Most of the concepts and strategies you read in this column are really answers to questions asked by readers who call our office.
About three of every four callers 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(s)” will accomplish all your goals.
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 (your will and trust documents) that can sit in a drawer until you go to business heaven. By far, the lifetime plan is the more important of the two. Let me say it loud and clear: Never, under any circumstances, can your will and trust accomplish your lifetime goals. Even worse, standing alone, your will and trust rarely accomplish your estate planning (death) goals. Remember, your death documents do absolutely nothing until after you draw 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: a retirement plan, a business succession plan and a business transfer plan. The business succession plan will designate which family members will run the company when Joe slows down (because in practice, Joe rarely totally leaves the business until he goes to business heaven). The business transfer plan (or a sales plan) describes how Joe will leave the business to key employees or an outside buyer (if there is no family member who will take over the business).
The various plans that we create are in response to the goals that clients list. To help you get started on the first task of creating the “right plan,” the balance of this article focuses on the 11 most common goals we hear from clients in the real world. Every one of these goals can be accomplished by employing one of the appropriate strategies, which are given in brackets. As you read the strategies, circle the ones that match your goals.
- Allow my spouse and me to maintain our lifestyle for as long we live [intentionally defective trust, S corporation, family limited partnership, retirement plan].
- Control my wealth—including my business—for as long as I live [voting/nonvoting stock for business, family limited partnership].
- Maintain my spouse’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 shown in the other 10 items in this list].
- Transfer my business to my business children tax-free [intentionally defective trust; never a sale].
- Treat my 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 (profit-sharing plan, 401(k) or IRA) [subtrust, retirement plan rescue].
- Educate my children/grandchildren [private retirement plan].
- Eliminate the capital gains tax [charitable remainder trust].
- Attract and keep key employees [nonqualified deferred compensation plan].
- Establish a family foundation and make gifts to charity without reducing the value of the wealth my family will inherit [charitable lead trust and charitable remainder trust].
These 11 goals and tax strategies are a good roadmap to help you get started on your own tax plans.