I recently came across an interesting article in an old issue of Newsweek titled, “Darling, It’ll Be Yours—Soon.” Written by Robert J. Samuelson, the article explains how “the inheritance boom is quietly reshaping how we think about death.”
When I began my professional practice as a CPA and lawyer back in the 1950s, a millionaire was hard to find. Today, millionaires are everywhere. One thing that hasn’t changed is estate planning—millionaires still scurry around trying to find ways to lower their estate taxes. Although the article entertainingly explores the problem, 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 solve the problem. Let’s start with the elders—mom and dad—who have the wealth.
- You ain’t dead yet. Typical estate plans (separate wills and trusts for him and her) don’t speak until you are dead, when it’s 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.
- Wealth is usually passed on to the younger generations of the family. When the younger generation steps into mom’s and dad’s shoes, it usually increases the family wealth. This gives the second generation (and those that follow them) 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: We assume that the children—particularly the business children—are likely to become wealthier than their folks. Because of this generational wealth transfer pattern, we view each generation of the family separately in terms of their special needs and objectives. Therefore, the plan we create is not just for mom and dad, but rather it is a comprehensive and coordinated plan for the entire family. What follows is an overview of how to keep your wealth in the family, instead of losing it to the IRS.
First Generation—You. Install a lifetime plan that removes wealth from your taxable estate during life. Use strategies such as:
- A qualified personal resident trust for your residence; an intentionally defective trust for your business
- A subtrust or retirement plan rescue for your profit-sharing plan, rollover IRAs and similar plans
- A family-limited partnership for your investment assets and an irrevocable life insurance trust for insurance, probably second-to-die.
All of these strategies begin their work while you are alive and in control.
We’ll dovetail your will and trust (death documents) with your lifetime plan. When done right, your death documents clean up what’s left after your lifetime plan has been implemented.
Second Generation—Your Kids. 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 according to 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.
Third Generation—Your Grandchildren. 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.