The answer to the above question is a thundering YES for about 99% of everyone reading these words. Why? Because it's almost certain that before 2009 ends, the tax law will be changed to make the "unified credit" (the amount of wealth that can be left to your heirs estate tax-free) $3.5 million (or more) per person. That's at least $7 million—tax-free—for a married couple.
We've always been able to beat the estate tax. Now, it's just going to be easier. But let's face it; an estate plan does nothing until you enter the pearly gates. A proper estate plan must include a lifetime plan as well.
If you were a client sitting in my office, the first question I would ask you is: "Assuming (No. 1 clients), you do not have enough wealth to worry about being hit by the estate tax... or (No. 2 clients), you know you will be hit hard by the estate tax but for the moment, forget the tax even exists and tell me, what your single biggest concern."
Hands down, the answer of a No. 1 client is, "To maintain our lifestyle for as long as we live." Sure, the client has other concerns—stay healthy, transfer the business to the kids, treat the non-business kids fairly—but lifestyle is always stage center.
We quickly take care of the No. 1 client's death planning: wills, trusts, life insurance. But the real emphasis is on lifetime planning: Transfer the business to the kids tax-free, yet have control via voting stock for life. Make sure the client has the best health insurance at minimum cost, as well as a wage continuation plan from the family business if someday the client can no longer work.
The biggest single lifetime planning task is making sure No. 1 clients get the highest rate of return on investments, all while minimizing risk.
Now let's talk about the No. 2 clients. They are affluent, and they have a big-time estate tax problem. But they have enough wealth to no longer worry about lifestyle. If the client still owns a business, transferring it to the kids in a tax-effective way is their single biggest concern. Waiting until death for this to happen only enriches the IRS. Instead, we use an intentionally defective trust to transfer the business tax-free. The client keeps control of the business for the rest of his or her life, but for estate tax purposes, it's gone.
But what if the No. 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 No. 2 clients also have a large amount in a qualified plan [401(k), profit-sharing or IRA]. Almost all either were or have turned conservative. The goal is to maximize the rate of return on these investable assets, while minimizing risk.
It's not as complicated as you think. Take this article to your professional advisor and discuss how the following strategies might apply to you:
1) For your business: a) a captive insurance company to lower your property and casualty insurance costs and b) an intentionally defective trust to transfer your business to your kids or employees 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 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.
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 of your heir's inheritance.