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Planning for Long-Term Care

Volume 3, Issue 4

Studies predict that approximately 40% (2 out of every 5) of Americans reaching age 65 will need some type of long-term care (LTC). Some of your clients would prefer to stay at home, no matter what the cost. However, without proper planning, the lack of available services and the staggering price tag for full-time home health care may leave them without that option.

A prior issue of our newsletter provided an overview of planning for Medicaid (Medi-Cal in California). This issue of our newsletter examines additional LTC planning options. Like so many others, this is an area where the planning team needs to work together to develop and implement a unified plan to accomplish each client’s LTC goals and objectives.

Medicare – Don’t Count on It for Long-Term Care

Many seniors think that Medicare will pay for LTC if they need it. That is simply not true. Medicare coverage is limited to: qualified medical expenses (80% of an approved amount for doctors, surgical services, etc.); hospitalization for 90 days per benefit period with a total deductible of $1,024.00 for the first 60 days and a co-payment of $256.00 per day for the remaining 30 days, and an additional one-time, lifetime benefit of 60 days of hospitalization, with a co-payment of $512.00 per day (for a maximum of 150 days).

Medicare only pays for a limited period of “skilled” nursing home care that begins within 30 days following a hospital stay of at least 3 days. The maximum period is 100 days per benefit period. “Skilled” care is that provided under the supervision of a doctor that requires the services of skilled professionals, such as physical therapists or registered nurses. Medicare never pays for any “custodial care,” which is basic personal care and other maintenance-level services. If the patient is eligible, Medicare will pay 100% of the costs for up to 20 days of skilled nursing home care. If the patient is eligible, from day 21 through day 100, the patient has a $128.00 per day co-payment. If a patient stops needing skilled nursing home care, the patient ceases to be eligible and Medicare stops paying. Home health care may be available in limited amounts, but only if “medically necessary.”

For all Medicare benefits there are deductibles and co-payments, which can be substantial. Lifetime limits can be reached in the case of catastrophic illness. Plus, as the cost of Medicare rises, so does the pressure on the government to make it “means tested” instead of a universal program. There are excellent private “Medigap” insurance policies available to cover the gap between Medicare coverage and actual cost.

Planning Tip:  Seniors need to understand Medicare’s limitations. It does not cover hospital costs beyond 150 days, skilled nursing home costs beyond 100 days, or any custodial nursing home or non-skilled home health care.
Planning Tip:  Those eligible for Medicare should be encouraged to buy “Medigap” insurance. However, seniors need to understand that Medigap insurance does not cover LTC that Medicare does not partially pay for.

Self-Insuring LTC Costs

Self-insuring for possible LTC expenses requires a close collaboration of financial planning and estate and tax planning professionals to ensure that there are sufficient assets available to cover possible costs for as long as needed. The collaboration requires a comprehensive look at the overall financial condition of the client, as well as a thorough understanding of the client’s health and wishes regarding care in the event of incapacity.

Planning Tip:  Use a thorough fact-finding questionnaire to assemble all the information needed for the analysis. This will include client assets, current and anticipated income and expenses, and other data, such as where care will occur, the level of support available from family caregivers, and any family history of incapacity. This information will provide the foundation for the planning required to maximize the value of Social Security income, fixed pensions, dividend, interest, and other income streams, along with maximizing tax deductions for things such as medical expenses.
Planning Tip:  For LTC self insurance to work, the client needs a qualified financial planner whose investment strategies will produce asset growth and income sufficient to fund the client’s projected LTC expenses. Armed with knowledge of the client’s assets and projections for income and expenses, the client’s advisors can assess the client’s ability to implement a plan to self-insure LTC and recommend an appropriate investment strategy.

LTC Insurance

Most clients will not be able to fully self-insure for LTC, given the current and projected costs of LTC. Those who cannot but are insurable and can afford the premiums should integrate an LTC policy into their comprehensive wealth plan. Doing so can obviate the need for Medicaid planning later.

Planning Tip:  The two types of LTC policies available are cash payment and reimbursement. The former pays cash to the insured. The latter reimburses the insured for actual costs incurred.
Planning Tip:  Policy benefits to look for in an LTC insurance policy include: nursing home and home care coverage; sufficient daily payouts ($200.00/day is a good start); elimination periods (the number of days you must be in the nursing home before benefits begin, typically 0 to 100 days); duration of benefits (3 years, 5 years, lifetime); renewability (make sure it is guaranteed renewable); waiver of premiums (insured pays no premiums while receiving benefits); and inflation protection. As with life insurance, the older an applicant, the more difficult it is to obtain insurance and the higher the premium for equivalent coverage.

LTC Advanced Planning Strategies

If total LTC self and/or third-party insurance are not options, other options may be considered.

The Medicaid Trust

One currently-effective planning technique is to transfer assets into a “Medicaid” trust. In a Medicaid trust, the trust maker retains the right to all of the trust income for life while irrevocably giving up the right to receive or benefit from any of the trust principal. The assets in the trust are not available to pay for the cost of the trust maker’s LTC.

