Automating Your Client Follow-Up Sequences This New Year

By: Darlynn Morgan
www.MorganLawGroup.com
Member of WealthCounsel

The New Year is a great opportunity to start fresh and overhaul many of the systems and processes used to follow up with clients in your law firm.  It’s also a great time to automate such tasks to ensure your follow up happens effortlessly and that no client or prospect gets left behind.

The Power of Consistent Follow-Up

Follow-up should be a foundational piece of your overall marketing strategy, as it’s the best way to keep leads “warm” while continuing to nurture them through their skepticism and objections.  It’s also a great way to combat “buyers remorse” and keep clients enthusiastic about working with you and paying your fees.

But the key to great follow-up is that it must be regular, consistent and happen the same way with every single lead or client, every single time.

If you don’t have a follow-up system in place, or you are only following up with people sporadically at best, now is a great time to get serious about it and stop leaving money behind on the table.

How to Create a Comprehensive Follow-Up Sequence

A great follow up-sequence will touch clients or prospects multiple times, using multiple mediums.  

Once you’ve identified the type of communication you would like your clients and prospects to receive, you can begin to create templates and scripts that will keep them engaged and moving along in your sales process.

How to Automate Your Follow-Up Sequences

The best way to automate your follow-up sequences is to use a robust CRM or practice management program. There are many platforms out there that will allow you to push a button and trigger a sequence that ensures all of the follow-up you have created reaches your prospects or clients at designated times.

Of course not every task can be handled via a practice management platform or CRM, but you can also use such programs to send automatic “tasks” to your staff or a fulfillment house/printer, so that they are reminded when there is someone to call or send a physical mailing to.

The important thing is not to be intimidated by CRM or practice management programs.  These are certainly advanced platforms, but with a bit of patience or help from your program’s customer service department, you can get things rolling relatively quickly.  And if you’re really stuck or prefer not to mess with it, this is one area that you can safely delegate out!

Commit To Regular Communication in 2012

I’ve heard many people say, “the fortune is in the follow-up” and it’s true when you start to notice the impact regular, consistent communication will have on your bottom-line.   Prospects will feel nurtured, clients will feel important and you will reap the rewards without adding a single, extra task to your plate.  It’s a great way to maximize the results from leads and clients you are already attracting to your law firm this year!

About the Author:

Darlynn Morgan is the founder of Morgan Law Group, an Orange County law firm specializing in estate planning for the entire family. Her straightforward and easy to understand legal advice has been featured in a number of publications including Forbes.com OC Metro Magazine, LifetimeTV.com, The Daily Journal and the OC Register. She was named a Super Lawyer by Southern California Magazine in 2007, 2008 & 2010 & 2011, which is awarded to the top 5% of lawyers in southern California, in addition to being named a top OC Attorney by OC Metro Magazine in 2010. For more information on Darlynn Morgan, please visit http://www.morganlawgroup.com

Editor's Notes:

Learn more about WebSource - an automated contact management system to stay in touch with referral sources and clients.

Join us for our Thought Leader Series Webcast, How Good Estate Plannners Become Great Marketers on Tuesday, March 6, 2012 from 1:00 - 2:00 PM ET.

The Private Trust Company

Cecil Smith, JD Apperson Crump PLC Member of WealthCounsel

Carol Gonnella, JD Gonnella Adamason, PC Member of WealthCounsel

Another Alternative for Your Client’s Choice of Trustee

As estate planners, we create trusts for our clients in part because of the federal and/or state transfer tax laws, to protect from lawsuits, divorcing spouses and ex-spouses, and to provide guidance and structure for future generations.  When designing a trust, our clients often hit a stumbling block when deciding who should be the trustee.  Many clients have become disillusioned with large public trust companies acting as the trustee because of their lack of personal contact, their fees, and on occasion, their lack of attention to the investments within the trust. Our clients understand that ownership must be relinquished and control must be compromised to avoid gift and estate taxes.  However, many of our clients want to retain as much control as possible without owning the property.  For the client in this situation, a Private Trust Company (PTC) may be the perfect solution.

What is a PTC?  A PTC is in essence a business entity that provides trust services for one family.  Only a handful of states actually allow PTCs, and it is very important to study the requirements of each state to ensure the PTC is properly formed and governed.  Generally, the PTC is prohibited from serving as a trustee or of transacting business with the general public. Because of this restriction, there is no necessity for strict state regulation and oversight as there is of a public trust company servicing a multitude of customers.  It is a family owned enterprise that combines the attributes of institutional and individual trustees and can provide many of the same services as an institutional trustee.  However, a PTC can have advantages over an institutional trustee in the following areas:

1. Control.  Families can retain greater control. Family members can be on the investment committee and, with some qualifications, on the distribution committee. 
2. Succession.  The PTC can be perpetual.
3. Retention.  The PTC may retain investments that an institutional trustee may be inclined to liquidate.
4. Liability.  Individual trustees may be exposed to unlimited personal liability. The board of directors of a PTC has less exposure to personal liability.  In this context, it is important to choose a jurisdiction having very rigid creditor rights prohibitions for the entity chosen to be the PTC.
5. Investments.  The PTC can enhance its investment opportunities by creating common trust funds.
6. Fees.  The PTC may have fees that are less than those charged by an institutional trustee.

