Estate Planning

Has Your Estate Plan Outgrown You?

If you’re married, you and your spouse have estate planning documents that were prepared before 2009, and the current and projected lifetime value of your estate is less than $5.5 million, or potentially $11 million, your plan may be outdated.


A brief history of the evolution of the estate tax and the estate tax exemption will help you decide if it’s time to consult with your estate planning attorney.

Beginning in 1916, an estate tax was enacted that subjected the net value of an individual’s estate to an estate tax upon death. The net estate value, which includes life insurance proceeds and taxable lifetime gifts, has always been reduced by an exemption amount that’s used to calculate the amount of one’s estate tax liability. It was originally $50,000, fluctuated between $40,000 and $100,000 until 1977, and increased to $600,000 in 1987, $675,000 in 2001, and $1 million in 2002.

The growth of the estate tax exemption accelerated over the next eight years, jumping to $1.5 million in 2004, $2 million in 2006, and $3.5 million in 2009 before landing at $5 million in 2010. With the addition of inflation increases beginning in 2012, the current exemption is $5.43 million.

Estate Tax Reduction Strategies

If you’re married and you and your spouse have “I love you” wills where each of you leaves 100% of your assets to each other upon your death, there’s no estate tax liability when the first spouse dies. This is true regardless of the size of your estate as a result of an unlimited lifetime and estate marital deduction for transfers of assets between spouses.

The estate tax exemption is irrelevant for spouses with “I love you” wills when the first spouse dies – with one important exception. If the value of the survivor’s gross estate exceeds his/her estate tax exemption when he/she dies, his/her estate tax liability can be reduced to the extent that a particular advanced estate planning strategy is part of the couple’s estate plan.

It was common practice for many years for estate planning attorneys to include a provision in a client’s will or living trust that would shelter a portion, or potentially all, of a couple’s estate from estate taxes where the value of the combined estate exceeded the applicable estate tax exemption amount. This could be accomplished through the use of what’s alternatively referred to as an “exemption trust,” “bypass trust,” “credit shelter trust,” or “B trust” provision.

In lieu of simply leaving 100% of your estate to your spouse when you die, a bypass trust provision carves out the value of the first-to-die’s portion of a couple’s estate up to the amount of the estate tax exemption at the time of death. The assets that comprise the calculated value are used to fund a trust that’s separate from, and bypasses, the surviving spouse’s estate. The value of the trust plus any growth in the value of trust assets between the deaths of each spouse is excluded from the value of the surviving spouse’s estate provided that the trust is properly funded and maintained.

Potential Bypass Trust Obsolescence

The use of a bypass trust can result in substantial estate tax savings in situations where the value of the surviving spouse’s estate plus the value of the bypass trust exceeds the estate tax exemption amount at the time of death. The bypass trust must be established as a separate legal entity and maintained in accordance with the terms of the trust. This includes making timely and accurate income distributions from the trust to trust beneficiaries and filing of required annual fiduciary income tax returns.

With the recent escalation of the estate tax exemption from $1 million in 2002 to $5.43 million today, many bypass trust provisions have become unnecessary. This is the case where the current and projected value of a couple’s net estate during their lifetime isn’t expected to exceed the current exemption amount.

Furthermore, beginning in 2013, with the introduction of “portability” rules, unused estate tax exemptions can be transferred to surviving spouses to increase the amount of the surviving spouse’s estate exemption without the use of a bypass trust. This change enables a couple to escape tax on the value of assets equal to double the estate tax exemption, or just under $11 million, provided that an estate tax return with appropriate portability election wording is filed in a timely manner after the death of the first spouse.

Consult With an Experienced Estate Planning Attorney

It’s important to keep in mind that the use of a bypass trust provision may still be appropriate for second marriages where you want to carve out assets for children and/or the use of the “portability” provision is unavailable. Estate planning is complicated with lots of potential traps for the unwary. Consultation with an experienced estate planning attorney is highly advisable before making any changes to existing estate planning documents.

Retirement Asset Planning Retirement Income Planning

Do You Want to RAP or Do You Prefer to RIP?

Retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Most goal-based planning is straight-forward, solving for the amount, and frequency, of payments that need to be made to accumulate a sum of money at a future date using two assumptions: rate of return and inflation rate.

College education planning is a good example of the use of this methodology with a twist. Unlike other planning where the future value will be withdrawn in one lump sum, college costs are generally paid for over a series of four or five years. This complicates the planning since it requires the calculation of the present value of the future annual costs of college at the beginning of college, which in turn becomes the future value that must be accumulated.