Planning Tip:  Retaining the right to receive the trust income keeps the trust assets in the trust maker’s estate for estate tax purposes, thereby giving a basis adjustment at death which wipes out any unrecognized capital gain or loss on the trust assets.

By using a Medicaid trust, a senior can preserve capital and still qualify for Medicaid, but only after expiration of the look-back period for the transfer to the trust (which can be as much as 60 months (5 years)).

Planning Tip:  The “penalty period” starts from the date the applicant applies for Medicaid and would be eligible but for the disqualifying transfer. Its length is determined by dividing the state’s average daily private pay nursing home cost into the total of the transfers made during the look-back period.
Planning Tip:  For the Medicaid trust strategy to work, insurance, an income stream, or other assets must be sufficient to pay for LTC if needed during the waiting period before applying for Medicaid.

A Medicaid trust can allow the trustee to distribute principal during the trust maker’s lifetime for the benefit of the trust maker’s spouse, children, or other designated beneficiaries, just not to or for the benefit of the trust maker. Many trust makers choose to maintain the right (called a Special Power of Appointment) to change the current or ultimate beneficiaries of the Medicaid trust by “reappointing” the assets to different family members at a later date.

Planning Tip:  Retaining a Special Power of Appointment prevents the trust maker’s contributions to the trust from being taxable completed gifts at the time of contribution. A distribution of trust principal to a beneficiary during the trust maker’s life is a completed gift.

Making Gifts

If a Medicaid trust is not desired, it is still possible to make “outright” gifts of property, wait until the look-back period expires, and then apply for Medicaid or use other planning techniques to qualify for Medicaid at the earliest possible date.

Protecting the Home

If the home is the only asset to protect, a deed to children or others with a retained life estate for the client will protect both the property and the client’s Medicaid eligibility upon expiration of either 60 months from the date of the conveyance or the applicable “penalty period.” As with other advanced planning strategies, because the penalty period begins only after the applicant has applied for Medicaid and is otherwise eligible, the client must have other LTC funding available to get past the look-back period, or someone willing and able to pick up the LTC costs during the penalty period.

Planning Tip:  If the home is sold while the client is receiving LTC under Medicaid, a portion of the sale proceeds equivalent to the value of the life estate (using Medicaid tables that give a higher value than an IRS life expectancy table) will have to be paid to the nursing home unless protected using other Medicaid planning strategies.

Crisis LTC Planning

Even if the need for LTC is imminent or immediate, sophisticated Medicaid planning opportunities can be employed to protect a substantial portion of the client’s assets. Carefully working within the Medicaid transfer rules can allow clients to provide security for themselves and a legacy to their families, while ensuring that they will remain eligible to receive LTC under Medicaid when necessary. For example, by combining the gifting of assets with the structuring of other asset transfers as an exchange for a secured interest (much like a loan) through the use of a promissory note, private annuity, or Grantor Retained Annuity Trust (GRAT), clients can pay for expenses during the waiting period that begins upon making the gifts. This allows them to channel assets to a trust, or to children and grandchildren, while receiving sufficient income through the note or annuity payments to pay for their care until they become Medicaid eligible.

If the client can live at home with the assistance of home health care, one can transfer assets and qualify for Medicaid immediately to cover home care costs in some jurisdictions. The planning team must exercise caution, however, because home health care may be appropriate initially, but if the client’s condition deteriorates to the point where he or she cannot safely stay at home, nursing home placement may be required. If the client requires this higher level of LTC, he or she must file a new application, and the Medicaid transfer rules will then apply. Thus, when planning for home care, the client and planning team must evaluate the possible need for institutional LTC services before making transfers.

Planning Tip:  Moving in with a relative or family member may be another option for seniors. It may also be advisable for the client to put in place a caregiver agreement and/or personal service contract to make a transfer to a family member as compensation for their providing home care services.


Counseling clients on their LTC options, including the availability of LTC insurance, is an integral part of comprehensive wealth planning. By working together, the planning team can ensure that assets are available as needed to meet each client’s unique LTC planning goals and objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Planning for Unmarried Couples

Volume 3, Issue 3

The 2000 census counted nearly 5.5 million U.S. unmarried couples sharing the same household, almost 8 times the number counted in 1970 and nearly 10% of the 60 million U.S. couple households counted. Of these, many are widows and widowers who choose not to marry for various reasons, and approximately 1% of these unmarried couples are same-gender partners.

Because U.S. and most state laws afford special benefits for those married to a person of the opposite gender, many common planning techniques that take advantage of those benefits simply do not work for unmarried or same-gender couples. As a consequence, the planning needs of the unmarried or same-gender couple is often far greater than that for a married opposite-gender couple with equivalent assets. This issue of our newsletter examines many of the unique planning needs of unmarried and same-gender couples and the opportunities that exist for all members of the planning team in working with these clients.

