The future of the Federal Estate Tax remains clouded.

We have been keeping our ear to the ground (actually we have been calling people and searching the Web for clues) to help our advisors predict what will happen with the Estate Tax.

As most of you know, under the 2001 Economic Growth and Tax Reconciliation Act, the Estate Tax is scheduled to be repealed. There will be no tax in 2010, and if lawmakers do nothing (please, no jokes), the Estate Tax would be back with a higher rate of 55 percent and an exemption of $1 million.

Rep. Earl Pomeroy (D – N.D.) , a senior member of the House Ways and Means Committee, was quoted on TheHill.com as saying it’s time to end the “hokey-pokey” Estate Tax code and provide continuity for planning.

This year, I provided you with a kind of “cheat sheet” that explained some basic Trust terminology, followed by a second article that defined an Irrevocable Life Insurance Trust (ILIT), a Qualified Terminable Interest Trust (QTIP), and an Intentionally Defective Grantor Trust (IDGT).

This is the third installment in our series on basic trust terminology.

The goal is help you better understand estate planning and asset protection and without feeling tripped up by complicated legal words or phrases.

Complex by Design, but Easy to Understand

There are many different kinds of trusts in the marketplace that can accomplish everything from shielding your  heirs from creditors and divorce to protecting a special needs child long after his parents are gone.

As complex as their functions can be, these Trusts are not difficult to understand.

Here are definitions for some of the most common Trusts you may have heard about:

1. Lifetime Protective Trust: When a client leaves an inheritance to a child outright, it can be subject to the child’s creditors, former spouses, addiction problems, inability to manage money and a Federal Estate Tax on the child’s estate.
   Leaving an inheritance in a protective trust will shield these assets from such predators. They can be designed to become dynasty trusts, which can provide protection for generations.
2. Testamentary Trust: This trust is contained in someone’s will. It comes into existence upon a Trustmaker’s death and is subject to probate proceedings.
3. Special Needs Trust: This is established to benefit a child with disabilities and who is entitled to government assistance, such as Social Security disability payments. An inheritance held within a special needs trust will not disqualify the child from receiving the assistance. Distributions are made at the discretion of the Trustee for the child’s special needs. The trust can be stand-alone or be a sub-trust of a revocable living trust.
4. Asset Protection Trust: When a Trustmaker puts assets into a revocable trust, the assets are not protected from claims by the Trustmaker’s creditors or lawsuits. Several states now permit Domestic Asset Protection Trusts (DAPT), which allow a Trustmaker to transfer property into an irrevocable trust of which he is the beneficiary.

If the statutory requirements are met, then the assets within are protected from predators, usually after a certain time period has passed.

Online Estate Planning Dictionaries

Here are some great resources for Trust term definitions:

NOLO.com’s online wills and estate planning dictionary http://tinyurl.com/cuflru.

FindLaw.com’s online estate planning and probate dictionary http://tinyurl.com/ch7t5o.

I hope this article helps you and your family. If you have suggestions for other terms you’d like to see defined, please forward them. As always, if you have a question or concern about a specific case, please contact our office.

This Wall Street Journal online guide is well written and has lots of good advice anyone looking to hire a financial planner.

Here is a direct quote from the guide’s main points:

• Look for a financial adviser who is a certified financial planner (CFP). They’re licensed and regulated, plus take mandatory classes on different aspects of financial planning.
• Consider the planner’s pay structure. A planner who earns money based on commission rather than a flat, hourly rate could have an incentive to steer you in a particular direction.
• Read the code of ethics that your financial planner adheres to. Look for the word “fiduciary” and language that requires planners to look after your best interests.

One of the greatest challenges many of my clients face is how to protect their families from the rising cost of long term care – both for themselves when they reach retirement and for elderly parents.

For example, the average cost of staying in a Florida nursing home is between $5,000 to $6,500 per month, or about $60,000 to $78,000 per year. Since the average length of stay in a nursing home is three years, this quickly totals nearly a quarter million dollars. A family with a loved one in a nursing home would need about $3 million in income-producing assets to avoid drawing on the principal.

That’s why it is important to start strategizing now to determine how you plan to pay for long term care.

Three Ways to Pay

Typically, there are three ways to pay for long term care:

1. Self Pay – The patient will pay for the expenses out of pocket.
2. Long Term Care Insurance – This is essentially a wager between you and an insurance company. You pay premiums and betting that you will eventually need nursing home care. The insurance company is betting you won’t need the coverage and that it can keep all the premiums.
3. Medicaid – This government entitlement program assists low-income seniors who need nursing care. However, medical costs have risen so dramatically that even middle class patients can’t afford to pay. About seven out of ten nursing home patients receive Medicaid benefits.

Not Poor, Not Rich Either

If you are more likely to choose Option 3, then you should understand how Medicaid eligibility works. The rules are strict, but they are not impossible to meet.

