfolio lost 23% in one day? That happened to everyone who was invested in the stock market on October 19, 1987. Most people panicked, and fell all over themselves trying to get out, permanently locking in their losses.

But those who swallowed hard and stayed the course not only survived, but saw their portfolios recover within 18 months. But not everyone can do that. Careful financial planning can help you determine whether or not you can.

Next, a financial plan makes you ask the tough questions: How long do I need to work before retiring? What kind of lifestyle can I afford then? How will inflation affect my income needs? Are my goals realistic? What about funding my children’s education? What kind and how much insurance do I need? How do I want to distribute my assets when I die? Should my children inherit everything? And what about taxes? Am I taking advantage of all of the legal ways to keep my tax bill as low as possible? Does it make sense to pay my mortgage off? Am I overdoing it with my current spending? Do I have too much credit card debt? Am I saving enough? Is it invested the right way?

Like anything worth doing right, preparing a financial plan takes time. It also takes skill, because things change. Staying current is a full-time job, and making mistakes can be costly. And no matter how much (or how little) money you make, having a plan in place sets you up for an easier life down the road.

You wouldn’t think of going on a trip without a GPS or a map, and you shouldn’t think about going through life without its financial equivalent: a financial plan. It doesn’t have to be complicated—but it should be flexible to allow for changes in your life, the markets, and the economic landscape. And it should be revisited annually to make sure it incorporates those adjustments.

You can do it yourself—and some do. But most people recognize that the complexities of an ever-changing tax code that affects so much of your financial life make hiring a professional a better choice.

And there are three basic types of professional planners: fee only, those who charge both a fee and commissions, and commission only. And just like investing in the stock market, there’s no such thing as perfection: all have their strengths and weaknesses.

Fee-only planners will provide specific recommendations to implement the plan; planners who charge a combination fee and commissions (or only commissions) suffer from a perception of conflicts of interest. The choice is up to you.

But one thing you can count on is that a fee-only planner is paid to give you the best advice available, and to consider all available options, free of any bias. That’s because he focuses only on giving advice. Period. In addition, he will act as your personal fiduciary.

A commission-driven planner, by contrast, has a financial incentive to sell you something to earn part of his pay. Both can (and often do) produce good results. But you may rest easier knowing you’ve paid for the best advice out there—and that your planner’s only incentive is to deliver it—and that he sits on your side of the table.

Robert E. Maloney, of Squam Lakes Financial Advisors, LLC, is a fee-only financial planner based in Holderness, New Hampshire. He is an active member of NAPFA and holds a Master of Science degree in Financial Services, from the American College in Bryn Mawr, PA, and is an Accredited Estate Planner.

Call Now Button