Why Your Estate Plan Often Flunks the Real Life Test

While thumbing through the pages of a trade journal, I ran across this quote, “We install 90% of what we sell. That’s one big advantage we have over [names one of the biggest square-footage discount chains].”

You know the routine: the thing-a-ma-jig doesn’t work. “The manufacturer,” says the installer; “improperly installed,” counters the manufacturer. Ultimately—after some grief and probably more dollars—it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life tax horror story.

Joe died, survived by his wife Mary, three grown kids (one managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $10.3 million at Joe’s death), before Joe died, he and Mary enjoyed about $350,000 of after-tax spendable personal income. In addition, they owned various personal property and a nice summer home with a total value of over $1 million.

About five years before he died, Joe gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning and his long-time friend, an insurance agent.

The professionals crafted a good traditional estate plan: no tax due at Joe’s death (the marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives. The estate plan probably would get an “A” in the classroom.

But here’s the unfortunate big lifetime detail the professional team missed: Mary, a healthy age 64, did not have enough cash flow to maintain her lifestyle. Joe’s $550,000 salary, plus generous perks from Success Co., stopped when he died. Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium. Also, she wanted to continue providing for the college education of three of her grandchildren (the other five had completed their education paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of necessary spendable income. Worse yet, they had no suggestions to solve the problem.06-07(2)

First, the solution to Mary’s immediate problem: the cash flow to maintain her lifestyle. The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 90 percent of Success Co. (Mary owned the other 10 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co. Now the large corporate profit can provide the income stream Mary needs, as the beneficiary of the marital trust (90 percent) and as a direct owner (10 percent).

What lesson should be learned from this sad tale? The first lesson is that estate planning (as practiced all over the United States) is really death planning. Do the documents—a will and a trust or two, put ‘em in the vault and wait to die.

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board…loud and clear. Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans: (1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live); (2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you (and your spouse) for as long as you (or your spouse) live; and (3) a transfer/succession plan for your business (that gets the value of the business out of your estate tax-free) to your business kids (or other successor).

Whether your master plan is done or is yet to be done, make sure it includes the three plans listed above. And always—I mean ALWAYS—get an independent second opinion. And finally, make sure that the professionals who create your plan know in advance that they are responsible for all aspects: he who creates the plan should install it and monitor it to the day that you (and your spouse) die.

Need help? A good way to get started is to read the book we wrote, Tax Secrets of the Wealthy. Send $367 to Book Division, Blackman Kallick Bartelstein, LLP, 10 S. Riverside Plaza, 9th Floor, Chicago, Illinois 60606. Or, if you need a second opinion, call Irv Blackman (847-674-5295).