Income limits are an issue, as well. This varies from state to state, but typically the limit is about $2,000 per month. In addition, Medicaid reviews an applicant’s financial records for the five years previous to their application. The government searches for uncompensated transfers – money or assets given away for free.

What if you earn $2,500 per month or $3,500, or $4,500? These amounts are not enough to pay for care but will disqualify someone from eligibility.

State by state, there are strategies that can help you with the dilemma of having too much income to qualify for Medicaid but not enough to pay for care. Sometimes these are called a Qualified Income Trust or a Miller Trust.

There are a variety of tools available for preplanning to cover the costs of long term care, and I encourage you to act now rather than wait.

I hope this article helps you and your family. As always, should you have a question or concern about a specific case, contact our office.

The Wall Street Journal has published an excellent analysis of the effectiveness of Intentionally Defective Grantor Trusts during an economic recession. Unusual Trusts Gain Appeal in Unusual Time – WSJ.com.

While these trusts carry risks and are often scrutinized by the IRS, estate planning lawyers are seeing an increased interest in them this year. With proper structure, an IDGT can yield better returns for heirs than other strategies.

I recently wrote about IDGTs as part of a series of wealth protection articles I published for my firm’s clients last year.

When most of you bought your first home, you probably signed a deed as a joint tenant next to your spouse’s signature. That’s the way your parents and grandparents did it, and the real estate agent told you it would to protect the surviving spouse from probate court after one of you dies.

It’s not unusual for the surviving spouse to assume that, because joint tenancy worked well to avoid probate the first time, it will work just as well twice. In thinking this way, the surviving spouse adds an adult child to the deed.

But there’s a trap in joint ownership with a child that you might not know.

Dad’s Dutiful Daughter

Here’s a hypothetical to consider:

Five years ago, Edward became a widower and sole owner of a home and three rental properties he bought with his wife. Edward has two adult daughters, Gwen and Stacy. Stacy has three minor children.

Edward is disabled. Gwen visits daily to do light housekeeping and processes his bills and the bookkeeping for the rental properties. Edward assigns her as joint tenant on deeds to his home and co-owner of the rental properties. Stacy lives in another state and isn’t involved in the upkeep of the properties.

Edward’s will indicates he wants both daughters to benefit equally from his estate and for a portion of its value to be set aside for his grandchildren. Despite this, Gwen will legally own the properties upon his death. The joint tenancy could cause Edward’s other daughter and grandchildren to be unintentionally disinherited.

Disaster Strikes, Estate Targeted

However, while Edward is still alive Gwen causes an automobile crash. She is unable to pay her medical bills and her debt goes into collections. The other driver in the crash was seriously injured and sues Gwen for damages. In the midst of this lawsuit, Gwen’s husband files for divorce, seeking half of his wife’s assets.

Any property she owns, including assets she shares with her father, is in jeopardy of being seized.

The Joint Tenancy Trap

Wanting to protect his estate, Edward decides to remove Gwen from the joint tenancy and then sell the properties. However, Gwen refuses, saying she deserves half the assets as payment for her caretaker duties. Edward must seek a court order to remove her from the deeds.

Even if Gwen had never faced debt problems, a nasty divorce or lawsuits, Edward’s final wishes for his estate might still have remained in jeopardy.

As you can see from this extreme example, the downsides of joint tenancy far outweigh any upsides. I urge you to consider these risks carefully before holding property in joint tenancy with an adult child.

I hope this information helps you and your family. As always, if you have a question or concern about a specific case or issue, contact our office.

A recent Florida case illustrates one big reason why clients need to constantly update their planning.

Although this case is unusual, it really does a great job of showing how life changes can destroy the best of plans or intentions.

Marriage Made for a Soap Opera

When Howard Herpich and Svetlana Ozerova married in February 2003, they signed a prenuptial agreement to waive rights to property brought into the marriage by or separately titled to the other spouse.

This agreement also directed that “in the event of a separation and reconciliation” the document would remain binding.

One month after the wedding, the couple separated. Their divorce was finalized in early 2005.

In officially executing the prenuptial agreement, the couple divided up marital assets accordingly and settled joint financial affairs.

Six months later, the Herpiches reconciled and remarried.

Daddy’s Dead. Who’s Got the Prenup?

When Mr. Herpich died two years later, his widow was appointed personal representative over his estate and she later petitioned to determine the homestead status of real property.

Mr. Herpich’s two adult children from a previous marriage sought to prevent their stepmother from controlling any part of the estate by claiming that the prenuptial agreement remained in effect.

The trial Judge ruled against the widow, determining the prenuptial agreement remained valid, despite the divorce between the couple’s first and second marriages.

The Judge ruled that the terms “separation and reconciliation” encompassed “divorce and remarriage” and essentially denied Mrs. Herpich any control to her late husband’s estate.

