Submitted questions to Mr. Doherty and his responses:

Certainly, there are other fact patterns indicating the use of a trust for educational purposes, but those two are what I see most frequently in my practice.

Any trust is a sophisticated document and should be prepared by an attorney who has experience in preparing estate planning documents. The cost of establishing such a trust will vary widely depending upon your specific location and the reputation and abilities of the attorney performing the legal work. But don't be penny wise and pound foolish when contemplating any matter that will affect the legal rights of you and your family.

In terms of drafting an educational trust (which I generally recommend be a separate, stand alone, document), care needs to be addressed to how the trust will "work." In other words, how, and for what purpose, will the trust funds be expended? For example, how is education defined? Private high school? Community college or a 4-year degree program? State school? Elite private university? Trade school? Graduate studies and/or professional school? All of the above? It seems that many, if not most, people interested in providing for the future education of young people simply say they want the youngsters "to go to college." Certainly admirable, but what if the individual's true abilities and desires run to being a mechanic? If the trust says "funding for college," a trade school wouldn't qualify. Also, will the child being educated be entitled to distributions for things like, Books and course fees? Travel to and from the school? Room and board? Uniforms, or other clothing considerations? Give care not to create a document which creates as many problems as it solves. A little thought and planning can avoid conflicts and confusion in trust administration.

Another important area I have seen expressed by clients is the desire to ensure that the youngsters actually exert some effort in getting educated. This thought gets expressed by requiring the student to carry a minimum course load, to maintain a minimum grade point average, to be continuously enrolled, and sometimes, to complete the course of study by a certain age. I do not mean to suggest that some young people would attempt to use guaranteed educational funding to become a "professional student," but apparently, a lot of parents and grandparents feel that way.

Consideration also needs to be given to how and when the trust terminates, and what happens to any unspent trust funds. In the educational trusts in which I been involved, a common concern expressed by the grantor of the trust is an unwillingness to allow a beneficiary to "sit around and not go to college" and then collect his or her portion of the funds when the trust terminates. I also suggest to my clients that a dollar figure be specified below which administration of the trust is not practical, thereby compelling the trust to terminate.

Lastly, speaking of money, an educational trust can be a wonderful document, but it is of little use if it is not funded. For the young couple, purchase of life insurance naming the trust the beneficiary can make some sense. Given that the toughest situation would be occasioned by the death of both parents, it may make sense to explore a survivorship life insurance policy which provides a greater death benefit at a lower cost than would two individual life policies. For mature individuals wishing to establish an educational trust fund, the funding possibilities include immediate funding through a gift, specifying a bequest in one's will, as well as life insurance.

Let me explain the tax impact of the loss of a step-up in basis by using a hypothetical situation. Under current law, if I established a $50,000 investment in a mutual fund, and when the account went to my son at my death it was worth $150,000, my son's basis (or tax cost) in the account is that $150,000 value on the date of my death. So, he can take the account, liquidate it for $150,000, and not owe any income taxes because there's no taxable gain on the transaction. However, if this scenario unfolded in 2010, my son would not receive a step-up in basis, therefore his tax cost in the inherited account would be my tax cost -- $50,000.  When he liquidated the account for $150,000, he would have a gain of $100,000, on which he would owe income taxes, regardless of the overall size of my estate. If that sounds like a worse result to you than the existing Federal Estate Tax, I think you're right.

The future of wealth transfer taxation has been a hot topic throughout the administration of George W. Bush, but little has changed since the passage of the law recited above that also increased the exemption equivalent to the 2008 level of $2,000,000.  Many forces have sought the complete repeal of this tax, but many forces think that the reach of wealth transfer taxes ought to be expanded.  During most of President Bush's term of office, the Republicans controlled both legislative branches of the Congress and the White House, yet wealth transfer taxes at the federal level remain.  If the Democrats gain control of the House, Senate and the White House, it will be a good bet that the reach of these taxes will almost certainly be expanded.  But, until the new Congress and new President have been sworn in, nothing affecting these taxes is likely to change until late 2009, if then.

However, regardless of what happens in Washington, one of the big concerns in this wealth transfer tax discussion of which I find people are completely unaware, is the re-emergence of the states. Most states used to be happy to receive the 5% "sponge tax" the federal government would return to a state that didn't have its own estate tax when one of its residents died owing Federal Estate Taxes. However, with the exemption equivalent rising so much (now $2,000,000), fewer and fewer estates are subject to this tax. So, there's less to send out to the states. What are the states doing? They're imposing THEIR OWN wealth transfer taxes! At last count, there are 21 states, plus the District of Columbia, that impose some sort of wealth transfer tax, either in the form of an estate tax, or in the form of an inheritance tax. No, Florida is not one of them, but who knows what the future may bring.  Keep in mind that, although you wrote from Florida, the state of your domicile (which very well may be a state other than Florida) at the time of your death is going to be the primary determining factor of whether your estate and heirs will have to address wealth transfer taxes.  For purposes of wealth transfer taxes, one can easily have a tax domicile in a state and be unaware of that fact.

