It is almost certain that before 2009 ends, the tax law will be changed to make the unified credit, the amount of your wealth that can be left to your heirs free of the estate tax, $3.5 million or more per person. That's at least $7 million — tax free — for a married couple. Hey, with a $7 million “freebie” to start, if you are married and are worth about $14 million or less, legally beating the estate tax will be an easy to attain goal.
The fact is we always have been able to beat the estate tax — whether you were worth $5 million or $50 million. Now, it's just going to be easier. But let's face it, an estate plan, which is really a death plan does absolutely nothing until you enter the pearly gates. Logic tells you that a proper estate plan must include a lifetime plan (the period from today until the day you get hit by the final bus).
With the new unified credit, the estate tax monster won't be scaring as many people. For the moment, please pretend you are a client, sitting in my office, and we are going to talk about your estate plan. Here's the first question I typically ask of clients: What is your single biggest concern? I ask this question of all my clients, including my No. 1 clients that do not have enough wealth to worry about being hit by the estate tax and my No. 2 clients that know they will be hit hard by the estate tax.
Let's talk about the major difference between No. 1 clients and No. 2 clients (you can only be one of them). Hands down, the most important concern mentioned of a No. 1 client is how to maintain his or her lifestyle (and the spouse's) for as long as he or she lives. Sure the client has other concerns such as staying healthy, transferring the family business to the business kids and treating the non-business kids fairly, but lifestyle is always center stage.
So professionally, we quickly take care of the No. 1 client's death planning with wills, trusts and life insurance. Always, the emphasis is on lifetime planning: transfer the business to the business kids tax-free, yet have dad keep control of the business (via voting stock) for life; make sure mom and dad have the best health insurance at minimum cost; create a wage continuation plan for dad (from the family business) if someday he can no longer work; and protect personal assets.
What's usually the biggest single lifetime planning task? Make sure — with the help of others — that No. 1 clients get the highest rate of return on their investments while minimizing risk.
Now let's talk about the No. 2 clients. They are affluent, and yes, they have an estate tax problem — big time. But they have enough wealth to no longer even think about any lifestyle concerns. Can you guess what their biggest concern is (aside from the estate tax, which we known how to legally conquer) that requires lifetime planning?
If the client still owns a business, transferring it (typically to the kids or key employees) in a tax-effective way is their biggest concern. Waiting until death only enriches the IRS. Instead we use an intentionally defective trust to transfer the business to the kids or key employees tax-free. Yet dad keeps control of his business for as long as he lives, but for estate tax purposes, it's gone.
But what if the No. 2 client has sold the business and is now sitting on a pile of cash or over the years has accumulated a sizeable amount of cash and a significant stock and bond portfolio?
Typically those No. 2 clients also have a large amount, often in excess of $1 million, in their qualified plan (401k profit-sharing plan or IRA). Almost all were or have turned conservative — their goal is to maximize their rate of return on these investable assets while minimizing risk. One of the fun parts of the planning system we use for these clients is to help them accomplish this goal.
One final fact about No. 2 clients: Their wealth, in normal times, tends to double every six to nine years, exacerbating the estate tax problems. So, of course, we design a lifetime plan unique for each client to maximize the growth of the client's wealth, but dovetail the lifetime plan with the estate plan to eliminate the impact of the estate tax.
It's not as complicated as you think. Take this article to your professional advisor and discuss how the following strategies, which we use for most No. 2 clients, might apply to you:
Business: Use a captive insurance company to significantly lower your property and casualty insurance costs and an intentionally defective trust to transfer your business to your kids or employees (really the best succession plan) tax-free.
Residence: Use a qualified personal residence trust or a 50/50 revocable trust ownership.
Qualified plan funds: Use a retirement plan rescue or subtrust (both avoid double taxation of your funds) for your 401k, IRA, etc., and turn them into three to five times more tax-free wealth.
Investment-type assets: Use a family limited partnership for real estate, cash-like assets, stocks and bonds.
When the above strategies are done right (and all are easy to do), it is not difficult to escape the clutches of the estate tax monster.
And finally, if you have charitable intent, look into charitable lead trusts, charitable remainder trusts and those wonderful family foundations. You can leave millions of dollars to charity without reducing the amount of your heir's inheritance.
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 or [email protected], or on the Web at www.estatetaxsecrets.com.