Tax law is complicated, particularly in terms of its role in estate planning. It’s so complex that it’s virtually impossible for any one person to know and understand it all. So, it should come as no surprise that when an estate planning advisor attempts to “do it all,” the result is an incomplete estate plan. The IRS wins; you and your family lose. The more you are worth, the more you and your family are likely to have to give up to the estate tax monster.
We often talk about Joe in this column. He is married to Mary, owns a successful business called Success Co. and has three children. Joe’s plans for Success Co. stipulate that one of these children, Sam, will eventually own and run the company.
As Joe approaches retirement, his estate-planning goals are twofold: 1) come up with a “lifetime” plan that will support Mary and himself financially for the rest of their lives and 2) establish a plan for what happens to his estate after their deaths.
Joe and Mary initially decide to consult with a local lawyer to create their estate plan, and he helps them set up a standard A/B trust with a pour-over will. Technically, this is a good idea, but it is highly incomplete as a comprehensive estate plan. Unfortunately, Joe and Mary’s attorney did not know about or did not know how to implement some other appropriate strategies for saving taxes and creating tax-free wealth.
Some of the lifetime planning techniques that the lawyer missed were reducing payroll taxes, deducting medical expenses for Joe and Sam and their families, creating a captive insurance company, and ensuring that none of the family assets would go to an ex-spouse in the event of a divorce. These strategies could produce estimated annual tax savings of between $80,000 and $100,000.
Other strategies Joe and Mary missed out on include creating a family limited partnership for Joe’s investments and establishing an intentionally defective trust to transfer Success Co. to Sam tax-free while still keeping the company in Joe’s control. The advisor also could have used a series of asset protection strategies for both Success Co. and Joe’s other assets, and used funds in Joe’s 401(k) and IRA to create $3.5 million of tax-free life insurance, to avoid double taxation of the funds at his death. The estimated potential tax savings from all of these strategies would be about $2.2 million.
Joe and Mary’s attorney was well-meaning, but he couldn’t possibly know all the potential strategies available to help them maximize their estate planning and save as much in taxes as possible.
Just like in the medical profession, comprehensive estate planners can use a network of specialists to address all of a client’s needs. If you have a heart problem, your general practice doctor will send you to a cardiologist, who in turn will send you to a cardiac surgeon if surgery is required. Similarly, a good estate planner can bring in a team of specialists to handle the different aspects of your comprehensive plan.
The estate planning advisor himself would create both the lifetime and the estate plans, but perhaps a lawyer who specializes in estate planning documentation would complete the endless amount of paperwork. Insurance is an important part of most comprehensive plans, so an insurance consultant might analyze your existing insurance and find ways to significantly increase your death benefits without additional premium costs. Other experts can be brought in as needed, including business valuation specialists, experts in foreign taxes and laws, and captive insurance company experts.
A comprehensive estate plan can enable someone like Joe to live comfortably for the rest of his life and deliver his estate to his heirs tax-free after his death. Eliminating estate taxes might sound impossible, but someone who knows the right tax rules and how to use them can accomplish it. Because tax laws are so complicated, however, truly conquering the estate tax monster is more than the typical family lawyer can accomplish alone. It really takes a team of experts to execute the most comprehensive and effective estate plan.
Remember, estate planning is a complicated game that you only play once. You need a team behind you that provides you with the best shot at winning it.