There are several states that allow PTCs, but only Nevada, New Hampshire, South Dakota, Texas, and Wyoming are states that have not only favorable tax laws and modern trust laws, but also specifically allow PTCs.  PTCs may be regulated or unregulated, and the practitioner is advised to research the laws to the chosen state to determine which status is most attractive for a particular client.  In addition, there may be capital requirements and fees that must be paid for a PTC, which vary with the state requirements.  There may also be intestate issues and SEC issues to be considered.  The family should be specifically defined in the operating agreement of the PTC and the Articles of Organization (if an LLC is chosen as the entity) should specifically state that the PTC is being used exclusively for a particular family.

For an unregulated PTC (which is what is chosen by most clients), there are few state mandates as to what kind of “presence” is needed by the PTC in the state.  All states require a registered agent to represent the entity of the PTC in the state. However, it is recommended to have more of a presence than just the registered agent.  These contacts could include:

1. Board of Director meetings in the state where the PTC is sited.
2. Having a bank account in the state where the PTC is sited.
3. Having an office in the state where the PTC is sited.
4. Having one of the directors be a resident of the state where the PTC is sited.
5. Having some tasks of the PTC be performed in that state.

The structure of the PTC should comply with Notice 2009-63, issued by the IRS in July of 2008.  A suggested structure is as follows:

1. Board of Directors.  This board may be composed of family and non-family members.
2. Investment Committee.  This committee is responsible for prudent investments of the trusts wherein the PTC is the trustee.  If there are concerns about SEC requirements, this committee could be a public trust company.
3. Discretionary Distribution Committee.  This committee makes distributions from the trusts pursuant to trust guidelines.  Care must be taken that family members serving on this committee are carefully chosen not to run afoul of the requirements in the above Notice. 
4. Amendment Committee.  This committee has the authority to amend the PTC’s governing documents.  It is somewhat akin to a Trust Protector.

Within the structure of the PTC, one should use caution to insure that personnel decisions are made by the appropriate person and that there are no reciprocal agreements between family members that could affect distribution decisions.  

PTCs are not “plain vanilla” strategies for every client.  But for the appropriate client, PTCs can provide families with greater control, fewer fees, and maximum trusteeship viability for the family…now and into the future. 

Editor's Note:

 

The Marketing Assistant: What Do Great Marketers Know That You Don’t?

Mark Powers Atticus, Inc.

Shawn McNails Atticus, Inc.

As marketing advisors and coaches, one question we constantly grapple with is this: how can good lawyers become great marketers? Driven to distraction by constant interruptions, difficult staffing issues and demanding clients, most attorneys don’t take the time – to do what it takes.

Yet, many of our attorney clients are very good at marketing when placed in the right situations. It’s getting them there that’s the problem. Making phone calls with contacts often involves a lot of phone tag, calendaring client development events takes time, planning the basic logistics of marketing is distracting. As a rule, attorneys aren’t very good at the initiation phase of marketing.

At Atticus, we believe this phase is essential – without someone to initiate and organize these steps, most marketing efforts will never get off the ground.

“If you aren’t successful in setting up lunches, dinners and meetings with referral sources, your client development efforts aren’t going to be very strategic,” Shawn McNalis, one of our practice advisors, says. “If you’re not meeting with the right people, then you’re relying on nothing more than happenstance to promote your practice. Happenstance will take you only so far. We advise our clients to take a more proactive approach.”

Large firms can rely upon marketing directors to deal with client development. But what does the small firm practitioner do?

Enter the Marketing Assistant. When Atticus’ client Mark Chinn, an attorney from Jackson, MS, had difficulty marketing himself, he sought change. That change came to him in the form of a young college student, studying marketing at a local junior college.

For a number of months Chinn had been listening to mepromote the idea of leveraging himself by hiring a marketing assistant. Though his new assistant had little experience, Chinn immediately noticed the difference hiring a marketing assistant made to his practice. Every morning, armed with a list of contacts, she and Chinn would have a short meeting to strategize, set up lunches and plan client development events. They also focused on placing articles about his firm in both local and statewide newspapers.

To accomplish this last task, they compiled a list of publications and set up the list as an e-mail group in their database system. Consequently, whenever something newsworthy happened in Chinn’s office – a new promotion, a new award – his marketing assistant could automatically distribute the news to the state or local press.

“She was so ambitious and proficient. Any assignment I gave her came back to me ten fold,” Chinn explained.

