"I still want to kick myself for thinking my estate plan was done. For years I was convinced that I had the perfect plan," said Joe, a 64-year-old reader.
"I never stopped studying articles, even books. All assured me my plan was the best it could be. I religiously attended seminars. Consulted with my cpa and several lawyers. All confirmed that the estate plan drawn by my lawyer (Lester) was right for me and Mary (Joe's wife).
"It never occurred to me that so many estate planning experts could be so dead wrong. Or that there could be a better way to transfer my business to the kids and deal with my other holdings. Not until a friend brought me a stack of your articles.
"I read and reread the articles. The next day I went to Lester's office. I can't repeat exactly what he said, but he gave me three reasons why the dozens of concepts in your articles wouldn't work for me: they don't apply to me, he'd never heard of them, or he'll check them and get back to me."
The above is a summary of about 20 minutes of Joe telling me about his years of planning with Lester, his CPA and insurance agent.
What's the bottom line? A series of blunt questions to Joe and his answers revealed Joe's professionals had crafted a traditional estate plan.
And my bet is that 90% of you married guys reading this article also have a traditional estate plan. What is it? Here's the traditional plan Joe had. See if it sounds familiar as you read further.
Joe's plan is built around two basic strategies. First, the plan takes advantage of the unified credit (actually $675,000 is tax-free; the amount is scheduled to gradually rise to a peak of $1 million in 2006). By using a two-trust arrangement (most often called Trust A and Trust B, Marital Trust and Family Trust or similar names) Joe and Mary will escape tax on the first $2 million of their combined wealth (assuming they survive to 2006 or beyond). Second, the marital deduction, which means zero estate tax when the first of Joe or Mary passes on.
That's it. The traditional estate plan that we see in all 50 states. That was Joe and Mary's plan. Is that the plan you and your spouse have?
What's the guaranteed result? The documents prevent theirs from collecting a dime at the first death (of either Joe or Mary). Good! But when the second spouse dies, theirs gets its pound of flesh. In Joe or Mary's case it's a ton. If their wealth had stayed the same, from today until the day both were gone, their estate tax would have been $3.75 million.
You'll love the rest of the story.
Joe said, "Irv, will you give me a second opinion?" I agreed. Joe sent me a standard package of information (tax returns and financial statements; family tree; and his estate plan documents). After two more telephone conversations we pinned down Joe's goals for him and Mary, his successful business, which he wanted to leave to his middle son, and his family.
Three weeks later I called Joe and outlined the wealth transfer plan I had created for him (with the help of my lawyer, Don). Joe's family will receive every dime of his and Mary's wealth—probably more because of the insurance program included in the plan. Gone was the $3.75 million estate tax obligation to theirs.
Joe was delighted, yet he felt he had been ripped off by his lawyer's traditional estate plan. Don and I explained that Lester's plan was the norm.
After our comprehensive plan was reduced to writing (four new documents and some modifications to the trusts that Lester wrote), we submitted the new plan and documents to Lester. He turned out to be open-minded and easy to work with. Don and I answered his stream of questions. Lester endorsed our plan 100%.
For me this story is rewarding, because it shows that the message we are trying to deliver—you can always win the estate tax game—is getting through to readers of this column. Yet there is much work to be done.
For you, the reader, if you are married and have a traditional estate plan (the same or similar to Joe's) you have work to do. Think second opinion.
Want to talk about your situation? Call me at 312/207-1040.
Keep key employees Can you help me get good people? How can I motivate my key people to stay? These two questions are asked again and again by most of my clients (and readers of this column).
Here's a tax idea that answers a loud "yes" to both questions: interest-free or low-interest mortgage loans. Consider offering your top executives such mortgages when they buy a new home to serve as a "golden handcuffs" to keep (or get) executives.
Let's look at an example. Joe Manager wants to buy a home and needs a $200,000 mortgage. If Joe gets a 30-year, 7% mortgage, his monthly payments will be $1,330. Instead Your Co. gives Joe a 3.5% mortgage. So, Joe's monthly payments drop to less than $900; over 30 years, Joe will save more than $155,000 in interest. To tie Joe to Your Co. you insert an acceleration clause in the mortgage agreement: If Joe leaves Your Co., then the balance of the mortgage immediately becomes due and payable.
What are the tax consequences of such an arrangement? When your company furnishes an interest-free or low-interest mortgage to an executive, it's treated as if the company (1) paid the executive an amount equal to the interest savings, and (2) received an equal amount back as interest. So, for your company, it's a wash for tax purposes. The executive will have compensation income equal to that "as if interest" income, but can claim a deduction for the same amount. The tax law allows an interest deduction on first mortgages up to $1 million and home equity loans up to $100,000.
One more point: Usually, a term-loan arrangement requires the compensation to be treated as paid up front, but sadly the interest on the repayment is spread out over the term of the loan, a tax-disadvantage mismatch between income and deductions. But there is a happy tax exception if you include an acceleration clause like Your Co. uses in the example. Then the compensation and interest are matched and treated as if paid year by year.