By Josh Gottlieb
Today, we’re going to discuss estate planning and how our notion of estate planning is different. It offers our clients a unique perspective when considering how to structure their estate. Estate planning is principally focused around people who have accumulated a significant amount of wealth and how they’re going to have their assets posthumously distributed.
The federal exemption from estate taxation increased from $600,000 not too long ago to $23 million for a couple today. This means that on the first $23 million of assets, no estate or gift tax will be levied. For people who have substantially more wealth, there's a fundamental goal to minimize the tax or to be able to make sure there's liquidity to pay the taxes at death.
Let’s start with some basics under the assumption that the client has significant wealth. This means that their estate plan goes beyond simply dealing with, “Who’s going to get what when I die?” At this point we focus on wealth protection, more generally on managing liabilities: tax liabilities, risk management and risk mitigation, to name a few.
Sometimes the goal relates to taxes, sometimes it’s asset protection, but there’s always that element of liability reduction.
For the purposes of this particular example, let’s say my estate is worth $200 million and my spouse has predeceased me. I’ve already used my lifetime and my deceased spouse’s lifetime exemptions: I’ve given away assets during my lifetime to my heirs so I will have, under today’s federal tax rate of 40 percent, or around $80 million, owed in taxes. Now I die. My $200 million of assets are now subject to estate taxation and my estate owes that $80 million. Typically that obligation needs to be met within the first nine months following death. Most people don't have a large portion of their assets invested in cash. They have real estate, publicly traded securities, hedge funds, private equity and ownership in businesses, among others. One of the things that we’ve seen clients suffer is not having sufficient liquidity at death, and the estate has to liquidate assets at a time when the markets are in a state of flux or they have limited time to monetize the investments. This results in selling assets at below market value in order to create the cash to pay the tax. This is not an ideal situation for our clients.
Most planners today, tax advisors, estate tax lawyers, accountants, investment and insurance advisors, recommend giving a client’s wealth away. Take as much of it as possible out of the estate. Put it into partnerships, create discounts on the valuation so the client can get the assets out of the estate. These strategies work well on paper because you’re sidestepping or reducing the estate tax.
The problem is that an individual may not want to give up all of his or her assets and concomitant control.
This individual has spent 20, 30, maybe 50 years accumulating wealth and is not ready to just give it all away. Dispersing assets at 70 years old may make sense because of a shorter life expectancy. But when we hear of people in their 40s and 50s being told to divest their assets, we know the reason they delay in speaking to insurance brokers or estate planners: they’re not ready to give it all away. “I just sold my business. I want to buy my toys, my cars, my houses. I’m not ready to think about losing what I’ve just gained.”
TGO looks at the estate planning strategy a bit differently and starts with not how to pay the least amount of taxes, but rather by learning what our clients want for the bigger picture. If you died today, what do you want to have happen? If you died 20 years from now, what do you think you want to have happen? Because that’s when the taxable events are going to take place. Most of our clients are not going to die in the immediate future, so the question is, do you want to give away your assets and give up control when you’re 40 or 50? Or do you want to manage that later? Do you want to take steps in the future to plan around minimizing taxes to provide more net assets to future generations?
A number of strategies can be used to maintain control and protect a client’s wealth. One of the instruments we look at is leveraging life insurance because life insurance does something that other instruments do not do: it produces immediate liquidity at death. Coincidentally, estate taxes are triggered when someone dies. So if I had that concern about an early death, that I don’t have time to do all the things I want to do over time, and I’m not ready to give up my assets and control of those things today, there are a lot of things that we can do to achieve these desires. If you’re younger and not ready to give away your wealth, it’s relatively inexpensive — assuming you’re insurable — to set aside some money to fund life insurance. But beyond achieving posthumous liquidity, we’ve figured out how to make this a good living investment.
A few assumptions typically hold true when considering long-term wealth strategies. If you believe that the individual is not dying in the immediate future, but that tax rates will increase and that the person likely will die at life expectancy, then we look at an estate and how much the client should be planning for — whether the money is going to his or her family or being donated to philanthropic causes, we build an estate projector that utilizes these assumptions to understand what we should be targeting for and how we plan for the estate, which is a very different premise than typical estate planning.
The other issue we focus on is how does the client live his or her life with desired assets, while providing sufficient control, and we build from there. Estate planning is not about, how do we just create the least amount of estate tax, but how do we manage a lifetime strategy?
Our approach is starting with what you want to have happen, and then we’ll figure out how to develop the right strategies, the right instruments, whether it’s life insurance, gifts, loans — and manage that in a way that fits your goals.
Our view is that it’s not all about the taxes. It’s about what do I want to have happen with my wealth and when do I want it to happen? Who do I want it to end up with, when? Not just how do I deal with today’s particular tax concerns. There are lots of strategies and instruments to use, and we employ those. Most importantly, we want to make sure that we’re doing whatever we’re doing in the context of what matters most to our clients.
Joshua A. Gottlieb is the Chairman and Chief Executive Officer of The Gottlieb Organization.