An interesting article in the April 3, 2000, issue of Newsweek titled, "Darling, It'll All Be Yours—Soon," got me thinking. 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, they scurry around trying to find a professional who can lower the estate tax for them when they get hit by the final bus.
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 No. 1: 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 No. 2: Years of experience have taught us that wealth is always passed on to the younger generations of the family. And then the younger generations increase the family wealth. This gives the second generation an even bigger estate tax problem than mom and dad had.
Logic tells you that the children—particularly the business children—are likely to become wealthy. Usually, these children accumulate more wealth than their mom and dad . . . to be repeated again when the family 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. Yet, the plan is not just for mom and dad, it is a comprehensive plan for the entire family. The following is a way to solve this do-not-enrich-the-IRS-estate tax problem.
- First Generation. Install a lifetime plan that removes wealth from your taxable estate during life. Use strategies such as (A) a qualified personal resident trust for your residence; (B) a grantor retained annuity trust for your business; (C) a subtrust for your profit sharing plan, rollover IRAs and similar plans; (D) a family limited partnership for your other assets; and (E) an irrevocable life insurance trust for insurance, probably second-to-die. All of these strategies 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. But when done right, your death documents just clean up what's left. The first part of the family plan and your wealth transfer was completed—tax free—while you (and your spouse) were alive.
- Your Kids—Second Generation. After completing the plan for mom and dad, it is easy to project what the financial future of the kids might look like. So, we start a plan for each of the kids, based on their individual assets and objectives. The process is the same, 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 tax purposes) is a key objective.
- Your Grandchildren—Third Generation. Probably the most important point to keep in mind is that because of the young ages in this generation, getting the children into a tax-free environment as soon as possible is a wealth-building must. These plans center on short- and long-term tax-advantaged strategies that fulfill lifetime needs: education, buying a house, starting a business and building a retirement fund.