Behavior Meets Taxation. Where Are The Tax Laws Going?

 This month, I had the opportunity to sit down with Irvine, CA based Jeffrey Verdon, a nationally recognized trusts and estates and asset protection lawyer who regularly advises affluent families on income tax and estate and gift tax reduction planning, and asset protection planning.  Here is part of my interview with Jeffrey:
Davies:  Jeff, we are in very turbulent times these days.  Investors have no clue as to what to do with the money, the game seems rigged in favor of crony capitalism and the tax laws are in a constant state of flux.  What are you advising your clients to do?
Verdon:  Bob, you hit the nail on the head.  Our affluent clients, who have invested in many of the popular alternative investments of the last decade, such as real estate, hedge funds, private equity, commodities and the like, seem to be a couple of steps behind the market and frustrated watching their capital being lost. As I meet with our clients and their professional investment advisors, the advice that continues to be given to our clients by their investment advisors is to focus on the return “of” capital, not return “on” capital. In other words, stop chasing yields, keep you money in safe investments and wait to see what Congress does about the tax code.  In my opinion, the ability for businesses and investors to plan longer term for where the tax laws are going to settle, will bring certainty to the financial markets and investor confidence.  Also, many of our substantial clients have found safety and refuge in the boring asset called cash value life insurance. Life insurance companies have solid balance sheets, received no TARP money or government bailouts and are paying above market rates (5.35% by one carrier) on the cash value in the policy, along with the death benefit paid to the named beneficiary if the insured dies.  All of the earnings inside the policy are 100% income tax free and can be withdrawn from the policy without any income taxes.
Davies:  Jeff, you know that I am an expert on behavior and clients’ behavior and actions are driven by fears, particular in this market. What are the 3 biggest fears your clients are expressing these days?
Verdon:  That is a very important question.  Estate planning is mostly about providing peace of mind to the client. Once a client has reached some level of financial comfort, the skill set for managing their wealth is quite a different skill set than the skills it took to create it, so most people are in unfamiliar territory.  Besides the volatility of the markets, our clients worry about lawsuits, and they worry their children will be ok and be able to find stable employment and be able to afford to own a home.
Davies:  What are you advising your clients to do?
Verdon:  Last year, Congress and the president passed the largest gift and estate tax benefits in the country’s history. The bad news is they only gave us 2 years to use them.  Two years is not very long, in the tax planning world, to implement strategies to tax advantage of the new rules.  Previously, one could make lifetime gifts up to $1M without incurring any gift tax. Beginning January 2011 and ending at mid-night December 31, 2012, taxpayers may gift up to $5M without incurring any gift tax. On January 1, 2013, the maximum gift that can be made tax free is $1M.  Why is this significant?  Removing $5M of an appreciating asset from the estate, not only saves the death taxes on the gifted assets, as it is removed from the estate, but the future growth on the gifted asset is also removed from the taxable estate. $5M growing at 6% per year, will be worth $29M in 30 years.
Davies:  Are you clients making $5M gifts taking advantage of the new law?
Verdon: Well, yes and no.  Ordinarily, an affluent client will not make a substantial gift to their children, in trust or otherwise, because they might need it in the future. This is the hang over from the 2008 Great Recession.  Generally, in order to make a completed gift for gift tax purposes, the donor must relinquish all use, benefit and control over the gifted asset.  If the donor needs or wants it back, he or she has no way to recapture the gifted asset.
Davies:  So, what are you advising your clients to do?
Verdon:  Recent tax rulings inspired us to design a type of Gift Trust we call the HYCET Trust – Have Your Cake and Eat It Too:  The HYCET Trust gives the client the ability to form an irrevocable trust, in a qualifying jurisdiction, appoint an independent but friendly trustee, and make a completed gift of assets to the Trust, and retain what we call a “discretionary beneficial interest “ in the Trust. This beneficial interest allows the Trustee to make future distributions from the trust to the taxpayer should he or she need or want a distribution and the gift from the taxpayer remains outside of the taxable estate.
There are specific rules that must be followed, but they are not particularly onerous and for those who want to take advantage of the generous but very temporary gift tax exclusion rules, the HYCET Trust could be a very practical solution.
Davies:  If someone wants to receive more information about your  HYCET Trust or the other services your law firm provides, how can they get in touch with you?
Verdon:  Our toll free phone # is 800 521-0464 and my personal email address is: This email address is being protected from spambots. You need JavaScript enabled to view it.. I will be happy to send or email a recent article I wrote about the HYCET Trust or any other subject matter the caller wishes to discuss. I have also just updated our very popular book: Estate Planning for Women Only.  If any of your female readers would like to obtain a copy, we ask for a $5.00 donation all of which goes to support the Wounded Warriors Foundation.
Davies: Thanks Jeffery.

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