Rick Law, an estate-planning attorney in Aurora, Illinois, also found it time consuming to market his practice to prospective referral sources. To overcome this obstacle, he hired a marketing assistant, Jonathan Johnson, who instantly impressed Law with his initiative and drive. Formerly a manager at a title-insurance company, Johnson used his background in sales to assist Law in his marketing efforts.

Since hiring Johnson, Law’s marketing efforts have been revitalized. “Attorneys can tend to be a little…prickly or porcupiny in our attitudes,” Law admits. “With my marketing assistant, there was a complete lack of that. It was very refreshing to me to see this outsider help implement some of my ideas, but also bring fresh new ideas for marketing my practice.”

Recently, inspired by one of the other Atticus Rainmaker participants, Johnson created an event for Rick Law’s top referral sources. Similar to a Spanish tapas dinner the evening’s menu featured many small dishes instead of one main course. “It was different, but the idea was received quite well. We limited it to our top referral sources, which fit perfectly with our clientele – mostly caregivers and nursing home professionals. Without my marketing assistant, this event would never have gotten off the ground,” Law said.

To leverage your marketing efforts by working with a marketing assistant, consider delegating a number of different client development activities:

• Schedule lunch/breakfast marketing meetings
• Manage your database of clients and referral sources
• Plan and manage parties, seminars and other group events
• Build and manage TOMA program – newsletter, email, birthday list
• Assist in preparation for speaking engagements
• Prompt you to write thank you notes
• Deliver gifts and buy tickets for your referral sources
• Prompt you into action when you stop marketing

There are several different ways for small firms to employ a marketing assistant. For $8 to $15 per hour, depending on your location, you can hire someone to work for you part time, such as Mark Chinn’s college student. If you require more support, hire someone full-time, as Rick Law did, or draft one of your existing staff members to help.

This last option is the most popular among my clients, but I’m particularly fond of contracting with virtual marketing assistants. Consider this option if you have limited office space or are not interested in hiring another employee. Since virtual marketing assistants work from their homes or remote office locations, a law firm doesn’t have to free up office space or include them on the payroll. The firm can specify how much time they need on a weekly, monthly, or per project basis. Virtual marketing assistants are paid $30 - $45 per hour, depending on their qualifications. I currently work with several virtual assistants who will work as little as 10 hours, or upwards of 80 hours per month, depending on my need for their services.

No matter how you set it up, this is an idea that works. We have identified the 21 most important Marketing Assets that a rainmaker must acquire to be successful, and I rate having a marketing assistant third overall in effectiveness.

In the words of Rick Law, “If you work with your marketing assistant to plan two or three marketing contacts a week, by the end of a year you’ll have made a hundred to a hundred and fifty marketing contacts. If that many marketing contacts a year won’t stimulate new business, nothing will!” I couldn’t agree more. If you are too busy to initiate client development activities, don’t despair – delegate.

About the Authors:

Mark Powers, President of Atticus, Inc., and Shawn McNalis co-authored How Good Attorneys Become Great Rainmakers and Time Management for Attorneys, and are featured marketing writers for Lawyers, USA and a number of other publications. To learn more about the work that Atticus (www.atticusonline.com) does with attorneys or the Atticus Rainmakers™

Editor's Notes:

Join us for our Thought Leader Series Webcast, How Good Estate Plannners Become Great Marketers on Tuesday, March 6, 2012 from 1:00 - 2:00 PM ET.

 

An Overview of Battley v. Mortensen: The End of Domestic Asset Protection Trusts?

Jennifer L. Moccia, JD, LL.M.
Rack & Olansen, P.C.
Member of WealthCounsel

In early 2011, a landmark federal bankruptcy case shed doubt on the asset protection powers of the previously lauded domestic asset protection trust (DAPT), alarming many attorneys and distressing certain of those trust wielding clients. In a decision filed by the United States Bankruptcy Court for the District of Alaska on May 26, 2011, Judge MacDonald set aside Thomas Mortensen’s transfer of real property to an Alaska asset protection trust as a fraudulent conveyance. Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD (2011). This case deviated from previous DAPT holdings because, not only was Mortensen deemed solvent at the time of the transfer, but Alaska’s four-year statute of limitations for reaching the assets transferred to the DAPT had already run. This controversial ruling has sparked heated debates among estate planners on whether its outcome could invalidate thousands of trusts formerly thought to provide exceedingly reliable asset protection.

Following his costly divorce in 1998, Thomas Mortensen personally drafted the “Mortensen Seldovia Trust (An Alaska Asset Preservation Trust)” in February of 2005. Mortensen had admittedly “not recovered from the financial carnage” of his divorce, and created the trust to hold and protect his recreational real property located in Seldovia, Alaska, worth approximately $60,000 at the time of the transfer. His mother also gave him $100,000 “to transfer the property to trust because she wanted to preserve it for her grandchildren.” In April of 2009, Mortensen became ill, accrued mass ive credit card debt and filed for Chapter 7 bankruptcy in August of the same year. He disclosed $26,421 in assets on the itemized personal property list provided to the Court, but did not include his interest in the DAPT (although he revealed the existence of the trust).

