Most of the concepts and strategies you read in this tax column are really answers to questions asked by readers who called our office. Also tossed into the column is a large helping of our years of experience consulting with our readers.
About three out of every four readers who call ask a variation of this troublesome question, “What will estate planning do for me, my family and my business?” The simple answer: The “right plan” will accomplish all your goals. Actually, the right estate plan is a group of small plans that all dovetail together.
There are basically two types of plans: a lifetime plan that should start now (in the next two or three months) and a death plan (really your will and trust documents) that can sit in a drawer until you get hit by the final bus. By far, the lifetime plan is the most important of the two. Let me say it loud and clear: Never, under any circumstances can your will and trust—no matter how fancy or how long—accomplish your lifetime goals. Even worse, standing alone, rarely can your will and trust accomplish your estate planning (death) goals. Remember, your death documents do absolutely nothing until after you have drawn your last breath.
Okay, so lifetime planning is the way to go. The typical business owner (let’s call him Joe) will have three plans: (1) a retirement plan, (2) a business succession plan (Who will run the company when Joe slows down? In practice Joe rarely will completely leave the business until he goes to business heaven) and (3) a business transfer plan (which usually leaves the business to Joe’s business child or children) or a sales plan (which leaves the business to key employees or an outside buyer if there are no kids or employees to take over the business). Can you imagine any of these three plans being effectively handled in death documents?
The various plans that we, as consultants, create are in response to the goals that you, the clients, list. To help you get started on the first task of creating the “right plans,” the remainder of this article focuses on the ten most common goals we hear from clients in the real world. Every one of these goals can be accomplished with ease by employing the appropriate strategy. [The strategies used most often are given in brackets.] You’ll easily recognize which are part of a lifetime plan and which are part of a death plan.
- Maintain our lifestyle (Joe’s and his wife Mary’s) for as long a we live [intentionally defective trust, S corporation, family limited partnership, retirement plan or a TIPs, which stands for transferable insurance policies].
- Control my (Joe’s) wealth—including my business—for as long as I live [voting/nonvoting stock for business or a family limited partnership].
- Maintain Mary’s lifestyle for as long as she lives [marital deduction, irrevocable life insurance trust, plus all strategies as shown in No. 1 above].
- Pass all of my wealth—every dime of it—to my family, instead of losing it to the IRS [strategies as shown in the other 11 items in this list].
- Transfer my business, tax-free to our business children [intentionally defective trust; never a sale].
- Treat children (meaning non-business children) fairly [family limited partnership, irrevocable life insurance trust, subtrust, retirement plan rescue].
- Avoid the huge (as much as 80 percent) double tax on my qualified retirement plan—like a profit-sharing plan, 401(k) or IRA—money [subtrust, retirement plan rescue].
- Educate my children / grandchildren [private retirement plan].
- Eliminate the capital gains tax [charitable remainder trust].
- Attract key employees and keep my key employees [non-qualified deferred compensation plan].
- An investment without risk that earns 8 percent (could be more or less depending on the person) [TIPs, an investment that has averaged 15.82-percent annual return for the past 15 years. (This is offered by a public company that trades on the NASDAQ. You must be a qualified investor with a minimum investment $50,000)].
- Establish a family foundation and make gifts to charity without reducing the value of our wealth to be inherited by our family [charitable lead trust and charitable remainder trust].
The 12 goals listed above (followed by the tax strategies that will help you to easily accomplish your goals) are actually a good road map to help you get started on your own tax plans.