Retirement Asset vs. Retirement Income Planning

Retirement planning is a whole other world. For starters, there are two stages of retirement planning, i.e., retirement asset planning (RAP) and retirement income planning (RIP). Until recent years, RAP was the only type of retirement planning and, as such, is what’s considered to be traditional retirement planning. RAP’s focus is the accumulation and “spending down” of assets. Although it’s more complicated, much of the methodology used is similar to other types of goal-oriented financial planning.

While RAP works well in the accumulation stage, it isn’t designed for calculating, and planning for, projected retirement income amounts that need to be available to pay for projected retirement expenses during various stages of retirement with unknown durations. As a result of the uncertainty of traditional RAP as a solution for providing a predictable income stream to match one’s financial needs in retirement, RIP was born.

Retirement Income Planning Issues

In addition to possessing the knowledge and experience of financial planners who specialize in RAP (RAPers?), retirement income planners (RIPers?) require an expanded skill set and associated knowledge to assist their clients with issues that are unique to RIP before and throughout a client’s retirement years. Planning issues extend well beyond asset accumulation and include, but aren’t limited to, the following:

  • Medicare
  • Long-term care
  • Social Security claiming strategies
  • Conversion of assets into sustainable income
  • Income tax minimization
  • Choosing strategies to address gaps in income
  • Retirement plan distribution options
  • Retirement housing decisions
  • Philanthropic
  • Estate transfer

Recommended Timeframe

Retirement planning is a time-sensitive and arduous task that requires a high level of discipline and commitment over the duration of one’s adult years, not to mention specialized expertise. Given the relatively short accumulation period compared to the potential duration of retirement complicated by an unknown escalating cost of living, the RAP phase should begin as soon as possible.

There are always competing goals, including saving for one’s first house and education planning, to mention a couple. All financial goals must be balanced against one another, keeping in mind that the ability to provide for your support – before and throughout retirement – supersedes all other goals.

RIP works best when it’s initiated long before you plan to retire. In addition to the nature and complexity of the various planning issues, this is very important given the fact that historically approximately 50% of all retirees retire before they plan on doing so. Given this reality, a 20-year pre-retirement RIP timeframe is recommended.

Finally, it’s important to keep in mind that RIP doesn’t end the day you retire. The success of your retirement years is dependent upon your ability to employ and adjust RIP strategies for the duration of your, and your spouse’s, if applicable, retirement years.

Do you want to RAP or do you prefer to RIP? As I hope you can appreciate, you need to do both at the appropriate time in your life in order to enjoy your retirement years on your terms.

See Planning to retire? Start with the right question

Retirement Income Planning

Financial Independence vs. Retirement Income Planning – What’s the Difference?

My clients and those of you who have visited my firm, Financial Design Center’s website are familiar with the firm’s mission statement that is prominently displayed on the bottom of each page of the website: Planning, Managing, and Protecting Your Financial Independence™. In addition to emphasizing our comprehensive approach to the financial planning process, i.e., planning, managing, and protecting, it clearly states the endgame – financial independence. This is our raison d’etre and is the focus of everything that we do for our clients.

You may be wondering, “What’s the difference between financial independence planning and retirement income planning and why are you writing a blog about the latter instead of the former?” For those of you who are actually thinking this, great question!

In order to answer this question, you first need to understand the difference between traditional financial planning and financial independence planning. Traditional financial plans are often designed for achieving one or more financial goals that may include buying a home, paying for college, and accumulating sufficient funds for retirement. Since retirement is the last goal chronologically, it is typically “backed into” using whatever resources haven’t been consumed by other goals. Consequently, traditional comprehensive planning may require you to delay your retirement and/or compromise your retirement lifestyle.

Financial independence planning works from the premise that your ultimate goal is the achievement of financial independence. Your financial resources are directed toward this goal through the development and management of a plan designed to provide an ongoing, inflation-protected, tax-favored distribution of income that will ideally enable you to live in the style to which you’re accustomed, while minimizing the possibility that you will outlive your assets.

You may be thinking, “Well, isn’t this financial independence planning stuff really retirement income planning?” Wow, you guys are good! While they are undoubtedly intertwined, financial independence income planning, or retirement income planning, as it is more commonly known and will be referred to from hereon out, is actually a separate and distinct component of the comprehensive financial independence planning process.

While, as previously stated, the ultimate goal of financial independence planning is the achievement of financial independence, it’s a comprehensive process that also includes planning strategies for achieving traditional financial planning goals, including, but not limited to, education, income tax, risk management (i.e., insurance), investment, and estate planning. Like various financial planning goals, the timing of the commencement of retirement income planning is generally specific to one’s stage in life.

Although I employ the financial independence planning process, which includes retirement asset planning, with all of my pre-retiree clients, in order to maximize its effectiveness, I generally begin to engage my clients in thinking about, and acting upon, retirement income planning strategies when they are 20 years from their projected retirement or financial independence planning dates.