Over the past decade, wealthy Americans have grown accustomed to thinking of estate planning as a task with short-term consequences. Due to federal legislation, the rules have been changing year after year. The short-term chaos, however, may be distracting high-net-worth families from facing the realities of how long their wealth needs to last and how vulnerable their assets might be. 

Given the risks faced by today's wealthy investors-whether it be from market volatility or malfeasance-it's not a subject to be treated lightly. This is especially true for investors in litigation-prone industries, such as hedge fund managers and doctors.

"In any investment vehicle where a manager has fiduciary duties, an investor or partner can step forward and sue for something that happened years ago," says Joshua Rubenstein, co-managing partner of trusts and estates at the law firm Katten Muchin Rosenman in New York City, who is seeing an increasing number of cases in which a fund manager's duty to partners is under examination. "Private equity and hedge fund managers in particular might find an investor coming forward and saying the money was mismanaged."

When it comes to assailable professions, physicians are long accustomed to sheltering their assets from creditors in case they are attacked in a malpractice suit.  So are property builders and developers. 

"This is partly a geographic matter, but in the Twin Cities there are a lot of medical device companies, and the heads of those companies are liable and need to protect their assets," says Ann Burns, chair of the trust, estate and charitable planning group at the law firm Plant Mooty in Minneapolis.

For estate lawyers and advisors, planning for clients in these risk categories means channeling assets into corporate or limited partnerships or limited liability corporations apart from their business, according to experts. While a creditor might try to gain control over such an entity, it can be structured to guard against creditors seizing voting interests.

Irrevocable trusts are also an increasingly popular asset protection vehicle, according to Rubenstein and his colleague Philip Tortorich, a trusts and estates partner with Katten Muchin Rosenman in Chicago. When the beneficiary of the trust is someone other than the grantor, the assets gifted or sold to the trust are generally beyond the reach of creditors of the grantor. In particular, assets sold for fair market value to the trust should not be subject to claims. Several states, including Delaware and Alaska, allow a grantor to settle a trust for his own benefit and prevent creditors from accessing the trust assets in the event of a claim. The grantor must be able to prove continued solvency after the assets are transferred to the trust, however. "You wouldn't do this for someone who already has a creditor crisis," Tortorich says.

IRS Scrutiny Of Asset Transfers
The traditional way to make sure a client's estate does not fall into the hands of disgruntled investors or other potential plaintiffs and creditors is to have the client transfer assets to his children while he's still alive, according to attorneys. But the strategies for such transfers are shifting as the federal government tweaks the tax code to raise revenues.

More than ever, estate planners have to consider the complications of gifting when it involves transferring interests from a hedge or private equity fund to family members, experts say.

To avoid hidden traps such as IRS over-valuation of the gifts, the owner must transfer a slice of every interest he owns so that the family members' interests do not vary in substance from his own-a vertical slice of the entire interest. An increasingly popular estate-planning tool to address this situation is the use of carry derivatives, based on the fund partner's carried interest or performance allocation.

A favorite instrument for estate planning in the current low-interest rate environment, the grantor retained annuity trust (GRAT), is under the Congressional microscope. A GRAT allows the parent, as grantor, to receive an income stream based on the asset value plus a variable interest rate, while if the trust earns money above the interest rate-easy these days-the heirs get the remaining assets tax-free when the trust's term expires. GRATs are a gamble, however: If the grantor dies before the trust's term expires, the entire asset goes back into the estate. For that reason the most popular GRATs have been set up for a short term, usually two to three years. But in March the House passed a bill (H.R. 4849) that would, among other restrictions, require a term of at least ten years, greatly increasing the odds of the grantor dying.

In light of the potential GRAT limits, estate planners might move more of their clients' assets into intentionally defective grantor trusts (DGTs), which remain out of the estate no matter when the grantor dies.