Despite Alaska’s four-year statute of limitations for reaching assets transferred to a DAPT, the Court applied federal law, which includes a ten-year statute of limitations from the date a bankruptcy petition is filed for setting aside a fraudulent transfer if the transfer was made with “actual intent to hinder, delay, or defraud” a creditor. See Bankruptcy Code Section 548(e). Therefore, the remaining issue to be decided was whether Mortensen made the transfer to his trust with the actual intent required to set aside the transfer.

Since, by the terms of the DAPT, the purpose of its establishment was “to maximize the protection of the trust estate or estates from creditors’ claims,” the Court held that the transfer was made by Mortensen with the clear intent to hinder, delay or defraud his creditors. Although Alaska law also states that “a settlor’s express intention to protect trust assets from a beneficiary’s potential future creditors is not evidence of an intent to defraud,” the ten-year statute of limitations under federal law was enacted in order to close this self-settled trust loophole, and the Court followed this legislative intent. In determining Mortensen’s actual intent, the Court not only looked to the purpose provision within the trust, but also considered his continual steady decrease in income, mounting credit card debt, statements of financial strife after his divorce and his lost stock market investment of the $100,000 from his mother (rather than using the funds to pay off his substantial credit card debt). Thus, the transfer to the DAPT was set aside and the recreational property was sold to satisfy his creditors.

Is this ruling the beginning of the end of DAPT planning, or was this merely an advisory, fact-specific ruling that provides additional clarity to the current DAPT rules? Lawyers are split as they speculate whether this outcome was a fluke or the new reality. Although the Court did not uphold Alaska’s four-year statute of limitations to prevent Mortensen’s transfer from being set aside, the four-year rule is still effective and powerful against claims for assets held by a DAPT. However, when Mortensen erred by filing for bankruptcy without consulting an attorney, he unknowingly exposed himself to the Bankruptcy Code and its ten-year “clawback” rule. Had he not filed, Mortensen would have remained protected by Alaska’s four-year rule. Despite the concern that this case signals the end of the utility of all DAPTs, many argue that Mortensen was simply a case of bad facts with an unsurprising result, given that the debtor elected to file for bankruptcy prior to the expiration of the ten-year statute of limitations, and openly admitted that the trust was created to protect his assets from creditors – the very intent that is required by federal law to set aside the transfer!

Ultimately, Mortensen was not a proper candidate for a DAPT since he had waning anticipated income, almost no net worth beyond the Alaska recreational property and escalating debt. While some contend that the sky is falling and landmines are erupting in the realm of DAPTs, this case provides clarity and guidelines for properly establishing an asset protection trust. Rather than contributing to uncertainty, the Court ultimately validated those DAPTs that were not established to defraud creditors, as well as those trusts established more than ten years prior to filing for bankruptcy, regardless of their purpose. In light of this holding, DAPTs remain an effective asset protection strategy when properly marketed, drafted and implemented.

About the Author:

Jennifer L. Moccia, an associate at Rack & Olansen, P.C., received her B.A. in Psychology and Business Management from the College of William and Mary, her J.D. from Regent University School of Law, and her LL.M. in Estate Planning from the University of Miami School of Law. She is a member of the Virginia State Bar, and was elected to the Board of Governors for the VSB-YLC. Jennifer is also a member of the HREPC, the American Bar Association Real Property, Trust and Estate Law Section and is an Accredited Veterans Affairs attorney.

Editor's Note:

Search Social Media Sites to Locate Beneficiaries

Ethan J. Wall, Esq.
Richman Greer, P.A.

Have you experienced frustration with locating a beneficiary during the administration of an estate?  Finding a lost beneficiary can be time-consuming and prolong the execution of the inheritance. You probably employ several methods to search for a missing person, but have you considered searching social networking sites?            

Social media sites like Facebook, Myspace, and LinkedIn are also a great place to search for a lost beneficiary. These sites allow you to search for a specific beneficiary by name, and narrow your search city or hometown, schools attended, graduation year, and various associations the beneficiaries may be connected with. While you should be cautious to ensure you are not fooled by an imposter (a fake social media profile), these profiles are not very common.  With a little practice and creativity, locating lost beneficiaries through social media sites may help expedite the process, locating lost beneficiaries through social media sites may help expedite the process, and can be an additional beneficial tool in searching for a missing beneficiary.

Editor's Note:

Connect with WealthCounsel on Facebook, Twitter, and LinkedIn and receive up-to-date information, participate in real time discussions and connect with your colleagues.    