Unmarried and Same-Gender Couples

Some couples choose not to marry, for example, because of the risk to one partner’s assets if the other needs long-term care, the loss of alimony, or the loss of Military retiree health and other benefits.

Other couples cannot legally marry under the law of their domicile, particularly same-gender couples. While some states (e.g., Massachusetts) and foreign countries (e.g., Canada) recognize and legalize such same-gender unions, U.S. federal law and the laws of many states do not recognize these unions. The federal Defense of Marriage Act (“DOMA”), signed into law in 1996, provides that, for purposes of federal law, marriage is “a legal union between one man and one woman as husband-and-wife” and a “spouse” is defined as referring “only to a person of the opposite sex who is a husband or wife.”

State and Federal Law Considerations

Many state and federal laws clearly favor and provide special priority or benefit to the opposite-gender spouse and blood relatives. Those who are outside those categories have neither rights nor recognition under these laws. Therefore, unmarried and same-gender couples are very unlikely to accomplish their planning goals without knowledgeable professional assistance and counseling. Examples of where state law generally will produce an undesired result in the absence of planning are:

  • Who will be able to make health-care decisions in the event of incapacity?
  • Who will be chosen as a partner’s guardian if one should be needed?
  • Who may take custody of the deceased partner’s body?
  • Who may direct the burial or cremation and disposition of remains?
  • Who will receive the deceased partner’s assets?
  • Who will get what assets in the event of the dissolution of the partnership?

In addition, unmarried couples without children may have different contingent beneficiaries, which also may necessitate more complex planning.

Planning Tip:  Proactive planning is essential to accomplish even the most basic goals of unmarried and same-gender couples because the law’s default provisions generally do not recognize their relationship.

Joint Tenants with Right of Survivorship

Many unmarried and same-gender couples want to leave everything to the surviving partner. Without competent advice, many opt for the apparent simplicity of titling assets in Joint Tenancy with Right of Survivorship (JTROS) to accomplish their objective. JTROS also provides the satisfaction of being similar to ownership by a heterosexual married couple. But, for the unmarried and same-gender couple, titling assets in JTROS has significant pitfalls, risks, and disadvantages.

First, there are the estate tax problems. The law treats a heterosexual married couple as owning JTROS assets 50/50 for purposes of estate taxes, such that only 50% of the value of a JTROS asset is included in the estate of the first spouse to die. In stark contrast, when an unmarried couple own property as JTROS, the law puts 100% of each JTROS asset’s value in the estate of the first to die; the survivor has the burden of proving his or her contribution to the equity of the asset. Not only that, unless the partners’ deaths are within a few years of each other, all of the property will be subject to estate tax, and at full value, in both partners’ estates!

Gift taxes, too, may present a problem. Depending upon the type of property and the applicable state law, changing how property is held may be deemed to be a gift subject to federal and state gift taxes.

Planning Tip:  Unmarried and same-gender couples can create significant federal and state estate and gift tax liability inadvertently by adding a partner to an asset as joint tenant with rights of survivorship.

No Marital Deduction or Marital Gift Tax Exemption

Using the federal marital estate tax deduction, a married person can transfer an unlimited amount of property to his or her spouse upon death. This is the common “A/B” planning used to delay imposition of federal estate tax until the death of the surviving spouse. Such planning is not available for unmarried couples because there is no spouse. With a same-gender couple, DOMA bars even those who are legally married from using this planning technique. Therefore, unmarried and same-gender couples must plan to avoid imposition of estate tax upon the death of the first partner to die.

Likewise there is also no unlimited gift tax exemption for lifetime transfers to anyone but an opposite-gender spouse. Unmarried and same-gender couples cannot transfer assets between themselves to equalize their estates like heterosexual married couples can, because transfers in excess of the annual gift exemption ($12,000 per person per year in 2008) are subject to federal gift tax and must be reported to the IRS. Gift splitting is also unavailable to unmarried and same-gender couples.

Retirement Benefits & Social Security

A surviving partner has no survivor benefit under the deceased unmarried or same-gender partner’s social security. Further, most private retirement plans will not allow a joint retirement annuity with anyone other than an opposite-gender spouse and many will only allow participants to name an opposite-gender spouse or blood relative as a beneficiary. And only surviving spouses can “roll over” an IRA or qualified plan to their own non-inherited IRA.

Planning Tip:  It is critical that the advisor review the retirement plans of each partner’s employer to determine the options available to the partners. This information is necessary to ensure an accurate determination as to not only the planning options available, but also the capital needs of the survivor. Life insurance can replace retirement benefits and social security that are unavailable to a surviving unmarried or same-gender partner.

