THIS IS A TAX WAR story, told in a U.S. Tax Court memorandum opinion case.
In 1989, Robert H. Lurie, a successful entrepreneur and very wealthy man, was diagnosed with cancer. He planned his estate, creating a traditional revocable trust that included a bypass trust (to save his unified credit) and a marital trust (for his wife). His will bequeathed his personal effects to his wife and passed everything else to the revocable trust.
Nothing fancy. Almost everyone who does estate planning starts (and unfortunately often ends, as Lurie did) with a traditional estate plan. As you will see, it can be a very expensive tax mistake.
Over his lifetime Lurie amassed a sizeable fortune. He donated more than $60 million to various philanthropic causes, most involving Northwestern University (your author’s alma mater). Obviously Lurie was a big hitter. He could afford the best estate planning advice. Yet he ended up with no more than a traditional estate plan.
Before telling you the rest of the story, let me make one point clear: If your professional adviser stops after creating only a traditional estate plan (as did Lurie’s and probably many of yours do), run. I mean run for your tax life. Get a second opinion.
Now the rest of the story. Back in 1974, trusts — 10 to be exact — were created that gave Lurie certain rights. In 1983 he exercised those rights. The IRS dragged those 10 trusts into Lurie’s estate. Are you ready for this? The IRS asserted an additional tax of $47.5 million, later amending its claim to an $83 million deficiency.
Lots of technical stuff in the court’s opinion, such as doctrine of equitable apportionment, tax allocation and tax reimbursement. Stuff that’s hard to understand. But the end result for Lurie’s estate is easy to understand — the IRS won.
How can such a failure of proper estate planning happen? You’ll be surprised at the three-word answer — traditional estate planning.
Over the years, I have reviewed hundreds of estate plans that, like Lurie’s, stopped with a traditional estate plan. Never, and I mean never, have I seen a traditional plan, except for tiny estates, be the best plan to prevent the client’s estate and heirs from being beat up by the IRS.
There are plenty of ways to beat the IRS legally and to prevent a tax disaster such as Lurie’s. If you have a traditional estate plan in place (or your professional adviser is talking about doing one for you), we would advise you to get a second opinion immediately.
Conventions offer a wonderful opportunity for trade association members to work and play (and, of course, get a legitimate tax deduction) at the same time. For me, as a seminar speaker, conventions are a delightful combination of teaching others, while I learn firsthand about the problems of the business owner attendees (while getting in my share of playtime too).
Recently, a trade association invited me to do my seminar gig at a Caribbean island resort. Great weather. Breathtaking views. Best of all, a large, want-to-learn audience of family business owners (including many wives and kids working in the business).
The hour-and-a-half seminar covered wealth transfer, estate planning, asset protection, business succession and related subjects. The feedback (each seminar attendee filled out a comprehensive seminar evaluation form) was gratifying.
But my learning experience started an hour after the seminar.
Here’s why. The association’s executive director — bless him — had prearranged five, no-charge, half-hour consultations with me. Each consultation started the same way:
- Reviewing a personal financial statement (listing only significant assets and liabilities);
- Listing their goals (particularly any burning issues or concerns involving the spouse, rest of the family and business); and
- Asking each one, “What are the one or two subjects you would like to talk about the most?”
Estate planning won hands down — all five — and business succession was mentioned by four out of five.
The balance of the time (15 to 20 minutes) was used to explain the various tax strategies each should use to accomplish their specific goals, based on the assets owned.
Here’s what I learned about the five who consulted with me:
- All were males who owned their own business (although one had already transferred all his stock to his two kids who ran the business).
- They ranged in age from 46 to 66.
- Net worth ranged from $2 million to $12 million.
- Profits, after officer salaries and bonuses, ranged from $300,000 to $1.5 million.
- All were smart, educated and well-informed entrepreneurs.
Surprisingly, I learned that their common denominator was that not one of them could solve the burning concern each of them had of maintaining his lifestyle for as long as he lives combined with the most perfect estate plan (really death documents in the form of a will and a trust).
Four of them had no business succession plan (by transferring the business to one or more of their kids or to one or more key employees). The best estate plan in the world cannot get the succession job done.
Simply put, not even one of these five typical business owners can accomplish their most important goals with an estate plan. What they clearly need is a lifetime tax plan that dovetails with their estate plan (death plan).
In the end, I recommended a plan for each of them using 15 different lifetime strategies that we use here in the firm (three was the smallest number of strategies, while six was the most for any one plan).
If you want to read more about the strategies, check out my Web site, www.taxsecretsofthewealthy.com.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].