Want to know more about how to engage in social media channels?

Read WealthCounsel's FAQ and view our short webinars on how to get started with Facebook, Twitter, and LinkedIn.

Creating an Exit or Succession Plan for Your Business

Peggy Hoyt, JD
The Law Office of Hoyt & Bryan, LLC
Member of WealthCounsel

It has been said that seventy percent (70%) of Americans have done no estate planning.  I would suspect this number may be even higher among business owners when it comes to creating an exit or succession plan for their business. 

One of my clients was the exception to this rule.  Three businessmen were very successful in the construction industry when the economy was booming.  They understood the importance of having a plan that would address what would happen to their respective business interests if any of them became disabled or died.  They engaged my services for the purpose of educating themselves about their planning options, developing the strategy for the plan and then implementing the plan through the creation of legal documentation.  And, they were even diligent enough to fund the plan with life insurance they felt would be sufficient to meet the liquidity needs of the business in the event a buy-out was required. 

Time went by.  The construction industry experienced a decline.  Some partners made personal loans to the company to keep it solvent.  The unexpected happened in more than one way – the business became unprofitable and one of the key partners became terminally ill.  Ultimately the business partner died.  The remaining partners reviewed the terms of the carefully prepared plan.  What were their obligations regarding the deceased’s ownership interests in the business?  Would there be sufficient life insurance to redeem the personal loans made to the company?  How much, if any, would be owed to the heirs of the deceased partner?

In all things, expectations – right or wrong – rule the day.  The surviving business partners expected to be reimbursed for the personal contributions to the company.  The surviving spouse expected to be compensated for her husband’s interest in the company.  Ultimately, each side made a compromise. 

The fair market value formula agreed upon by the partners assumed the business would be a profitable ongoing concern.  The life insurance proceeds would be used to provide liquidity to purchase the deceased’s interests and avoid the possibility of an “unexpected partnership” with a surviving spouse.  The surviving spouse would receive the value of the business in exchange for the ownership interest of the deceased.  Reality, as it ultimately does, set in. 

The company owed more than it made.  From an accounting perspective, it was completely insolvent and therefore, without value.  The surviving spouse believed she would receive the insurance proceeds because during his last days her husband reassured her there was a life insurance policy to buy his interest. The surviving partners needed to be repaid for the personal loans made to the company and the liquidity provided by the insurance proceeds should be used to accomplish that goal. 

This was a situation ripe for litigation.  Fortunately, not all business agreements end up in court.  Instead, the parties followed the intent of the written agreement, the spirit of the partnership and reached an agreement where all concerned both won something and lost something.  In the end, the plan accomplished its intended goal. 

Editor's Notes:

How do you create lasting legacies for your clients?

70% of Americans fail to do estate planning because they lack awareness as to why they should. In an effort to change this alarming statistic, WealthCounsel launched the Creating Lasting Legacies campaign. Watch Peggy Hoyt's video on how she helps create lasting legacies with her clients.

Practice Tip: Catering Your Practice to an Aging Population

David A. Wells, Jr. Esq
David Wells & Associates, P.C.
Member of WealthCounsel  

*Also written by Jack W. Benge

Eliminating background noise is the best way to help older clients with hearing problems. Figure out ways to screen background noise or just turn off office equipment that generates loud sounds such as printers, filters and air con­ditioners. Simply making eye contact with older clients, allowing them the opportunity to read your lips, can solve many hearing-related issues. When leaving telephone mes­sages for these clients, it is important to speak slowly and repeat any important information at the end of the mes­sage. Following up the phone call with written documenta­tion also helps to eliminate any confusion.

Above all else, dealing with older clients requires patience and understanding. Seniors tend to be more alert in the morning, so scheduling meetings before lunch is impor­tant. Only ask one question at a time and always provide information in writing for clients to review when they get home. Offices are generally designed with aesthetics rather than comfort in mind, so make sure the office both looks and feels accessible. Simple adjustments and a relaxed ap­proach will allow practitioners to make their office senior-friendly in a field that is trending older.

About the Author:

David A. Wells Jr., is a graduate of Tennessee Temple University in Chattanooga, Tennessee (B.A., Communications, 1987), and the Walter F. George School of Law at Mercer University in Macon, Georgia (J.D. cum laude, 1991). While in law school he was the managing editor of The Mercer Law Review. Mr. Wells has been practicing in the estate-planning field since shortly after graduating from law school. He was a named partner in a well-regarded suburban practice for a number of years, and he left to start David Wells & Associates, P.C., in 1999. David can be reached at david@wellsassoc.com.

Jack W. Benge is a graduate of the University of Florida (B.S., Journalism, 2010), and is currently working on his J.D. from Loyola University Chicago School of Law. He has been a law clerk at David Wells & Associates since June 2011 and can be reached at jack@wellsassoc.com.