Generation-Skipping Transfer (GST) Tax Issues

The GST tax is an onerous tax that applies at the maximum federal estate tax rate (currently 45%). If one partner is more than 37 1/2 years younger than the other, that younger partner is a GST “skip” person relative to the older. That means that transfers from the older to the younger partner during lifetime and at death in excess of the annual exclusion will result in the automatic allocation of GST exemption unless an appropriate option exercise is made on the older partner’s gift or estate tax return. Transfers in excess of the exemption and exclusion will be subject to the GST tax. In addition, one partner’s children who are more than 37 1/2 years younger than the other partner are GST “skip” persons for gifts and bequests from that other partner.

Other Considerations

Unlike an opposite-gender surviving spouse, a surviving unmarried or same-gender partner cannot disclaim assets into a trust for his or her benefit. Therefore, an unmarried or same-gender couple must be very careful in planning for the possible use of disclaimers. Also, unlike in divorce, there is no tax-free transfer of asset interests upon the dissolution of the relationship between unmarried and same-gender couples.

Planning Tip:  Disability insurance is often a critical component of any plan for unmarried or same-gender partners because of the statutory bias against those who are not opposite-gender spouses.

How to Plan for Unmarried Couples

Revocable Trusts

Revocable trusts are an excellent tool when planning for unmarried and same-gender couples because these trusts can solve many of the planning dilemmas discussed above. If the trust maker funds his or her assets to the trust during lifetime, those assets are available to care for the trust maker and/or the partner, as the trust specifies, upon the trust maker’s disability during his or her lifetime.

If drafted correctly using a support or “HEMS” (Health, Education, Maintenance and Support) provision, upon the trust maker’s death the surviving partner can access the trust’s assets without subjecting them to additional estate tax at his or her death. Also, the trust maker can determine the ultimate distribution of the trust assets following the death of the surviving partner and even revoke the trust if there is a change in planning goals and objectives. A revocable trust also provides the added benefit of privacy as to the trust maker’s beneficiaries.

Living trusts also avoid automatic court involvement during disability and death. This is important because, as discussed above, there are statutory preferences in any court proceeding for blood relatives, whether or not they share the unmarried couple’s views of their relationship. Moreover, a judge may be biased against unmarried and same-gender couples. A will-based plan opens the couple to court involvement in their affairs, for instance to appoint a guardian or conservator for an incapacitated partner, and typically it is the non-incapacitated partner who has to start the court proceedings. With living trusts, on the other hand, the non-incapacitated partner can be the successor trustee, and the burden will then be on the incapacitated partner’s family to bear the costs and expenses if they want to challenge the incapacitated partner’s planning and trust documents.

Planning Tip:  Properly drafted revocable trusts can ensure that unmarried and same-gender partners’ goals and objectives are met, both in case of disability and after death. With revocable trusts, the burden is on disgruntled blood relatives of the trust maker to sue to set aside the trust, which is usually a difficult and expensive undertaking.
Planning Tip:  A will-based plan virtually guarantees the involvement of the courts, where personal prejudices and statutory preferences may disadvantage the surviving or non-incapacitated partner vis-a-vis the disabled/deceased partner’s blood relatives. Often, a will-based plan will require that the surviving or non-incapacitated partner be the one who begins the court case.

Life Insurance

Life insurance is a particularly useful and often critically important planning tool for unmarried and same-gender couples. In addition to providing income replacement and even wealth creation for the surviving partner, life insurance can provide the liquidity necessary to pay estate taxes, including those that result from there being no marital deduction for such a couple.

If a partner has children, life insurance also can provide funds for distributions to them without diminishing the desired asset transfer to the surviving partner, such as the deceased partner’s interest in the couple’s home. Life insurance can also be used to make sure that the survivor has the cash needed to pay off any liens against those assets.

Planning Tip:  State law determines whether one unmarried or same-gender partner has an insurable interest in the other, but most jurisdictions now recognize an insurable interest with these types of relationships.
Planning Tip:  Life insurance, particularly if owned by an Irrevocable Trust, can help preserve confidentiality by giving blood relatives neither the right nor the opportunity to learn of the existence of the insurance or the amount of policy proceeds received.


Due to the numerous statutory provisions favoring opposite-gender spouses and blood relatives, the planning needs of unmarried and same-gender couples are often far greater than the needs of similar married opposite-gender couples. By working together, the planning team can ensure that unmarried and same-gender couples achieve their unique goals and objectives, both during lifetime and after death.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Planning for the New “Zero Percent” Tax Bracket

Volume 3, Issue 2

This issue of our newsletter addresses a law change that is important to all wealth planning professionals and their clients. Beginning January 1, 2008 and continuing through at least 2010, a zero tax rate may apply to long-term capital gain and dividend income that would otherwise be taxed at the regular 15% and/or 10% rates. The new zero tax rate is available to the extent that the taxpayer’s other taxable income minus exemptions and deductions is less than a specified amount.

The new zero tax rate thus creates the opportunity for eligible clients to sell certain appreciated assets at no tax cost. By coordinating their efforts to ensure that clients take advantage of this opportunity, the planning team can preserve more of the client’s investible assets or provide resources to fund implementation of the planning team’s recommendations.

