The Money Doctors

Doctors and financial advisors have a lot in common, and perhaps nowhere is this more evident than on late-night television.

There, sandwiched between nightmare-date shows and infomercials, lurk the ads from the ambulance-chasing lawyers — and from those applying such tactics to the securities industry. “Have you been harmed?” they ask, almost rhetorically in a breathless manner. “You could be due money.”

Of course, this suit-happy environment is a relatively recent development in the brokerage industry, so financial advisors would do well to borrow one of the medical profession's best tactics for fighting it: Holistic treatment.

Financial advisors alert to the personal, as well as financial, needs of their clients tend to forge strong bonds, which in turn breed the kind of communication and trust that can head off suit-breeding misunderstandings.

Treating the client as a whole person also grants an advisor access to information that can help expand the client/advisor relationship.

One of the best ways to start treating a client holistically is to begin gathering information about him. The following questions are useful in this regard:

Do you have a plan for handling your financial affairs in the event of lifetime disability?

In the event a client is afflicted by accident, illness or disability, he needs to place a trusted family member, friend or other advisor in a position to handle routine financial matters. The alternative to such contingency planning is a court-supervised proceeding for the appointment of a guardian or conservator. Such proceedings are public and generally subject to ongoing court supervision. Priority of appointment generally is given by law to close family members — regardless of whether those individuals are adept at handling financial matters.

By establishing a trust and by signing a document known as a “durable power of attorney,” an individual can achieve greater certainty that, despite any disability, his affairs will be handled by a trusted and competent person without the expense, publicity and heartache associated with court proceedings.

With a durable power of attorney, an individual designates one or more trusted persons to handle both routine and extraordinary financial matters. The durable power of attorney can be effective immediately or effective only upon disability. It can grant limited or extensive authority to the designated “attorney-in-fact”.

By establishing a trust, an individual, as grantor or settler, creates comprehensive, legally enforceable arrangements for managing all financial affairs during life and after death. The individual generally manages the trust as long as he or she is able. But, in the event of disability or death, a successor trustee designated by the individual steps in and handles all financial matters privately as directed by the grantor. For the trust to operate effectively, assets must be retitled in the name of the trust.

Do you and your spouse hold your assets so that each spouse can take full advantage of — and not suffer unintended consequences from — 2004 estate and generation-skipping tax relief?

In 2001, the federal estate and gift tax was overhauled by taxpayer-friendly legislation that takes a significant leap forward in 2004. The principal features of current law are a series of significant — if currently short-lived — increases in the exemption from federal estate and generation-skipping transfer tax, and more gradual and modest decreases in the estate tax rate as follows:

At some point, Congress may repeal estate taxes completely and permanently. In the meantime, individuals and families with assets exceeding $1.5 million in 2004 and 2005 still need to plan to defer and to minimize estate taxes.

It is essential to note that the estate tax relief does not apply to lifetime gifts. Thus, individuals can make transfers up to that amount during life without paying any immediate gift tax, but the scheduled increases in the estate tax exemption do not shelter lifetime gifts in excess of $1 million.

To take full advantage of the tax relief, married couples may need to “rebalance” their holdings. Failure to plan properly for the increasing exemption can make a material difference. Consider the following example:

John and Mary own assets valued at $3 million. In the unhappy event that John dies in 2004, leaving everything to Mary, who then dies shortly thereafter in 2005, estate tax at Mary's death would be about $700,000. Their loved ones would be left with $2.3 million. If, instead, John and Mary properly plan their estates so that each of them owned $1.5 million in his or her separate name, they can avert all estate tax on their combined estates, leaving $3 million for their loved ones.

Have you considered making your annual gifts to loved ones earlier rather than later in the year because annual exclusion-giving is a “use it or lose it” proposition?

Each year, individuals can make “annual exclusion” gifts to loved ones without any estate or gift tax consequences. Under current law, annual exclusion gifts may be made in amounts up to $11,000 per donee per year. Married couples can double the annual exclusion, even if all of the funds come from one spouse through “gift splitting.” For example, a married couple with two children can transfer up to $44,000 to their two children in 2004 and every year thereafter.

Annual exclusion-giving is a “use it or lose it” proposition. If your clients fail to make annual exclusion gifts in any year, they cannot transfer “makeup” annual exclusion gifts in any later year.

For an individual receiving a gift, nothing beats cash to be invested or spent as the donee sees fit. Some studies have shown, however, that individuals who receive cash gifts tend to spend the money, but individuals who receive gifts “in kind,” like securities, tend to hang onto the gift. The transfer of securities may afford an additional benefit and carry an additional burden. If your client gives away securities that have been beaten down by the market but that are expected to appreciate over time, the donees reap the benefit of the growth of the gift, and such growth escapes estate and gift tax in the client's estate. The donee also will bear the income tax on any capital gain if the securities are sold because the donee's basis in the securities for income tax purposes will be the lower of the donor's cost or the value of the securities on the date of the gift. Under current tax law, long-term capital gains tax generally is assessed at a new and favorable 15 percent rate.

In order to qualify your gifts for “annual exclusion” treatment, the beneficiary must have the present right to enjoy the gift. For example, outright gifts qualify for the annual exclusion. It is possible to transfer annual exclusion gifts to a properly structured trust for the benefit of the loved one.

If the donee has a right to a limited time to withdraw the gift from trust (a so-called “Crummey” trust), the gift qualifies for the annual exclusion. If the donee fails to exercise the withdrawal right, the gift can remain in trust until the loved one for as long as the donor directs.

Annual exclusion-giving also can assist children, grandchildren or other loved ones at planning for the escalating costs of tuition or medical care. Consider the following options:

The direct payment of tuition directly to a school or college on behalf of a student is not a taxable gift and may be paid over and above any annual exclusion giving.

This unlimited gift tax exemption also applies to direct payments for medical care and even medical insurance. The key is that the payment be made directly to the provider of services rather than to the individual benefiting from such services.

By raising these and other relevant personal planning matters with your clients, an advisor does himself and the client a substantial service. Holistic treatment: It's not just for doctors anymore.

Writer's BIO:
Henry M. Grix is a member of the law firm of Dickinson Wright in the firm's Bloomfield Hills, Mich. office. He specializes in tax, estate and business-succession planning.
[email protected]

Gimme Shelter