Appeals Court: Divorce Ends the Agreement

An appellate court disagreed with the trial Judge and said the “separation and reconciliation” wording in the agreement cannot be considered the same as “divorce and remarriage.”

The appellate court said the prenuptial agreement had been effectively ended by the 2005 divorce and was no longer binding. The original agreement’s language had anticipated only one marriage between the Herpiches, not a divorce and a remarriage.

This case highlights the importance of updating those plans after a life event, such as birth, death, marriage, divorce and remarriage.

I recommend financial advisors discuss this important estate planning issue with at least three kinds of clients.

• Divorced clients who have reconciled or might reconcile with a former spouse.
• Single clients who want to solidify control over assets in preparation for a future marriage.
• Clients who live with a significant other.

I hope this information helps you, your clients and their families. As always, if you have a question or concern with this or any planning issue, don’t hesitate to call our office.

(This is the final installment in a six-part series of powerful planning strategies that will help you take advantage of a down market and protect wealth.)

Here’s one more great strategy that can help protect your wealth during a down economy. The Charitable Lead Annuity Trust (CLAT) pays a set dollar amount annually to a charity of your choice while possibly providing you a deduction. When the trust expires, your family receives the asset that funded the trust.

Who can use this strategy?

This strategy is a good idea for those who don’t need an asset’s income, have desire to help a charity, but ultimately want to transfer the asset to their loved ones.

A CLAT is basically the opposite of a Charitable Remainder Trust. Once funded with assets, the income is paid to the charity for a period of time. Upon termination of the trust, the asset transfers to you or your client’s heirs.

Here’s a simple example:

Dad put $500,000 worth of stock into a 20-year CLAT that provides $45,000 a year to a charity to pay for scholarships. The stock’s annually earnings increase the value of the trust. After 20 years, the initial principal and any growth will transfer to Dad’s son and daughter.

For gift tax purposes, only the remainder interest (what the IRS projects Dad’s trust to be worth at the end of 20 years) is subject to tax.

The benefits for Dad:

1. He makes an immediate impact for a charity.
2. He substantially reduces estate and gift taxes.

What’s the next step?

While this example was an oversimplified discussion, I believe a CLAT can be an attractive and successful strategy to protect wealth during difficult economic times. It pays out a handsome donation to a charity – sometimes for decades – while still protecting the asset it holds for heirs.

My advice to you is the following:

1. To protect your lifestyle, be certain you won’t need the asset’s income.
2. Carefully structure your CLAT so that its assets will not be entirely depleted by the end of the designated term.

I hope the information in this six-part series of planning strategies was useful to you and your family. If you have a specific case or a question, don’t hesitate to call our office.  As always, feel free to call me for further advice or to share your ideas.

With a Grantor Retained Annuity Trust (GRAT), you can avoid gift-tax consequences while temporarily freezing the value of an asset that will be worth more later.

The asset can be shares in a company that is likely to go public or beaten down shares of stock that are likely to appreciate.

Like loans, GRATs mature within a specified number of years and you get back any money you put in when the trust expires.

How Does It Work?

A GRAT is an irrevocable trust and can be designed in a variety of ways to benefit you and your family. In general, it involves transferring an asset, such as stock, with a retained right to receive fixed income, at least annually.

The GRAT permits the value of the grantor’s retained interest to be subtracted from the value of the property transferred in order to arrive at a net gift amount.

While it can be structured in many creative ways, it is typically used in the following way:

1. The grantor has an asset that he believes will appreciate and that he wants to remove from his estate for tax purposes. (With stocks and real estate at a low, this is a powerful tool, assuming the grantor believes that values will appreciate.)
2. The grantor receives a defined income stream, which reduces the value of the principle.
3. The beneficiaries receive the appreciation, whatever that may be.

For example, Dad places $500,000 of company stock into a GRAT. He receives a certain sum in income, pays tax on it, but allows all of the stock’s appreciation to transfer to his children, gift tax free.

What Are the Benefits?

There are many non-tax benefits to a GRAT, as well. For example, if you wants a specific asset to go to one child over another, or you don’t want a former spouse or creditor who might contest your will to obtain it, a GRAT makes it less likely that the asset will be lost if your estate is embroiled in a lawsuit.

Be aware that if you die before the trust ends, then it’s as if the GRAT never existed. The trust’s entire value – including its returns – will be included in your estate and subject to the estate tax.

Another good planning approach is to create separate GRATs for each asset. If you combine two or more unstable assets into one GRAT, then the losses on one might offset the gains on another.

A well-designed GRAT is a powerful way to avoid gift-tax consequences while providing your family a significant portion of an asset’s income.

I hope this information helps you and your family. If you have a specific case or a question, don’t hesitate to call our office.  As always, feel free to call me for further advice or to share your ideas.