I conduct a workshop that touches on this topic entitled, "Deadly Estate Planning Mistakes . . . and How to Avoid Them." One of the mistakes I talk about is thinking that these sort of taxes have been repealed, or are going to be repealed, and failing to plan because of it. That is, in my opinion, a HUGE mistake. Like it or not, these sort of levies have a very long tradition in the United States.  In fact, one of the very first non-excise taxes imposed by the United States Congress was an estate tax . . . in 1798! That's 118 years BEFORE the imposition of the modern income tax. So, my view is that wealth transfer taxes, in some form or another, assessed at either the federal and/or state level, are here to stay. People ought to understand that and plan for it.

Annuities exist in two basic forms: immediate or deferred. An immediate annuity provides, in exchange for a premium payment, regular, predictable income over a specified period. A typical immediate annuity settlement would be for the payments to last for the life of the annuity owner, and perhaps for the life of the spouse. A deferred annuity is a specified investment that grows over a period of time. This growth has certain tax advantages, and when it's time to take out the funds, the contract can either be converted to an immediate annuity, or the annuity owner can take out whatever portion of the funds is desired over time, or all of the funds at once.

There are two basic investment bases for annuities: a fixed rate contract or a variable contract.

Fixed rate annuities operate like certificates of deposit, in that a rate is established for a certain term, and after the expiration of the term, a new rate is established. That is all the fixed annuity holder gets -- that specified rate of return. Fixed rate annuities also have contract guarantees that protect the principal from ever declining in value. A frequent criticism of fixed rate annuities is that the rates the contracts are paying are very low.

A variable annuity has a range of investment options that are called sub accounts. These sub accounts look and act like mutual funds. When one opens a variable annuity, the investor determines how the funds are allocated into the various sub accounts. Many financial people consider this to be a convenient way to implement an asset allocation strategy. A common criticism of variable annuities is that they are expensive to own, in that the insurance company charges the annuity owner various annual fees such as an expense ratio, mortality charges and contract charges, all of which are charged whether or not the contract actually makes money in any one year.

There is another investment base for a deferred annuity, and that is known as an index-based annuity. These contracts are actually fixed annuities, as they offer a minimum return and provide contract guarantees, but because they are linked to a stock market index (such as the Standard & Poor's 500), they offer the opportunity to get a better return than in a regular fixed rate annuity contract. A common criticism of index-based annuities is that they are difficult to understand and that many of the agents selling them do not explain them well to their clients.

A gripe about ALL annuities is the surrender charge. Although the structure of the surrender charge in a fixed annuity is different than in a variable annuity, both versions have them. A surrender period is specified, and if you want to take out more than a certain amount from the contract during that period, you will incur a charge. I am not going to defend the surrender charge concept, but it is important for you to understand why it's there. The use of the funds you have invested in an annuity provides the insurance company with a profit making opportunity. This opportunity is a particularly important part of the company's profit structure in an index-based contract. So, when you open the annuity contract, you are essentially saying to the insurance company: "You have the use of my funds for the surrender period, except for whatever penalty free withdrawals the contract lets me make." Therefore, if you "break" your promise to the company by withdrawing the funds before the expiration of the surrender period, the company feels it has to have the ability to recover some of what would actually be a loss to it.

However, the existence of surrender charges illustrates a critical point: if there is any reasonable likelihood that you will need funds beyond the contract's specified liquidity, than deferred annuities are probably not suitable for you. Annuities are designed to be long-term investments, places where funds can be put away for extended periods, to grow (hopefully), thereby supplementing retirement needs. If this doesn't sound like what you want to accomplish, perhaps you should just forget about annuities.

Most of the problems I see with annuities, particularly deferred contracts, is that people often get sold them for the wrong reason. All annuities are designed to provide retirement income, yet they are often sold as some type of tax magic, as wealth transfer devices -- all kinds of reasons that don't really fit why the product exists. Variable annuity salespeople like to tout the death benefits in the contract, pointing out that, at the death of the annuitant, the beneficiary will always get at least what has been put into the contract. That may be true, but remember, you should be buying the annuity to supplement your retirement income, and the last time I checked, dead people didn't have retirement income needs. In my view, one of the huge drawbacks to variable annuities is that the account value during your life can decline -- perhaps precipitously -- and those funds you thought you had for your retirement have taken a hit. So, when the use of a deferred annuity seems to be appropriate for a client, my current recommendations usually run to index-based contracts, as they offer what may be the best of both worlds: contract guarantees DURING YOUR LIFE; and, the opportunity to get better than fixed rates of return. Yes, there is a lot of negative reporting about index-based annuity contracts, but I feel a lot of the criticism in unjustified.

