The Four-Month Estate-Tax CureNovember 1, 2011
A reader of this column (Joe, age 62) and his lawyer (Lenny) live in Florida. Joe started Success Co. from scratch and now employs 82 people, including his son, Sam, who runs its day-to-day operations.
Joe recently went to Lenny to prepare his estate plan, armed with this information: His wife Mary is 63, and they have three children and seven grandkids. Joe spelled out his basic goals:
• Transfer Success Co. to Sam without Joe or his son getting killed by taxes.
• Treat the two nonbusiness kids equally.
• Keep control of his assets, particularly Success Co., for as long as he lives.
• Minimize or eliminate the estate-tax bite.
• Make a substantial contribution to charity if the gift does not reduce his children’s inheritance.
Success Co. is worth about $9 million. Joe’s other assets include real estate leased to Success Co. ($1.3 million); a 401(k) plan worth $1.8 million; various liquid investments worth $4.6 million, including stocks, bonds and CDs; and two homes ($1.9 million). Other assets bring Joe’s total net worth to just more than $20 million, and he also owns a $3-million life-insurance policy with a cash-surrender value of $462,000. Joe has no debt.
Lenny’s estate plan comprised two documents: a pour-over will with an A/B revocable trust. What’s wrong with this plan? Technically, nothing, but the sad fact is that a traditional estate plan is nothing more than a death plan that does not go into action until Joe and Mary pass a.
To begin to prepare a more refined estate plan for Joe, we carefully considered the three major points laid out in Lenny’s cover letter:
• After Joe’s death, Success Co. would go to Sam.
• After Joe and Mary entered heaven, the rest of the assets would be divided equally to the two nonbusiness children (but significantly less to each child than the $9 million current value of Success Co.).
• The $3 million life-insurance policy, plus the liquid assets, would easily be enough to pay the anticipated estate tax. The letter also suggested that the policy transfer to an irrevocable life-insurance trust.
Two plans are needed to accomplish these goals—a traditional plan (the old-fashioned will and A/B trust); and a lifetime plan, designed to accomplish Joe’s goals based on each significant asset owned.