In the years ahead, planners will have to be more circumspect with grantor trusts and other vehicles that allow the grantor, for gift tax purposes, to discount the fair market value of the shares based on the fact that they are being taken out of the market and becoming the property of a family member with no control over the business, estate planning attorneys say. Congress is also addressing perceived estate and gift tax abuses by calling for limits on valuation discounts when a business owner transfers shares to family members.

"Case law says there has to be a business purpose for transferring the shares, so estate lawyers will be trying to get rid of family limited partnerships or LLCs created for the sole purpose of getting the discount," says Burns. With valuations and interest rates close to rock bottom, her firm is putting together many minority interest sales, even those with a clear business purpose. "And if a patriarch or matriarch has stepped down but still owns a controlling interest in a family-owned business or partnership, they should sell right now," she says. "If they die owning a controlling interest, there won't be a discount. And if their concern is getting income from the business entity, they can sell the stake on a promissory note."  

Longevity In A Tough Economy
The sad case of Anthony Marshall is a reminder that outside creditors aren't the only people who might try to pounce on an estate. Marshall was 85 last year when a New York State Supreme Court jury pronounced him guilty of stealing millions from the estate of his mother, the socialite and philanthropist Brooke Astor, who died in 2007 at the age of 105. The case, now dragging through the appeal process, began in 2006 when Marshall's son Philip, then 53, filed a petition accusing him of keeping his mother-Philip's grandmother-virtually imprisoned in her Park Avenue home. As Rubenstein sees it, family members are likely to be more litigious in the future as parents, children and grandchildren expect to live into their 80s, 90s and 100s, with their financial needs growing as they age.

"The traditional plan in which the next generation gets their inheritance when the parents die would mean that today the kids might not get the money until they're 70 or older, and by then they'll be less interested in growing the family's wealth," says Rubenstein. "On the other hand, the parents might need to hang on to the money while they're alive for their own health care."

James Moniz, president and CEO of Northeast Wealth Management in Braintree, Mass., worries about the children of the wealthy at a time when even the best education does not guarantee earning power. "With this economy, it's going to take the young generation longer to build their own wealth," he says.

Burns says she is seeing the effects of the economic downturn in more requests for wills with flexible terms. "You pair a dollar amount with a percentage, so that you don't end up giving more to charity than to your kids," she says. "For example, you say each of my children gets $5 million or no less than one-third of the entire estate."

Tortorich likes the idea of gifting for longevity planning purposes. "People are giving some money to their kids to test the way they're going to use it over a long life expectancy," he says. If the parents find they have a spendthrift, an overly cautious hoarder, a speculator, or a combination within their offspring, they can help their kids work on that financial behavior.

In 2010, many estate attorneys were advising clients to sit down with a wealth manager to draw up a scenario projecting how much money they will need if they live into their 90s or even 100s, with all of the medical bills that typically accompany old age, then earmark some of the remains for gifting, assuming the gift tax rate itself remains a gift from Congress.

If Congress adjourns shortly before the 2010 Christmas holidays without changing the current 35% gift tax rate for
2010-most likely the lowest rate any living Americans will ever see-estate planners will feel relatively safe telling clients to make large gifts to their children, even above the $13,000 per child annual exemption amount. (Under compromise legislation approved by the U.S. Senate and before the U.S. House of Representatives in December, the gift tax would stay at 35% through 2011 and 2012. The lifetime gift exemption would be raised from $1 million to $5 million-providing for a $10 million total exemption for married couples.)

Here's another advantage of gifting: It gives parents and the next generation or two the chance to talk openly about who should get what and why. When it comes to the will itself, it is easy for an estate advisor to admonish a family patriarch to communicate his intentions to all family members as a preventive measure against hurt feelings and contention upon his death.
Reality is always more complicated-especially when members of the next generation are worried about outliving their money.
"Long life expectancies can make children more litigious if they feel they haven't been treated fairly," says Rubenstein.  "On the other hand, 90% of all probate contests are from dashed expectations."