Originally, we designed "the System" to reduce the estate tax. However, it has evolved into a way to keep all of a person's wealth in his or her family, an outcome that automatically eliminates the impact of the estate tax by default. However, most people want more than just an estate plan. They also want a plan that, at minimum, accomplishes the following goals:
A comprehensive plan created using the System accomplishes not only the six "wants" listed above, but almost any tax or economic want of the business, its owner or the owner's family. The technical aspects of the System can be modified to deal with changes in the law, economic conditions and other factors over the course of the client's lifetime, as necessary.
Now, let's follow how Joe, a real-life reader of this column, implemented the System using eight steps:
Step 1. Joe sent me two financial statements—personal and the last year-end for his business—as well as a family tree and a list of the documents comprising his current estate plan.
Step 2. Joe and I had a short phone meeting to answer my questions and ensure I understood his short- and long-term goals.
Step 3. I prepared a "discussion agenda" outline that detailed every strategy that might apply to Joe's situation for two plans to be created: an estate plan and a lifetime plan. The two plans dovetailed.
Step 4. Joe and I spent almost an hour and a half discussing the items on the agenda, and we agreed on which specific strategies the two plans would include.
Step 5. My "network" went to work. The network is my admission that no one knows it all, certainly not me. I wrote a detailed report for the network lawyer so he could draft the documents to implement the plans. Joe sent his current estate plan documents to the lawyer. We kept the documents that were compatible with the new plans and amended or rewrote the rest. Then, my network insurance consultant reviewed Joe's life insurance policies. In the end, my insurance consultant was able to increase Joe's death benefits from $2 to $3.45 million without any increase in annual premiums.
Step 6. The lawyer wrote a "concept" letter that explained every strategy incorporated in the new plans. I reviewed the letter, made a few suggestions and e-mailed the letter to Joe. It is important to note that the letter had nothing new in it for Joe. The purpose of the letter is always the same: to put all the details of the plans on which we had agreed in one place, in easy-to-understand language. Separate calls from me and the lawyer made sure that Joe was comfortable with the plans.
Step 7. The lawyer drafted the necessary documents that together made up the lifetime and estate plans. After Joe said the documents were "perfect," he had his local lawyer review the documents and he signed them in the lawyer's office.
Step 8. The insurance strategies Joe ultimately used were determined by me and the network lawyer. The network insurance consultant prepared all the proposals (from six different insurance companies) and explained them to Joe. The amount of insurance (in this case, $3.45 million) was determined by Joe and myself. My arrangement with the network insurance consultant is clear: He cannot sell any insurance or suggest an amount. His function is to supply the best possible information for the client to decide how much insurance is needed and ultimately purchased.
As a result of using the System, Joe and his family will save about $3.7 million in estate taxes, and his family will get an extra $1.45 million in tax-free life insurance.