The answer to the above headline question is a thundering "YES" for about 99% of everyone reading these words. Why? Because 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 (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 you get hit by the final bus).
With the new unified credit (at least $3.5 million, $7 million if married) the estate tax monster won't be scaring as many people. The goal of this article is to change the way you think about estate planning.
So 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 would ask you, "Assuming, (#1 clients) you do not have enough wealth to worry about being hit by the estate tax... or (#2 clients) you know you will be hit hard by the estate tax but for the moment, forget the awful tax even exists and tell me: What Is Your Single Biggest Concern?"
Let's talk about the major difference between #1 clients and #2 clients separately. (You can only be one of them.) Hands down, the answer (most important concern) of a #1 client is, "To maintain my lifestyle (and my spouse's) for as long as we live." Sure the client has other concerns: for example, stay healthy, transfer the family business to the business kids, treat the non-business kids fairly... but lifestyle is always stage center.
So professionally, we quickly take care of the #1 client death planning: wills, trusts, life insurance. Always, the real 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. Protect personal assets.
What's usually the biggest single lifetime planning task? Make sure -- with the help of others -- that #1 clients get the highest rate of return on their investments, while minimizing risk.
Now let's talk about the #2 clients. They are affluent. (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 is their biggest concern (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 #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 #2 clients also have a large amount (often in excess of $1 million) in their qualified plan (401(k), profit-sharing plan or IRA). Almost all either 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 #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 #2 clients, might apply to you:
(1) For your business: (a) a captive insurance company to significantly lower your property and casualty insurance costs and (b) an intentionally defective trust to transfer your business to your kids or employees (really the best succession plan) tax-free; (2) for your residence (a) a qualified personal residence trust or (b) a 50/50 revocable trust ownership; (3) for your qualified plan funds (i.e. 401(k) IRA) (a) a retirement plan rescue or (b) subtrust (both avoid double taxation of your funds) and turn them into three to five times more tax-free wealth; and (4) for your investment-type assets (like real estate, cash-like assets, stocks and bonds) a family limited partnership.
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 your heir's inheritance.
Have a question? Take a look at taxsecretsofthewealthy.com and estatetaxsecrets.com. In a hurry, call me at (847) 674-5295.
IRVING L. BLACKMAN is a practicing certified public accountant specializing in wealth transfer and business succession and valuation. He is a founding partner in Blackman Kllick Bartelstein LLP, CPAs, one of the largest accounting firms in the country, and is a member of the Illinois Society of CPAs and the American Institute of CPAs. The firm can be reached at (312) 207-1040. Blackman is the author of 31 books on taxation, as well as hundreds of articles for professional publications.