Editor's Note:

Can a Charitable Lead Annuity Trust Own Life Insurance?

Alan R. Jahde, J.D., LL.M.
Anderson & Jahde, PC
Member of WealthCounel

Yes. As the following describes, a Charitable Lead Annuity Trust (“CLAT”) can hold life insurance. Preferably, the grantor will contribute a fully funded policy rather than have the CLAT purchase the policy and pay premiums.

CLATs are irrevocable split interest trusts that pay a fixed annuity amount to charity for the lifetime of the grantor or a fixed number of years. At the end of the annuity period, non-charitable beneficiaries (usually the grantor’s family) receive the remainder free of estate or gift tax.

CLATs may be taxed as grantor or non-grantor trusts and may be inter-vivos or testamentary trusts. The IRS pre­scribes forms for planners to use in designing CLATs.¹ The CLAT’s annuity payments must be ascertainable but need not be identical from year to year.²

If structured properly, a CLAT qualifies for the gift tax charitable deduction³ and/or the estate tax charitable de­duction.⁴ A transfer to an inter-vivos CLAT interest may also qualify for an income tax charitable deduction.⁵ The amount of the charitable tax deduction equals the present value of the annuity payments to charity, calculated by ref­erence to the applicable §7520 rate.⁶ CLATs are particu­larly well-suited in this low interest environment, where it will take less effort for earnings to exceed the §7520 rate.

A CLAT must make an annuity payment in cash or kind to charity each year during the annuity period. This necessar­ily limits the type of assets a CLAT may hold. Preferred assets include income producing investments. Undesir­able assets include illiquid investments and hard-to-value investments.

The tax rules do not mandate constant annuity payments, and there is no prohibition against a CLAT making mini­mal annuity payments to charity each year, followed by a large balloon payment in the final year of the annuity period (with the remainder passing to the grantor’s fam­ily). This type of CLAT is known as a “shark fin” CLAT because the graphical depiction of payments during the annuity period resembles a shark fin.

Rev. Procs. 2007-45 and 2007-46 prescribe IRS approved forms for CLATs. Although the IRS has not specifically approved shark fin CLATs, it has not specifically prohibit­ed them. Furthermore, a comment in the Rev. Proc. 2007- 45 endorses annuity payments that increase during the annuity term.⁷ Of course, there is the possibility that the IRS may someday decide shark-fin CLATs do not work, and disallow charitable deductions for contributions. Until then, planners should discuss the benefits and risks with their clients. If the client is comfortable with the risks, planners should not fear shark-fin CLATs.

Once the decision is made to create a shark fin CLAT, the issue must be addressed of whether the grantor should contribute a paid up policy to the CLAT or the Trustee should purchase the policy and pay premiums using cash contributed by the grantor. The charitable split dollar rules of §170(f)(10) disallow a charitable income tax deduc­tion for amounts transferred to a charitable organization used directly or indirectly to purchase life insurance that ultimately benefits the transferor or his family.⁸ Although minimal guidance has been issued as to whether a CLAT – not technically a charitable organization – is subject to the charitable split dollar rules, there is a risk that the IRS will determine that it is. The consequences of this would be harsh: the charitable deduction could be disallowed to the transferor and the CLAT could be subject to an excise tax equal to the premiums paid.⁹

A safer approach is for the grantor to contribute a paid-up policy on his life and a small amount of cash to the CLAT. The Trustee would make the annuity payments to charity from the cash and in the year of the grantor’s death, the Trustee would make a balloon payment to the charity. Un­der this approach, there is no risk that the personal benefit contract rules would apply.

In conclusion, a CLAT whose primary asset is life insur­ance can be a very useful vehicle for benefiting charities and the grantor’s family in today’s low interest rate envi­ronment. To avoid the risk that the charitable split dollar/ personal benefit contract rules apply, the grantor should contribute a paid up policy to the CLAT.

¹ For intervivos CLATs: Rev. Proc. 2007-45, 2007-29 I.R.B. 89 (July 16, 2007); for testamentary CLATs: Rev. Proc. 2007-46, 2007-29 I.R.B. 102 (July 16, 2007)
² Rev. Procs. 2007-45 and 2007-46 at § 3
³ IRC §2522(c)(2)(B)
⁴ IRC §2055(e)(2)(B)
⁵ IRC §170(a)
⁶ IRC §7520 requires that this be determined with reference to IRS tables.
⁷ For an additional defense of shark fin CLATs, see Pratt, Goldberger & Lee’s article in LISI  Charitable Planning Newsletter #163 entitled “Biting Back: Re­sponding to the Attack on Shark-Fin CLATs”
⁸ This would be considered a “personal benefit contract” under §170(f)(10)(A)(ii)
⁹ §170(f)(10)(A) and §170(f)(10)(F)

About the Author:

Alan Jahde is co-founder of Anderson & Jahde, PC, a Denver area tax law firm founded in 1995. He is also co-founder of Castle Re Life Insurance Company, Ltd. His areas of practice include Private Placement Life Insurance Planning, Estate Plan­ning, Income Tax Planning, and International Taxation.