The Zero Tax Rate

The zero tax rate applies to eligible individual taxpayers who have “adjusted net capital gain.” Adjusted net capital gain is the sum of:

Net capital gain (generally the excess of net long-term capital gains other than collectibles gain, gain taxed on sales of certain small business stock under IRC Sec. 1202, and unrecaptured IRC Sec. 1250 gain over net short-term capital losses, subject to certain limitations),


Qualified dividend income (generally dividend income from domestic corporations and qualified foreign corporations, including dividends from U.S. possessions corporations and corporations eligible for benefits of a comprehensive income tax treaty with the U.S. that includes an exchange of information program; dividends that are not qualified include dividends from foreign investment companies, dividends from stock held for short periods, and payments in lieu of dividends).

Planning Tip:  The zero tax rate does not apply to net capital gains and qualified dividend income of non-grantor trusts, estates, and C corporations.
Planning Tip:  The zero tax rate does not apply to collectibles gain or gain taxed on sales of certain small business stock under IRC Sec. 1202 (both taxed at a maximum rate of 28%), or to unrecaptured IRC Sec. 1250 gain (taxed at a maximum rate of 25%).

Who Gets the Zero Tax Rate?

For tax years beginning January 1, 2008, the zero tax applies to individuals’ adjusted net capital gain to the extent that it does not exceed:

the threshold for the taxpayer’s 25% income tax bracket, minus

the taxpayer’s taxable income other than adjusted net capital gain.

Planning Tip:  Stated another way, the zero rate only applies to adjusted net capital gain to the extent the taxpayer’s other taxable income minus exemptions and deductions is below the bottom of the 25% income tax bracket for that taxpayer.

For 2008, the threshold for the 25% income tax rate is:

  • $32,550 for single taxpayers and married taxpayers filing separate returns;
  • $65,100 for married taxpayers filing joint returns and surviving spouses; and
  • $43,650 for heads of households.

Thus, taxpayers whose ordinary income plus net capital gains and dividend income not included in adjusted net capital gain exceeds their respective 25% income tax thresholds will not be eligible for the zero rate. Conversely, if their 2008 ordinary income plus net capital gains and dividend income not included in adjusted net capital gain is less than their respective 25% income tax threshold, the zero tax rate applies.


Example 1. Tom and Mary Taxpayer file jointly and have taxable income of $60,000 in 2008, comprised of $50,000 of ordinary income and $10,000 of adjusted net capital gain. Since the Taxpayer’s ordinary income is less than the 25% income tax threshold, the zero tax rate would apply to all of their $10,000 adjusted net capital gain.

Example 2. The Taxpayers have taxable income of $75,000 in 2008, comprised of $50,000 of ordinary income and $25,000 of adjusted net capital gain. In this case, $15,100 (the difference between their 25% income tax threshold and their ordinary income of $50,000) would be subject to the zero tax rate, and the balance, $9,900 ($75,000 – $50,000 – $15,100), would be subject to the 15% rate.

Example 3. The Taxpayers have taxable income of $75,000 in 2008, comprised of $70,000 of ordinary income and $5,000 of adjusted net capital gain. Since their ordinary income exceeds the 25% income tax threshold, none of their adjusted net capital gain would be subject to the zero tax rate – all $5,000 would be subject to the 15% rate.

Planning Tip: To the extent taxpayers have a gap between (1) their ordinary income plus net capital gains and dividend income not included in adjusted net capital gain and (2) their 25% income tax threshold, that gap can be taken up by adjusted net capital gain subject to the zero tax rate, even if they have income that is subject to higher rates.

Example 4. Frank and Susan Taxpayor file a joint return with adjusted gross income (AGI) of $225,000, consisting of $105,000 of wages, plus $120,000 of adjusted net capital gain. For 2008, the Taxpayors claim a total of $55,000 in personal exemptions and itemized deductions, resulting in taxable income of $170,000 ($225,000 AGI minus $55,000 in deductions). The zero rate applies to $15,100 of the Taxpayors’ adjusted net capital gain calculated using the formula above as follows:

the $65,100 maximum threshold for joint filers for 2008, minus

their $50,000 of regular taxable income ($170,000 taxable income minus $120,000 of adjusted net capital gain).

The $104,900 balance of the Taxpayors’ adjusted net capital gain ($120,000 minus $15,100) will be subject to the 15% rate.

Planning Tip:  2008 year-end tax planning should pay careful attention to opportunities to use income and deduction timing to make clients eligible for the zero tax rate.

Application of the “Kiddie Tax”

Also new for 2008 is that the “kiddie tax” (which applies to the child at his or her parents’ highest marginal rate on the child’s unearned income over $1,800) affects many more children.

For tax years before 2008, the kiddie tax applied only to children under 14. Effective January 1, 2008, a child is subject to the kiddie tax if he or she is (a) under 18; or (b) age 18, or a full-time student and 19-23 years old, and his or her earned income constitutes one-half or less of that child’s support.

