While browsing through my small mountain of files looking for ideas of what to write, I ran a cross a still-timely and interesting article in an old issue of Newsweek titled, Darling, It’ll Be Yours-Soon.
The article explains how “The inheritance boom is quietly reshaping how we think about death.”
How true.
When I began my professional practice (as a CPA and lawyer back in the ’50s), a millionaire was hard to find. Today, millionaires are bountiful. And when it comes to estate planning, most millionaires scurry around trying to find a professional who can lower the estate tax for them when they get hit by the final bus.
The article (well written by Robert J. Samuelson), like so many other articles, entertainingly explores the problem, but it offers no solutions.
Let’s set the scene for how you (whether you are mom and dad trying to give it away tax-free or one of the kids on the receiving end) can, in fact, solve the problem. Let’s start with the elders, mom and dad, who have the wealth.
Fact number one: You ain’t dead yet. Typical estate plans (separate wills and trusts for him and her) don’t speak until you are dead: too late to beat the tax collector. The solutions lie in lifetime planning. A lifetime plan keeps you in control of your wealth for as long as you live, yet transfers it — including your business — to your kids (and grandkids) while you are alive.
Fact number two: Years of experience have taught us that wealth is always passed on to the younger generations of the family. And when the younger generations step into mom’s and dad’s shoes, they usually increase the family wealth. This gives the second generation (and those who follow) an even bigger estate tax problem than mom and dad had.
Here’s how we solve this do-not-enrich-the-IRS-estate tax problem: Logic tells you that the children — particularly the business children — are likely to become more wealthy than their folks. Usually the business children accumulate much more wealth than their mom and dad, a process to be repeated again when the family business wealth goes to the grandchildren two generations later.
Because of this generation-to-generation wealth transfer pattern, we view each generation of the family separately in terms of their special needs and objectives. So, the plan we create is just not for mom and dad, it is a comprehensive and coordinated plan for the entire family. Following is an overview of keeping your wealth in the family, instead of losing it to the IRS.
First Generation. Install a lifetime plan that removes wealth from your taxable estate during life: Use strategies like (1) a qualified personal resident trust for your residence, (2) an intentionally defective trust for your business ; (3) a subtrust or retirement plan rescue for your profit-sharing plan, rollover IRAs and similar plans; (4) a family limited partnership for your investment assets, and (5) an irrevocable life insurance trust for insurance, probably second-to-die. All of these strategies — and there are many others — begin their work now while you are alive and in control.
Of course, we’ll dovetail your will and trust (death documents) with your lifetime plan. When done right, your death documents just clean up what’s left after your lifetime plan has been implemented. The first part of your family plan and wealth transfer must be completed — tax-free — while you (and your spouse) are alive.
Your Kids-Second Generation. After completing the plan for mom and mad, it is easy to project what the financial future of the kids might look like. So, as soon as we finish the plan for the first generation, we start a plan for each of the adult kids, based on their individual assets, whether in the family business or not, and each of their specific objectives.
The process is the same as for mom and dad, but flexibility (remember, this generation usually is still in the process of trying to accumulate wealth, rather than trying to get rid of it for estate tax purposes) is always a key objective of the second generation.
Your Grandchildren-Third Generation. The plans for this generation are closely tied to the plans of the two older generations. Probably the most important point to keep in mind is that because of the young ages in this generation, getting the youngsters into a tax-free environment as soon as possible is a wealth-building must.
These plans center on short-term and long-term tax-advantaged strategies that fulfill lifetime needs: education, buying a house, starting a business and (if they don’t go in to the family business) building a retirement fund.
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Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection.
