Would you invest four hours to stop the IRS from taking one-half of your wealth? Over the years I have asked this question hundreds of times when giving one of my many tax-saving seminars or when a reader of this column calls me. The response from the audience or the caller is almost always the same: an enthusiastic "yes" followed by something like, "Irv, how do you do that?"
The answer is … with the "system" … to be exact … with the "comprehensive system." Let’s start by getting an overview of the system. Originally, the system, 40 years ago, was designed to reduce the estate tax. Over the years the system has evolved to focus on keeping all of a client's wealth in the family. As a result, the system now automatically eliminates the impact of the estate tax.
Stop for a minute and jot down what you are worth today … better yet, jot down the amount you think you might be worth when you get hit by the final bus. That's the amount the IRS wants to get at. The system will guide you step-by-step to keep every dollar of your wealth in your family. Great!
But a properly designed estate plan must do more. It must be comprehensive, which required us to develop a comprehensive system. Just what does "comprehensive" mean in this context? Experience has taught us that the typical client wants not only an estate plan (really a death plan), but also a lifetime plan that accomplishes at a minimum the following:
- To control his wealth, particularly his business, for as long as he lives.
- To have strategies in place that helps him save income, payroll, capital gains and gift taxes.
- To find the best way to transfer his business to the business children (it can actually be done tax-free).
- To treat the non-business children fairly.
- To make sure he and his wife can maintain their lifestyle for as long as they live.
- To keep the stock of the family business in the family if one or more of the business children, who owns stock, gets divorced.
A comprehensive plan created using the system handles not only the six "wants" listed above, but almost any tax or economic want of the business owner for himself, his business or his family. The technical aspects of the system are changed or modified as required to deal with changes in the law, economic conditions and other factors over the course of the client's lifetime, as necessary.
Now, let's follow how the system was implemented by Joe, a real-life reader of this column. The system is highly organized into eight specific steps, which are described as follows.
Step No. 1: Joe (married with three kids, two kids are in his business) sent me an information package consisting of two financial statements, personal and the last year-end for his business; a family tree, including name and birthday for all of his potential heirs; and a list of the documents comprising his current estate plan.
Step No. 2: After my thorough review of the package, Joe and I had a short phone meeting to answer my questions and make sure I understood Joe's goals, both short-term and long-term for him, his family and his business.
Step No. 3: I prepared a "discussion agenda" in outline form that detailed every strategy that might apply to Joe's situation for the two plans to be created: an estate plan (really a death plan) and a lifetime plan (from today until Joe gets hit by the final bus). The two plans dovetail.
Step No. 4: Joe and I spent more than an hour discussing the items on the agenda and agreed on the plans (death and lifetime) that now needed to be turned into documents. It should be noted that Joe decided not to have his wife Mary on the agenda call (about half of my clients have their spouse on the call). However, at my request, he agreed to get Mary's consent that the plans we agreed on were OK with her. Joe honored my request and Mary actually called me twice with some good questions.
Step No. 5: Time for my "network" to go to work. So, after the agenda call, I wrote a detailed report for the network lawyer, so he could draft the necessary documents to implement the plans. Then, I informed my network insurance consultant to review Joe's life insurance policies. In the end, my insurance consultant was able to increase Joe's death benefits — from $2 million to $3.45 million — without any increase in annual premiums. The lawyer and insurance consultant called Joe to get acquainted, asked questions, answered Joe's questions and got some additional information, so they could do their professional work.
Step No. 6: The lawyer wrote a "concept" letter that explained every strategy to be used in the new plans. I reviewed the letter, made a few suggestions and the lawyer’s secretary e-mailed the letter to Joe. It is important to note that the letter had nothing new in it for Joe. The purpose of the letter is always the same: to put all the details of the plans that Joe had agreed to in one place in easy to understand language. Separate calls from me and the lawyer made sure that Joe (and his wife) was comfortable with the plans. When Joe said "yes," the lawyer went to the next step.
Step No. 7: The lawyer drafted the necessary documents that together made up the two plans: lifetime and estate. After Joe said the documents were "perfect," at our suggestions Joe had his local lawyer review the documents, and Joe signed them in his lawyer’s office. Of course, the local lawyer asked some questions before the signing, and he thanked us for completing a task he did not have the expertise to do.
Step No. 8: The insurance strategies Joe ultimately used were determined by me and the network lawyer. The network insurance consultant prepared all the proposals (from six different insurance companies) and explained them to Joe. The amount of insurance ($3.45 million) was determined by me and Joe. My arrangement with the network insurance consultant is clear: he cannot sell any insurance or suggest an amount. His function is to supply the best possible information, so the client (sometimes with my help) makes the decisions of how much insurance is needed and ultimately bought.
The result of using the system: Joe and his family will save about $3.7 million in estate taxes, and his family will get an extra $1.45 million in tax-free life insurance.
The number of months from my first contact with Joe until the plans were finally done was a little more than five months. How much time did Joe actually spend? When I asked him he didn’t know exactly, but his best guess was a total of between three and four hours.
Joe, a rather conservative and very busy guy, told me that this was the best investment of his time that he ever made.
One final thought. Whether your estate plan is done or about to be done, check with your advisor to make sure your estate plan will deliver all your wealth to your family and that your lifetime plan works with your estate plan. Any questions, call me (Irv) at 847-674-5295.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847-674-5295, e-mail [email protected], or on the Web at WWW.TAXSECRETSOFTHEWEALTHY.COM.