Planning Tip:  If the earned income of a child age 18, or age 19-23 if a full-time student, exceeds one-half his or her support, the kiddie tax rules will not apply and the child will be able to take advantage of the zero rate for long-term capital gains and qualified dividends.


The zero tax rate for adjusted net capital gains presents a significant opportunity for those clients whose ordinary income is less than their 25% income tax rate threshold (no matter how high their other income), as well as clients with college-aged children whose earned income is greater than one-half of their support. Like so many other areas, this is one where the client’s planning team needs to work together to ensure that clients pay the least amount of tax possible while still accomplishing personal goals and objectives. Paying no tax on eligible adjusted net capital gains can provide additional investible assets or increased liquidity to fund the planning team’s recommendations.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Exciting New Developments in Buy-Sell Planning

Volume 3, Issue 1

This issue of our newsletter examines exciting new developments in business succession planning – specifically, the use of LLCs or partnerships to own life insurance for buy-sell planning purposes. Such a structure obtains the advantages of cross-purchase and stock redemption buy-sell agreements without many of the disadvantages of either traditional structure. This development is significant to all wealth planning professionals and their business-owner clients.


For many business owners, the business itself is their primary source of income both during working years and in retirement. Thus, buy-sell planning is critical for not only death planning but also disability and retirement planning during lifetime.

Unfortunately, the two traditional types of buy-sell agreements ((1) stock redemption (aka entity purchase) and (2) cross-purchase agreements), have significant limitations and disadvantages that often prevent business owners from adequately preparing for many business succession issues.

Stock Redemption (Entity Purchase)

With a Stock Redemption arrangement, the corporation owns the life insurance and agrees to redeem the shares of a deceased shareholder at that shareholder’s death. The shareholder in turn agrees that his estate will transfer the shares back to the corporation for an agreed-upon price.

The advantages of this arrangement are:

  1. The simplicity of only one life insurance policy per shareholder;
  2. The shareholders allocate all premium costs according to their percentage ownership in the corporation; and
  3. This arrangement ensures compliance with the terms of the buy-sell agreement.

The disadvantages of stock redemption arrangements are many:

  1. There is no change to the surviving shareholders’ basis at the owner’s death so the surviving shareholders will incur larger capital gain tax upon a lifetime disposition;
  2. The insurance policies are subject to attachment by the corporation’s creditors;
  3. If the corporation is a C corporation, the death proceeds may also be subject to the alternative minimum tax (AMT);
  4. If corporate-owned buy-sell policies are over-funded to provide non-qualified retirement benefits to the owners, the benefits are generally subject to income tax; and
  5. Potential taxation on redemption of the stock to the extent of earnings and profits where the attribution rules of IRC Sec. 318 apply.

If the corporation is an S corporation, the results of a stock redemption arrangement are better, because the AMT and attribution rules do not apply where the business has always been an S corporation. Also, the life insurance cash value and death proceeds give the shareholder some stock basis adjustment, reducing the amount of capital gain tax that may be triggered on a sale during life or at death.

Planning Tip:  Stock redemption arrangements require only one policy per shareholder and thus cost less to implement, but have significant disadvantages as compared to cross-purchase arrangements.


Under a cross-purchase arrangement, each owner/shareholder owns a policy on every other owner, and each surviving owner agrees to buy the deceased owner’s interest directly from the deceased owner’s estate.

The advantages of this structure are:

  1. The survivors use income-tax-free death benefit to buy stock directly from the decedent’s estate, thereby increasing their average share basis;
  2. Use of the “wait and see” approach allows surviving shareholders to keep the insurance proceeds for themselves to the extent that retained corporate earnings are available to effectuate a redemption; and
  3. Policies are protected from the corporation’s creditors.

The disadvantages of cross-purchase arrangements are:

  1. The number of policies required to accomplish funding (each owner must own a policy on each other owner) quickly becomes unwieldy as the number of shareholders increases;
  2. Policies are subject to attachment by the owner’s creditors;
  3. An owner may fail to pay premiums or refuse to pay death benefits pursuant to the buy-sell agreement;
  4. The premium burden is allocated based on the cost of insurance of each other owner; and
  5. Application of the transfer-for-value rule (when surviving owners purchase from the deceased owner’s estate the policies on the other survivors) or need to buy new policies to cover increased values.
Planning Tip:  Cross-purchase arrangements also have significant disadvantages. For many clients, the number of policies required for funding and the unequal cost burden are simply too big of a hurdle for implementation.

Use of LLCs to Structure and Fund Buy-Sell Agreements

In a recent Private Letter Ruling, PLR 200747002, the IRS accepted a strategy that has the advantages of both cross-purchase and redemption agreements without the disadvantages of either. With this structure, the shareholders execute a cross-purchase agreement and form an LLC, taxed as a partnership, to own the life insurance. The cross-purchase agreement and LLC operating agreement have provisions that reference each other.

