It's sad, but true. All estate plans are not created equal. This article is targeted to help everyone who has a completed estate plan in place, but is not 100 percent delighted with the plan. Over the years, I have asked hundreds of people in this not-delighted group, "Why?" Hands down, the single biggest reason is, "Because my family's wealth must be shared with the IRS to pay [often followed an expletive] estate taxes."
We are about to attack this problem head on, then solve it.
When I consult with readers of this column (who have an estate tax problem), they fall into one of three categories: those who want to...
#1. » Maintain their wealth... Tend to be older and retired/main goal is to maintain their lifestyle, including spouse, if married.
#2. » Grow their wealth... Tend to be younger/still hell-bent-for-thunder to expand their business and seek business and investment opportunities.
#3. » Get rid of their wealth to family and/or charity... Can be any age, but usually 59 or older; seldom completely retire: have earned, inherited or both significant wealth; legally reducing or eliminating the estate tax bite is often their favorite indoor sport.
Which category are you? It's possible to be a bit in two categories at the same time. No matter what category someone is in, the economy troubles almost every reader/client I talk to.
Yes, the economy is a current problem. But over the years, what do you think is the common concern to almost all of my readers -- whether -- in category #1, #2, or #3? ... They have the gnawing feeling that their estate plan is just not right, could be better, but they don't know what to do about it.
Can you guess why they feel that way? (Hint: The real reason is they are right: Their plan could be better.). The simple answer to the why is they have a traditional estate plan (TEP). Bet almost 100% of my readers (yes, that includes you) has a TEP, if you have a "completed" estate plan. A TEP, is simply a set of documents -- usually a short will, with a longer trust -- that contains a typical A/B set of trusts (often called a family trust and a residual trust).
A TEP is a good start to estate planning, but it never -- and I mean never -- can conquer the IRS estate tax monster. The best a TEP can do is defer the estate tax until both the husband and wife have gone to their reward. Then, the IRS will collect its pound of flesh.
A recent email from a column reader (Joe) explains the problem of a TEP. The email said in part: "I would like for you to review my [and his wife Mary's] Revocable Family Trust. My Ohio lawyer thought that the documents should be reviewed by a Florida lawyer." A telephone conversation with Joe confirmed that he was a solid #3 (as described above) and was moving to and intended to become a resident of Florida.
At my request Joe sent me a standard consulting package: (a) personal financial statement for Joe and Mary; (b) last year-end financial statement for his family business, Success Co, (being run by his son Sam); (c) a family tree -- including all of his kids and grandkids; and (d) his estate planning documents (No surprise, two TEPs, one for Joe, one for Mary).
Now, two facts that will lay the groundwork to prevent a large portion of your wealth from being lost to the IRS, but instead enriching your family:
Fact No. 1. (Is obvious, but ignored.) The estate tax plans for clients in categories #1, #2 and #3 should be substantially different. After all, the facts, circumstances, ages, goals, how the economy might impact them (stays lousy, inflation might rage, etc.), and other factors logically call for different estate plans. What's true in real-life practice?... Almost all plans -- whether #1, #2 or #3 -- are plain vanilla (TEPs). Not a ghost of a chance to save taxes.
Fact No. 2. (Bad -- really incomplete -- legal work favors the IRS, not the client.) I searched my files to find five each of category #1, #2 and #3 clients, a total of 15). I wanted only "completed" estate plans where the client came to me for a second opinion. Even I was shocked. True to form, each had a TEP ... a good start.
But not one had a comprehensive lifetime plan... we put in 15 such plans. Only one had an irrevocable life insurance trust, we created 10 more. There were no family limited partnerships or intentionally defective trusts, we created eight and five, respectively. Each of the 15 plans required from two to as many as six lifetime strategies to bring the overall plans up to our standards. We did nothing fancy or unusual (for our way of planning). All strategies were easy to do, legal and saved (depending on the client) payroll taxes, income taxes and, in all cases, eliminated the impact of gift and estate taxes.
The question still remains. Why don't TEPs work to save taxes? ... Let's solve the mystery by asking and answering a few questions. When does a TEP take effect... not until you die, not a second before. What is a TEP's purpose? ... To create a detailed plan of to whom, how much and when your wealth is distributed (not while you are alive, but only after you are dead). Logic tells you if you want to win the estate tax game against the IRS, a lifetime plan is essential.
We have done so many estate plans over the years that we have reduced our methodology to an organized system that includes 23 core strategies and dozens of sub-strategies in the right combination.
The system always works. We applied the system to Joe's (and Mary's) information package. We used six core lifetime strategies and two sub-strategies. Their estate tax would have been just over $7 million. We not only killed Joe's potential estate tax liability, but created an additional $3 million in tax-free wealth for Joe's family with a strategy called "retirement plan rescue" (converts funds that would normally be double taxed at death -- because funds are in an IRA or other qualified plan -- into tax-free life insurance).
The answer to the following questions, often asked by readers of this tax column, should help everyone reading these words win their own estate tax battle. "Irv, how do I know when my estate plan is done and done right?"... Here's a two-point answer: (1) When your advisor can look you in the eye and tell you -- whether you are worth $4 million or $40 million (or more) -- that the estate plan created for you will eliminate the impact of the estate tax. Simply put, if you are worth $12 million, $12 million to your family (all taxes paid in full); if you are worth $42 million, $42 million to your family. Fill in your own number. And (2) your advisor can explain in simple English how each strategy works to save those millions. If your advisor can't do it, get a second opinion.
Now, a seeming shift (which you will see is really not a shift) in subject matter. This tough economy has been tough on the Red Cross, which is still pouring money into Haiti following the tragic earthquake.
Here's a little plan to help you save a ton of taxes while helping the Red Cross. My book, Tax Secrets of the Wealthy sells for $367. The book shows you step-by-step how to totally eliminate the estate tax. You'll learn how to use the system we use to do real-life tax planning for our clients. Simply write a check (payable to the Red Cross) and the book is yours. Send your check to me: Irv Blackman, 3960 Deer Crossing Court, Unit 102, Naples, FL 34114.
I'll do two things in return: (1) Send you a copy of Tax Secrets of the Wealthy (as my gift to you) and (2) pay the shipping (via UPS). How much should be the amount of your check?... $100... $200... $500 -- you decide. Please affix your check to your business letterhead with your business card (just your name, address and phone numbers -- home and cell -- if you are not in business). I'll forward your check to the Red Cross and ask them to acknowledge receipt directly to you.
Want more information? Browse my website: taxsecretsofthewealthy.com. In a hurry, call me (Irv) 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. Blackman is the author of 31 books on taxation, as well as hundreds of articles for professional publications. Tax Secrets of the Wealthy is headquartered in Naples, FL.