Editor's Note:

Discover the advantages and disadvantages of Donor Advised Funds vs. Private Foundations, and learn how Community Foundations can help your clients achieve some of the highest levels of tax benefits with our recorded webcast, Designing Effective Charitable Planning Strategies for Today's Savvy Philanthropist.

Testamentary Charitable Lead Annuity Trusts (A Brief Overview)

Sean R. Kenney, JD
Myers Urbatsch, PC
Member of WealthCounsel

Charitable lead annuity trusts (“CLATs”) are an interesting vehicle for testamentary planning due to the historically low interest rates. Further, proper use of a testamentary CLAT not only zeroes out the estate tax but also offers a donor the chance to leave a charitable legacy with the organization of his or her choosing. This short article has two main goals: (1) to present the estate planner with a brief overview and description of a testa­mentary CLAT and (2) suggest assets this author finds most suitable for funding a CLAT. As the title suggests, this is a brief overview of these two topics, and for those who want a more in-depth discussion, I suggest visiting the Leimberg Information Services website and doing a search for “CLAT,” where one will find a bevy of interesting and more nuanced mate­rials.

So, what is a CLAT? Simply put, a CLAT is a split inter­est trust that pays an annuity over a term of years to a lead beneficiary, namely a charity, until the end of such term at which time the remainder of assets in trust are distributed to a non-charitable beneficiary, such as an individual or non-charitable trust. As noted above, the estate tax can be reduced to zero per charitable deduction, which is based on the value of the present interest of the annuity payable over a term of years. The annuity amount is calculated from the term of the CLAT and the applicable 7520 Rate at which time the CLAT is employed. It just so happens that the September 2011 7520 Rate is at 2%, which is a historically low rate. The lower the 7520 Rate, the lower the annuity amount payable to the charitable lead benefi­ciary. This is in contrast with the term of the CLAT, i.e. the longer the CLAT term the smaller the annuity payment. Although not discussed in this article, it is imperative to know that CLATs are subject to the private foundation rules per Internal Revenue Code Section 4941. It also should be noted that testamentary CLATs are preferable when there is considerable other wealth that passes onto to the beneficia­ries, so as the beneficiaries do not have to wait until the end of a specified term to receive a bequest.

Take for example a testamentary CLAT funded with an asset worth $1,000,000 with a ten-year term that became effective as of September of 2011, with a 7520 Rate of 2%, and contrast it with a testamentary CLAT funded with an asset worth $1,000,000 with a ten-year term that became ef­fective as of September of 2008, with a 7520 Rate of 4.2%.

September 2011 Annuity Payment to Charitable Benefi­ciary: $111,326.35
September 2008 Annuity Payment to Charitable Benefi­ciary: $124,522.15

That’s over a $13,000 a year difference in annuity pay­ments. In only 2007 for example, 7520 Rates were as high as 6%. Thus, when drafting a testamentary CLAT as a sub-trust in a revocable living trust, it would behoove the practitioner to be very much aware of the current 7520 rate and adjust any planning as needed.

A fair question from a grantor of a revocable living trust debating whether to incorporate testamentary CLAT provi­sions in their trust instrument is “how much do the remain­der beneficiaries receive at the end of the ten-year term of the CLAT?” The answer, in good lawyerly fashion is “it depends,” which provides a nice segue into the next section of this article.

Think about all of the above from a practical standpoint using as an example the CLAT funded with $1,000,000 pay­ing out for a term of ten-years at $111,326.35. That means that after the tenth payment the CLAT will be worthless provided that there was zero growth within the asset or as­sets used to fund the trust. To examine further, review the numbers below listing average annual growth rate for the term of the trust and the remainder that the beneficiaries receive at the end of the CLAT term:

1% Annual Growth: 0 to Remainder Beneficiaries
2% Annual Growth: $1.96 to Remainder Beneficiaries
3% Annual Growth: $67,684.55 to Remainder Beneficiaries
4% Annual Growth: $143,648.21 to Remainder Beneficiaries
5% Annual Growth: $228,643.76 to Remainder Beneficiaries
6% Annual Growth: $323,477.92 to Remainder Beneficiaries
7% Annual Growth: $429,016.64 to Remainder Beneficiaries
8% Annual Growth: $546,188.87 to Remainder Beneficiaries
12% Annual Growth: $1,152,211.61 to Remainder Beneficiaries

It is important to remember that any amount, including the $1.96, is to some degree a windfall because the beneficia­ries really was not supposed to receive anything due to a looming estate tax. Realistically, the beneficiaries will likely want to do somewhat better considering there will be legal and accounting expenses. Thus, a balanced portfolio of marketable securities and bonds are generally the preferred assets for funding a testamentary CLAT. For a number of reasons, which are outside the scope of this article, funding a testamentary CLAT with real estate that has debt on it and/ or using small businesses interests (a non-grantor testamen­tary CLATs can generally not be a qualified shareholders of an S corporation) that produce dividends are generally not acceptable assets for funding a testamentary CLAT.