Special provisions of the LLC include:

  1. The LLC manager is a corporate trustee, and any replacement must be a corporate trustee;
  2. Members cannot vote on life insurance matters;
  3. The manager must use life insurance proceeds as required in the buy-sell agreement; and
  4. The LLC must maintain a capital account for each member, with special allocations of premiums and proceeds.

Upon examination of this structure, the IRS ruled that the life insurance death proceeds would not be includible in the estate of the deceased LLC member. Thus, this structure contains the advantage of the traditional buy-sell structures without the disadvantages.

Planning Tip:  Using an LLC to own life insurance for buy-sell funding purposes accomplishes the buy-sell objectives without causing many of the adverse income tax consequences and without causing estate tax inclusion.

“LifeCycle” Buy-Sells

This ruling adopts an approach similar to the “LifeCycle” Buy-Sell Agreement, first written about in “Using a General Partnership to Structure and Fund Buy-Sell Arrangements,” by James C. Peterson and William S. White, from the January 2000 issue of the Journal of Financial Service Professionals.

There are some differences, however, between the PLR and “LifeCycle” structures, in particular:

  1. The PLR uses term insurance – LifeCycle uses cash value insurance to also accomplish retirement planning objectives;
  2. The PLR limited its ruling to funding a death buyout – LifeCycle can also be used for non-qualified retirement benefits; and
  3. The PLR LLC has a more restrictive operating agreement – for example, LifeCycle does not require a corporate trustee as manager (only requires an independent trustee) and restricts a member against voting only on policies on that member’s life. Counsel who submitted the PLR believes that these more restrictive provisions are only necessary for those seeking a letter ruling.
Planning Tip:  Using an LLC or partnership to own insurance for buy-sell funding purposes eliminates the tax and other disadvantages of both cross-purchase and stock redemption agreements. Further, this structure requires only one policy per owner, making it a more attractive structure from the business owners’ perspective.


Buy-sell planning is critical for business owners, but many defer implementation of a business succession agreement because of either the cost or tax disadvantages, or both, of the traditional buy-sell structures and common alternative. Use of an LLC or partnership to own the life insurance for a buy-sell arrangement eliminates both of these impediments and thus is much more attractive to business owners.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Opportunities with Planning for Pets

Volume 2, Issue 12

For many clients, pets are members of the family. These clients often say that if something happens to them, they are more concerned with what will happen to their pets than to their children or spouse.

This issue of our newsletter examines the issues surrounding caring for pets after the disability or death of the pet’s owner. Given many clients’ feelings towards their pets, and the costs of care and longevity of some types of pets, this is an area where the planning team can differentiate itself and provide real client value while also generating additional revenue for multiple team members.

What Will Happen to the Pets When the Owner Becomes Disabled or Passes Away?

Most pet owners do not want their pets killed if something should happen to them. However, without proper planning, the death of the pet is almost certain in some areas. For example, in some Nevada counties, if the client does not provide for a pet by way of a trust, when the client dies Animal Control must take the pet to the local kill shelter if there is not a family member present who is willing to care for the pet. Some kill shelters euthanize animals 72 hours after they arrive at the facility, making it virtually impossible for anyone to adopt the pet. Clients can avoid this unintended and unfortunate result by creating a trust that names a caregiver for their pets.

Planning Tip:  Research how your state or county laws affect pets after the owner dies or cannot care for the pet. Help your clients to provide caregiver information to their local Animal Control so that, when the time comes, Animal Control can contact the caregiver(s) to retrieve the pet.
Planning Tip:  Provide your clients with a Pet

Alert Card including the owner’s name, number of pets, and multiple caregivers’ names and phone numbers. Laminate the card and ask each client to place it in their wallet behind their driver’s license. If something happens to the client, someone searching for their identity will see the Pet Alert Card and know there are pets that need care.

Providing for Pets Upon the Owner’s Death

Outright Gifts

The law treats pets as property. Because property cannot own other property, money and other property cannot be left or transferred outright to a pet. One can transfer or leave assets to a caretaker with the request that the caretaker care for his or her pets. However, because the caretaker receives the gift outright, no one is responsible for ascertaining whether a pet is receiving the care requested by the pet owner.

Once the caretaker receives the gift and the pet’s owner is gone or incompetent, there is nothing to stop the caretaker from having the pet euthanized, throwing it out on the street, taking it to a local kill shelter, or using the assets in ways unrelated to the care of the pet. In addition, once in the caregiver’s hands, the assets are exposed to the caregiver’s creditors and they may be transferred to a former spouse on the caregiver’s divorce.

Statutory Pet Trusts

As of August 1, 2007, thirty-eight states and the District of Columbia have enacted statues pertaining to pet trusts, and others have legislation pending. (See Beyer Animal Statutes for a listing of all states’ pet statutes.) These statutes allow virtually any third party designated by the terms of the trust to use the trust funds for the benefit of pets.

