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Working in Tandem

Tax attorneys and CPAs tell advisors how they can better hold up their corner of the estate-planning triangle.

By Lynn Vincent

You’ve heard of the fire triangle: fuel, heat and oxygen. Take away just one and—snuff—the fire’s out. Take away, or weaken, one component of the advisor-attorney-CPA triangle, and the fire can go out of a client’s estate plan—perhaps forever. Below, the other two sides of the triangle lend their advice on how financial advisors can keep their corner burning brightly, improving client service and overall practice performance.

Style over substance
Some advisors need to take a broader view of estate planning, says CPA Marjorie Horwin, a veteran of PricewaterhouseCoopers and Deloitte Touche. Horwin currently heads the estate and trust division at DaszkalBolton, an accounting firm in Boca Raton, Fla. “What I see in my practice is that clients come in and they’ve had a bunch of [estate-planning] techniques thrown at them, and maybe have executed those techniques,” Horwin says. “But the insurance advisor involved has not looked at a whole strategy to determine what the true, overall, long-term goals of the client are.”

Instead, the advisor has executed a tactical maneuver—usually involving the establishment of some irrevocable instrument and the consummated sale of an insurance product—to minimize or defray estate taxes, sometimes to the detriment of the client and his beneficiaries. Take a pair of Horwin’s recent clients, for example. A married couple with two grown children—we’ll call them Mr. and Mrs. Jones—arrived in her office bearing a qualified personal residence trust and an irrevocable life insurance trust, both already in place. Standard estate-planning instruments, right? Commonly used ... so what’s the problem?

The problem, says Horwin, is that the Jones’ children were each teetering on the edge of divorce. Because of the existing trusts, when Mr. and Mrs. Jones pass away, their home and the insurance proceeds would pass directly to their children. “But the kids didn’t want them directly,” Horwin says. “They were concerned that if they actually divorced, those assets would be included with their overall worth and therefore become part of the divorce settlement.”

Horwin notes that irrevocable life insurance trusts, while useful for avoiding estate taxes, may create long-term problems for heirs or wind up funneling wealth in ways the decedent may not have wanted. In a world where the divorce rate is 50 percent, she says, a savvy financial advisor might instead have put the client’s assets in a spendthrift trust, which also can be structured to sidestep estate taxes. Horwin encourages advisors to look beyond estate taxes to the long-term path down which clients’ assets will flow. Be innovative, she says, “There are too many cookie-cutter plans out there.”

“Some advisors need to take a broader view of estate planning.”

—Marjorie Horwin, CPA, DaszkalBolton

Avoiding cookie-cutter plans is Roy Patterson’s specialty. An advanced sales consultant for estate and business planning for Hartford, Patterson encourages advisors to build plans with flexibility, especially now that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) has created for all estate-planning professionals an unfolding decade of ambiguity. “We don’t know what’s going to happen with EGTRRA in 10 years,” Patterson says. “One of our problems in estate planning today is that there’s so much uncertainty. And since we have more uncertainty, we need more flexibility.”

What would happen, for example, if a client—whom we’ll call Mrs. Brown—wishes to transfer a $4 million estate at her passing, and the chosen instrument is an irrevocable A-B trust? A standard way to set it up would be to designate her husband as the beneficiary of all assets not going to an exemption trust, and to designate the children as the exemption trust beneficiaries.

Today, under EGTRRA, that exemption would be worth $1 million. But if Congress in 2011 changes the estate-tax exemption to, say, $3.5 million, then the children would be multimillionaires, since the amount of Mrs. Brown’s money below the federal exemption level would flow into the exemption trust. Meanwhile, Mr. Brown would inherit just $500,000—probably not what his wife would have wanted.

Advisors who learn during the age of EGTRRA-limbo to build flexibility into their clients’ estate plans can avoid problems like the Browns’. Instead of setting up standard, static irrevocable trusts, Patterson suggests adding language that helps the trust flex to whatever tax law exists at the time of the client’s passing. He also suggests that advisors take time to review any dusty trusts clients may have lying around. There may be workaround products available that help clients carry their wealth safely across the morphing EGTRRA landscape.

Variable virtues
Brett Berg notes that EGTRRA is changing the way advisors involved in estate planning are selling life insurance. Because of the moving tax-scape, “you can’t just plug in some numbers, calculate the estate tax, and sell a policy, problem solved,” says Berg, who leads an estate and business planning team at Nationwide Financial. “You have to do some planning.” Planning that includes tax-avoidance, of course. Despite fluctuations in estate-tax exemption amounts—or even the disappearance of estate taxes—most clients could use some liquid estate-planning instrument to defray other types of taxes such as those on income, capital gains or generation-skipping transfers. Variable universal life products, Berg says, are the perfect answer—even in today’s volatile equities markets since VUL products offer clients:

  • A death benefit that, if properly structured, is not subject to estate or income taxes
  • Client-allocated sub-accounts created for variable insurance products and not available to the public
  • Cash accumulations that can be available on a tax-advantaged basis during the client’s lifetime
  • No general limitations on the amount a client can contribute, unlike an IRA or a 401(k) plan

These may be ideal for meeting a range of clients’ estate-planning needs in a changing tax environment.