Nevertheless, the use of any financial product is a complex matter, and its appropriateness for use in your particular situation ought to be determined after a sound review of your financial circumstances with a competent advisor. Don't make a mistake -- get proper, objective advice before you commit your hard earned funds to any program or product. And, make sure you understand what you are doing, and why you're doing it.

Like the names suggest, the difference between term and cash value (more commonly called "permanent") life insurance is that term insurance covers the insured for only a specified period, whereas permanent insurance covers the insured until the insured dies. In other words, with term coverage, a death benefit is paid only if the insured dies within the specified period. Permanent insurance remains effective throughout the life of the insured, so the death benefit will be paid whenever the insured dies, as long as the policy is in force. Generally speaking, all types of life insurance policies remain "in force" as long as the premium payments are up to date. Also, a new type of life insurance contract has been developed, generally referred to as "return of premium" term life insurance. As the name suggests, it is temporary coverage, and if the insured doesn't die within the term, the premiums are returned. Although this concept sounds appealing, my examination of these policies utilizing real cases suggest they are generally not a good financial option. While the premiums in these policies are lower than the premiums in permanent policies, they are higher than the premiums in "regular" term policies, and what is returned to the policyholder is never more than the actual premium payments. Be aware of interesting insurance industry statistics: Only about 2% of all term life insurance polices ever pay a death benefit, whereas almost 20% of permanent policies pay a death benefit. This disparity is not because term policies are bad and permanent polices are good, it is simply a reflection of the proper uses and costs of life insurance.

You wondered whether one type of life insurance was "better" than the other. There is no automatic answer, as what is appropriate life insurance coverage depends upon an individual's particular circumstances. As a general rule of thumb, term insurance (temporary) ought to used to provide protection for temporary problems. As examples, an individual has purchased a house with a mortgage; or, a child has been born and the parents want to ensure that the child can attend college. How will these obligations be met if the primary income earner dies prematurely? Big questions, but they are temporary problems which will be extinguished when the mortgage is paid off, and when the child is out of college. These are the type of problems that term life insurance can nicely address. On the other hand, permanent insurance generally ought to be used to provide protection for permanent problems. For example, if one's desire to acquire life insurance relates to a wish to pass wealth to children, or to a charity, or to provide liquidity for estate settlement purposes, then these are considerations which are permanent in nature. Usually, permanent life insurance is a better option to address those types of concerns.

However, the "temporary concerns equal term life and permanent concerns equal permanent life" formula is a bit simplistic, as additional factors are usually involved in the acquisition of life insurance. Matters such as, the family that has a very large death benefit need, but can only afford term life insurance; or, the temporary problem may be small enough, or may last long enough, that permanent life insurance may make more sense.

At young ages, the annual outlay to keep a term life insurance policy in force is MUCH less than for a permanent policy with the same death benefit. Most of the premium cost in a term policy is the cost associated with the statistical likelihood that the insured will die within the term. It is not likely that a 30-year old healthy man will die during the following 20 years (a common term life coverage period). In fact, it is statistically VERY unlikely that he will die within that period. That simple fact explains why an insurance company can provide that 30-year old healthy man with hundreds of thousands of dollars of death benefit coverage in exchange for just hundreds of dollars per year in premium.

However, never forget that the likelihood any insured will die within a specified period increases as the insured gets older, and the likelihood of death increases very significantly as the insured gets much older. Therefore, the premium requirements of the term policy have to increase, eventually reaching the point at which term coverage may become cost prohibitive. Take for an example, an individual with the desire to acquire life insurance because he wants to leave his son $1,000,000 at the time of his death. While he could get the coverage in a term policy for certainly no more than $1,500 per year when he's 45 (and healthy), he will find the cost of acquiring that $1,000,000 policy is likely to approach $80,000 per year when he gets into his late 80s, and if he lives longer, the annual cost of a term life insurance policy will go up even further. Of course, this scenario assumes he will be healthy enough to get continued coverage throughout his life, because any significant health incident along the way may make future acquisition of life insurance impossible -- at any cost. On the other hand, if the insured had acquired a permanent life insurance policy when he was 45, his annual premium payments, although much higher than the requirement in the term policy, should remain level and he should not be required to pay more as got older. So, as long as he maintains the policy, his beneficiary will receive the death benefit when he dies -- whenever that death occurs. This hypothetical illustrates why permanent problems are generally better addressed by the use of permanent life insurance.

Please keep in mind that everyone's situation is unique, and insurance needs should be reviewed with a competent professional, one who understands your needs and goals. Life insurance may be critical to your family's financial future, so make sure you get proper, objective, advice before you make any decisions to purchase a policy.