Green is in, and our community abounds with businesses informing us how to contribute. But is this concept relevant to estate planning? Yes! The key green goals of saving energy, using resources wisely and recycling define the best wealth transfer or estate planning concepts.
First comes saving money, as the recession has brought home to all of us. While estate planning has traditionally focused on saving dollars by deferring or reducing estate taxes, the 2010 tax legislation requires a shift toward recycling, preserving and planning for more efficient wealth transfers, away from complex tax planning, for most. This isn’t to suggest that abandonment of planning will work, because a complete lack of planning can still result in very expensive “un-green” consequences.
Since 2009, the uncertainty of estate tax law has frustrated us all. Would exemption amounts increase or decrease, or would the tax disappear? What tax rates would apply? Would popular planning strategies survive? Would the traditional (exemption/marital deduction planning) continue to be useful? Greater certainty seems to be here at last.
Semi-complex estate tax planning has been de rigueur since the late 1980s, when the tax-free transfer threshold of $600,000 increased unevenly until 2009 when it peaked at $3.5 million. In 2010, the tax was slated to disappear, but throughout most of 2010, it hovered as a maybe tax due to legislative uncertainty. Finally, the “2010 Tax Act” ushered in a two-year period of certainty and tax reduction. Beginning last month, only estates, lifetime gifts and gifts to a grandchild in excess of $5 million will be exposed to estate tax ($10 million for married couples), at a rate of 35 percent of the excess, as opposed to the 2009 rate of 45 percent. Thus, most—except the upper 2 percent of the U.S.—can now plan knowing gift and estate taxes won’t apply until at least 2013. Without having to wrap gifting goals with a maze of verbally obtuse tax saving clauses, real planning can now resume. But don’t be fooled: Many important decisions remain for those with estates below the $5 million per person threshold.
Without informed planning, administrative costs can escalate, since California law controlling transfers is unaffected by the tax changes. Assets may not pass as wished, and transfer devices may not be efficient. Lack of a cohesive plan can also spark interfamily disputes at an explosive monetary and interpersonal cost. In this new environment, many may be tempted to avoid professional advice altogether, thinking that, without the tax burdens, planning no longer matters or a “do your own” will suffice, just as possibly more meaningful planning avenues emerge. But complexity hasn’t gone away, it’s just changed character.
Second, since a family’s most fundamental resources are material wealth and bank of knowledge, culture and experience, let’s recycle them all. Think of estate planning as fundamental recycling, since it uses transfer methods to maximize asset value for wealth “reuse” and seeds future growth. Business owners will want to consider how the business’ know-how and culture—its intangibles of values, energy and strategies—will be transferred, as well as core assets. Without both, a family business legacy can be squandered or compromised.
Third, green thinking considers the sustainability of our planet’s resources. What better than to apply “sustainability” concepts to family wealth planning. The old adage that the rich get richer and the poor get poorer is hard to deny, as they apply to cash and asset transfers as well as to transfers of work ethics and resourcefulness. All are passed on through families.
What about teaching a child or grandchild to develop a business plan; open a financial account; pick a reliable investment manager, CPA or attorney; or translate a dream into a financial reality? These skillsets are fundamental, but often overlooked.
Fourth, what about planning efficiencies? It’s easy enough to do nothing, use default gifting methods (“I give everything to my spouse” or “equally to children”) or simply print and fill-in an online will or trust. Numerous wealthy moguls have resorted to these do-little methods with devastating, soap opera-like consequences. Besides being grossly inefficient and expensive when the overall consequences are measured, they overlook the leveraging techniques that timed gifting and use of protective planning devices provide.
In some cases, sophisticated tax planning will apply, but for most, carefully chosen, simple devices can be effective, such as creating a single “flex trust,” adding another person to property title as a joint tenant or tenant in common or taking title between spouses as community property. These techniques can vest title in the “right” person, split an interest or control a gift’s timing. Relied on without guidance, however, they can backfire and create unintended income tax consequences or cause property to vest inappropriately. Informed planning is the key.
Finally, ask, “What will the next generation need or want to help them grow?” Perhaps cash is best, but maybe an equity-based appreciating asset (such as a stock or bond ) is better, or a beneficial interest in an income tax-deferred, long-term retirement plan that will grow. Give one family member voting interests in the business and another non-voting interests, depending on the recipients’ aptitude and ability to participate. Perhaps annual payments of school tuition to a grandchild, niece or nephew, or payment of medical expenses directly to the provider is better from a tax-savings as well as a personal benefit perspective. Perhaps use of a non-tax based, generation-skipping trust affords the best long-term protection for beneficiaries who might otherwise be tempted by unwise investments, imprudent marriages or creditor issues.
Like the need to consider and embrace new technologies and green preservationist habits, it’s time to dust off the core wealth transfer concepts. Estate planning is essentially about assets, people and delivery systems—not just taxes.