As that environment changes, Berg expects advisors to face estate-tax-repeal rumors floating down from Capitol Hill. “It’s important now for prospective clients not to be lulled into a false sense of security, thinking estate taxes will simply go away,” he says. He also recommends discussing the issue with clients now and joining forces with other advisors to emphasize the continuing need for planning.

Watching your assets
A non-EGTRRA lightning bolt from Capitol Hill struck some of Vivien Chang’s clients. The past year’s rash of corporate scandals—Enron, WorldCom—has created new estate-planning concerns for corporate directors and the officers of publicly held companies. Chang, a tax attorney with the Seattle law firm Bullivant Houser Bailey PC, notes that the Sarbanes-Oxley Act, or Corporate and Criminal Fraud Accountability Act of 2002, has some high-end executives as worried about simply keeping an estate as they are about paying taxes on one.

The act overhauled U.S. business practices and laid corporate officers and directors open to personal liability should they be found to have purposefully or negligently mishandled corporate accounting. “Insurance advisors need to be aware of these additional exposures,” Chang says. “Corporate directors and officers will be looking at more asset-protection products versus straight tax-planning products.”

Chang also says many clients she sees are surprised there are any tax implications at all for life insurance products. “When I tell them their life insurance benefits are estate-taxable, they’ll say, ‘My advisor says they aren’t,’” she adds.

Could these clients be mistaking income-tax free for entirely tax free? Maybe. But, says Chang, “It comes up all the time.” That’s bad news for an advisor because “it forces a confrontation in which the client must now go back and question advice the agent gave him.”

It may also make it appear as if the advisor was trying to sell the client a product without giving him all the facts. “We usually resolve the issue fairly quickly, but it may make the advisor look bad,” Chang says. And a gaffe like that may throw all the agent’s advice open to question.

Reaching out
That’s why attorney George Dionisopoulos believes in regular, meaningful interaction with other estate-planning professionals. Although he chairs the estates and trusts practice group at the law firm Foley & Lardner in Milwaukee, writes a regular newspaper column on business succession, lectures frequently on estate-planning topics, and maintains a healthy client base of business owners and public-company executives, he isn’t too busy for professional mixers.

“Don’t underestimate the value of networking through professional associations and other opportunities to interact with referral sources,” advises Dionisopoulos, who belongs to the 60-member Milwaukee Estate Counselors Forum, a monthly networking group.

From his viewpoint, the value to advisors of attending such groups goes beyond referrals. “When a client comes to me and asks me about the estate-planning advice an insurance agent has given him, if I know that advisor from my group, I’m in a position to say, ‘Yes, I know that agent. She’s recognized in the field.’”

Dionisopoulos has found this of particular value to advisors whose clients may view insurance proposals and illustrations with a skeptical eye. “There has to be a level of confidence in the agent,” he says, “that the proposals are meaningful and realistic to the client.”

“When I tell [clients] their life insurance benefits are estate-taxable, they’ll say ‘My advisor says they aren’t.’”
—Vivien Chang, Bullivant Houser Bailey PC

Paper trail
Dionisopoulos also appreciates it when advisors do the tough groundwork required to help clients complete—and document—a detailed summary of their financial health. That includes assembling data on existing retirement accounts, insurance policies, wills, trusts and any related beneficiary designations.

Doesn’t every advisor take the time to pull that paperwork together? Well ... no. Dionisopoulos has known some advisors who seem more product-oriented, prone to taking a quick snapshot of financial details to make a quick recommendation and sale.

“So often the financial advisor has the first real contact with the client or family,” Dionisopoulos says. “This is a very practical area where the advisor can provide a real value-added service to the client, and also to the client’s estate-planning team.”

Working together
Teamwork is paramount in estate planning, says David Cahoone. President in Sarasota, Fla., of the National Network of Estate Planning Attorneys (NNEPA), he recommends that insurance advisors work closely with a client’s other advisors to develop and implement a client’s plan, then monitor it together on at least a semi-annual basis. He notes that the stereotypical attorney-agent relationship (agent sees attorney as deal-killer who recommends that the client buy term and invest the difference, while attorney sees agent as a mercenary most interested in hot-and-cold running premium checks)—hasn’t been the experience of most NNEPA attorneys.

“We have often been in the position to recommend to clients that they purchase insurance as a key part of their estate plan, and have been able to refer them to agents who could help them put it into place quickly,” Cahoone says. “To the extent that we’ve ever had challenges in working together, one challenge is that we become too focused on getting our own piece of the estate-planning puzzle done. But if attorneys, CPAs and agents work as part of a collaborative effort, and if each of us implements our part of the estate plan quickly, we can put together a good plan that achieves optimum results for every client.”

Lynn Vincent is a frequent contributor to Advisor Today.


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