Some state statutes specifically limit the terms of a pet trust. For example, some states limit the amount of money an individual can leave in trust for their pet. In those states that have adopted the Uniform Trust Code’s pet trust provisions, the amount of money an individual can leave in trust for a pet cannot exceed the amount required to care for the pet over the term of the trust. The trust must distribute any excess funds to the person(s) or charity(ies) who would have taken had the pet trust terminated.

In making this determination, the level of pet care the owner provided determines the endowment amount required to provide care for the pet. Factors include: the cost of daily care (food, treats, and daycare), veterinary care (yearly teeth cleaning, shots, nail trimming, and emergency care), grooming, boarding, travel expenses, and pet insurance. Additional factors may apply in particular cases. For example, horses are expensive to maintain and require exercise, training, and a large tract of land; some birds and reptiles have very long life expectancies; and care of some pets will require construction of a special habitat on the caregiver’s property.

Traditional Trusts

Even if your state does not have a specific pet trust statute, a pet owner can name a human caregiver as the beneficiary of a trust, require that the distributions to the beneficiary are dependent on the beneficiary caring appropriately for a pet, and require the trustee to ensure that the beneficiary is properly caring for the pet using trust assets. This type of trust may be used without regard to whether the state has a specific pet trust statute.

Planning Tip:  Both statutory pet trusts and traditional trusts allow the pet owner to provide detailed requirements as to how the caregiver must care for the pets upon the pet owner’s disability or death.
Planning Tip:  Will planning is inadequate for pets because it does not address disability and because of the time lapse between death and the will being admitted to probate.

Funding Pet Care

Many pet owners do not have sufficient funds to properly care for their pets after their disability or death. Life insurance is one way to increase funds available to care for pets after the pet owner’s death.

Planning Tip:  Life insurance that names a pet trust or traditional trust as a beneficiary is an ideal funding mechanism. If the client is concerned that funding of a pet or traditional trust will reduce the children’s inheritance, the client can increase the amount of life insurance and name as beneficiaries both (1) the pet or traditional trust and (2) the children (or a trust for the children’s benefit).
Planning Tip:  Financial advisors, when determining wealth accumulation needs, should take into consideration the care needs of a beloved pet. Use of pet or traditional trusts to provide pet care also gives the financial advisor the opportunity to continue to manage the trust assets after the client’s death or disability.

Trust Terms

In addition to stating that it is the client’s intent to create a trust for the benefit of (or to provide funds adequate for the care of) his or her pet, the trust should specifically name a succession of caregivers/beneficiaries and a separate trustee to ensure that the serving caregiver/beneficiary is properly caring for the pet. The trust should also allow the trustee to reimburse the caregiver/beneficiary for all pet expenses with proper documentation, have access necessary to determine whether the pet is receiving the intended care, and withhold distributions to the caretaker/beneficiary if the pet is not receiving the intended care. If your state statute does not limit the trust terms, the client can include anything that is not illegal or against public policy.

Here are several issues for client consideration:

  • Creating a pet panel to offer guidance to the trustee and caregiver/beneficiary, and to remove and replace the trustee and caregiver/beneficiary, if necessary. Consider including a veterinarian to make the final decision regarding euthanization for medical reasons, to ensure that the pet is not euthanized prematurely by the caregiver/beneficiary.
  • Paying the caregiver/beneficiary a monthly fee for caring for the pet or allowing the caregiver/beneficiary to live in the client’s home, rent free.
  • Awarding a bonus to the caregiver/beneficiary at the end of the pet’s life as a “thank you” for taking care of the pet.
  • Determining how the trustee is to distribute the remaining trust funds after the last pet dies.

If the client chooses not to create a pet panel to determine who will be a successor caregiver/beneficiary, the trust should name multiple successor caregivers/beneficiaries (three or more) in case a caregiver/beneficiary is unwilling or unable to serve. As a final back-up, the client should consider requiring the trustee to give the pet to a no-kill animal sanctuary if there are no caregivers/beneficiaries available. This can literally save the pet’s life.

Pet Identification

To prevent the caregiver/beneficiary from replacing a pet that dies to continue receiving trust benefits, the pet owner should specify how the trustee can identify the pet. The client should consider micro-chipping the pet or having DNA samples preserved for verification.


You may encounter pet owners who want their healthy pets euthanized when they become incapacitated or die, thinking “no one can care for my pets as well as I do.” However, many states’ courts have invalidated such euthanasia provisions on the basis that destruction of estate property is against public policy. In these states, encourage clients to consider using no-kill organizations that have the pet’s best interest in mind and will find the next best home for their pets. Again, this is a state-specific question and thus it is critical that advisors know their state’s laws in this area.


Many clients are oblivious to the issues surrounding the care of their pets after their disability or death. By raising this issue with clients, the planning team can differentiate itself and provide value in an area that is significant to many clients, while also creating additional revenue for multiple team members.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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