Talk about disappointment. And shock.

Our legacy planner presented his legacy plan proposal this afternoon. That was fine. Indeed, it was quite exciting.

But he didn’t merely present his ideas for our future. He showed us where our current estate plan, drafted about eight and a half years ago, is going to leave us . . . unless we take some drastic action.

The results of our current plan are so far off-kilter from where we actually want to go, I can hardly express my dismay.

Some of the most shocking elements:

• Even though we are engaged in deliberate and diligent charitable giving, at the rate we’re going right now, we should continue to acquire substantial assets that will transfer from one of us (probably me, based on actuarial expectations) to the other (probably Sarita) at death. And those assets will be locked up in a QTIP (Qualified Terminal Interest Property) Trust, so the survivor will be unable to give them away.The QTIP permits invasion of principal only for the purposes outlined in the trust–health, education, maintenance and support.

  Nine years ago, when we were first beginning to leave poverty, those goals sounded reasonable enough. But now that we have become wealthy and we would rather engage in philanthropic activities, the trust could seriously “cramp our style.”

But this was the least of our worries.

• We created an Irrevocable Life Insurance Trust (ILIT) intended to ensure that, when we die, federal estate taxes won’t force an emergency fire sale of our company. The life insurance in the trust is supposed to provide enough cash for our kids to pay off the IRS and keep the company going.Except . . . according to our legacy planner, this trust is written in such a way that it will provide income only to our children . . . until they die.

  He didn’t mention it, but, assuming he is correct, that means the trust wouldn’t “even” achieve the purpose for which we created it!

And then, worse . . .

• When our children die, their children (our grandchildren) will receive the assets of the trust . . . as long as they are 21 years old or older.What’s so bad about that?

  Well . . . why should our grandchildren receive millions of dollars from a trust established by their grandparents? What good will that money do them? What harm could it do?

  . . . It is our opinion today that we don’t want to ensure our grandchildren receive a particular inheritance. We believe that is their parents’ (i.e., our children’s) responsibility. Our kids should ensure their children have a goodly inheritance. That shouldn’t be our responsibility.

And then the coup de grace:

• When the second one of us dies, despite all our wonderful plans, our estate is likely to grow so large that it will be subject to additional millions of dollars of straight estate taxes, IRD (”In Respect to a Decedent”) taxes on the retirement funds of the second-to-die, and GST (Generation Skipping Taxes) taxes–all of which taxes will be due and payable in cash within nine months of the death that sparks the tax.

“How can our estate plan be in such bad shape?” I asked in some anguish. I have had the plan reviewed numerous times over the years. The most recent review occurred just a year ago.

One of the causes of difficulty: simple compound returns on investments (or compound inflation) can turn relatively small numbers into giant numbers over time. Even an unbelievably small factor of 2% inflation over 39 years (from when our plan was written to the time of expected death for the second one of us) will more than double an initial investment.

Acquire modest returns on an investment of, say 7%, over the 27 years the actuaries say I should live, and a $1 million investment grows to over $6.2 million. A steady 10% return will yield $13.1 million! Do a bit better than that–say, a still reasonable 12%–and your $1 million turns into $21.3 million in 27 years!

The numbers can grow beyond our mental expectations very quickly.

But there was something else our legacy planner said that sent chills up my spine.

“The biggest problem,” he suggested, “is that your attorney and accountant have never looked at your plan together. Your attorney doesn’t know how your numbers have changed over the years. He has never calculated how the plans he has created for you will work out in practice down the line: what the numbers really look like. And your accountant doesn’t know what your estate planning documents actually say or what they will do–which means he also hasn’t worked out the numbers long-term, either.

“They didn’t communicate back when you were having your documents drafted nine years ago, and they haven’t communicated about the details of your plan since then.”

Ouch!

Too bad I didn’t know any better!

And now what can we do . . . with irrevocable life insurance trusts and other irrevocable trusts in place?

Rather sobering!

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This entry was posted on Monday, April 7th, 2008 at 9:32 pm and is filed under estate planning, legacy planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.