However, what if you could fund a CLAT with assets that gave the annuity producing assets more leverage in actu­ally yielding at a higher rate? In other words, can a CLAT be funded with minority membership interests in a lim­ited liability company that were discounted due to lack of marketability and control where the underlying assets were a balanced portfolio of marketable securities and bonds? There are many different considerations here, again which are outside of the scope of this article, but with the proper planning you can utilize these marketability discounts to reduce the amount of annual growth in the CLAT needed to produce favorable results.

About the Author:

Sean R. Kenney is a Senior Associate with Myers Urbatsch PC, located in San Francisco, California, where his practice focuses on estate planning, with a special emphasis on gift and estate tax audits and controversy. Mr. Kenney has helped design, imple­ment, and successfully defend against IRS attack, estate plans for high net-worth individuals throughout the state of California. In his spare time, he likes having impromptu dance parties with his one-year-old son and wife, and finding the best Pho and Ramen restaurants in San Francisco.

Editor's Note:

Discover the advantages and disadvantages of Donor Advised Funds vs. Private Foundations, and learn how Community Foundations can help your clients achieve some of the highest levels of tax benefits with our recorded webcast, Designing Effective Charitable Planning Strategies for Today's Savvy Philanthropist.

How to Create Long Lasting Legacies for Your Clients

Louis V. Pavone, J.D.
Loss & Pavone, P.C.
Member of WealthCounsel

An estate planning attorney’s basic task, amongst other things, is to draft written instruments, usually in the form of a will or a trust, which provide for the orderly distribution of assets to the client’s spouse, descendants or other intended beneficiaries with minimal tax impact at the death of a client.

Black’s Law Dictionary defines this disposition of assets, whether in the form of personalty or realty, as a Legacy.  For reasons which I will explain later, I prefer to refer to this as a legacy upon death, or a “Death Legacy”.

Quite commonly, the estate planning legal professional can get so caught up in properly performing the design and drafting functions to implement a client’s legacy (in the strictest legal sense of the word) that what a legacy may mean to the client in the broadest sense of the word is overlooked.

While the design and drafting functions are important to effectuate a legacy bequest which minimizes the impact of estate and income taxes on a client’s estate, the estate planning attorney should never lose sight of what the client perceives his or her legacy should fully embody. 

Some clients believe that the most important legacy an individual could leave his or her children are life lessons which helps mold a child into the person he or she shall become.

That type of legacy is achieved while the client is living.  I refer to it as a “Life Legacy” because it consists of the character qualities that a parent role models to a child over the course of a lifetime.

As a clients’ Trusted Advisor, estate planning attorneys should use this as an opportunity to creatively merge clients’ Life Legacies and Death Legacies into long lasting legacies that can impact many generations.

By way of example, in a recent interview with a wealthy Christian couple, after considerable probing to determine what passions drove them, I perceived that our clients passed down significant quality character traits of their own to their children. Their Faith, moral values, integrity, work ethic and their habit of faithful charitable giving were all evident.

After having considered their Life Legacy which included substantial faith-based charitable giving, we found that it was inconsistent with their original designed Death Legacy.  In our design meeting we encouraged our clients to consider Charitable Remainder Unitrusts funded by IRA assets to eliminate estate taxes, avoid minimum distribution rules, and effectively move assets at death from one income tax exempt entity to another.

Upon completion of that design meeting and the subsequent execution of the estate plan documents, not only were we successful in eliminating estate taxes and  providing their children with a stream of income during their lifetime, but we were also able to extend the clients’ passion for faith-based initiatives by way of charitable giving after death.

Since the objects of their charitable giving were organizations which sought to spread the Gospel and reach unbelieving, lost souls for Christ, our clients left our office with a sense of self-fulfillment because their Death Legacy would now reflect their life-story and their Life Legacy:  a legacy which could impact others for all eternity.

Accordingly, when it comes to planning and designing a “Long Lasting Legacy” for clients, it is important to probe beyond the Financial Statements, Income Tax Returns, and Estate Planning Questionnaires to be able to fully understand what passions drive your clients.  Do this and your clients will see you as being their intuitive, trusted advisor who will achieve their desired result.

Editor's Notes:

How do you create lasting legacies for your clients?

70% of Americans fail to do estate planning because they lack awareness as to why they should. In an effort to change this alarming statistic, WealthCounsel launched the Creating Lasting Legacies campaign. Watch Lou Pavone's video on how he helps create lasting legacies with his clients.