TEC -MAXIMUM WEALTH CONTROL STRATEGIES – David HOKANSON
AN INTERNATIONAL ORGANIZATION OF CEOs
SPEAKER PRESENTATION SUMMARY
MAXIMUM WEALTH CONTROL STRATEGIES
FAMILY WEALTH PLANNING
Creative financial planning begins with creative thinking, which begins with thinking beyond
traditional boundaries. Family wealth counseling differs from the standard financial planning
approach, which involves little more than looking at net worth statements, tax returns and
determining how much estate tax you will owe.
Using the financial planning process to obtain unique and maximum benefits requires planning in
three specific areas:
- Financial aspects of family wealth. The financial aspects include financial statements,
tax returns, investments and all the things that make up your financial picture. Adding up
all the numbers to determine a net worth is an effective, but shallow, measure offamily
wealth. This is the least important of the three areas. But for most people, this is where
the planning process begins and ends.
- Social aspects of family wealth. The government says you can’t grow up and grow
wealthy without supporting the general welfare of the country. What the government
doesn’t typically say, however, is that you have options in how you support it. The
traditional method is to write a check to the IRS once a year. A better way is to gift to the
charities of your choice rather than gifting the government. Everyone is a philanthropist. If
you don’t do any planning and just follow government rules, you are an involuntary
philanthropist and the government is your charity. It’s much better to be a voluntary
philanthropist and choose how you will support the general welfare of the country.
- Spiritual/emotional aspects of family wealth. When lawyers and accountants look at
your financial statements, all they see is numbers. When you look at them, you see a mirror
that reflects what you have traded your life for. They aren’t just a bunch of numbers,
they’re a reflection of what you have accomplished in life.
The spiritual and emotional aspects of family wealth involve putting some fun back into the
concept of providing for the general welfare of the country. Sending your hard-earned
money to the federal government is no fun. They don’t even bother to say “thanks.”
Giving your money to charity provides a lot more personal satisfaction. If you took all the
taxes you have paid (and might pay in the future) and sent the money to a charity, they
would treat you like royalty.
The skillful blending of these three aspects will produce unique and powerful estate planning
Your wealth can be divided into personal capital (what you get to keep) and social capital (what
YOu don‘t get to keep). There are two basic misconceptions regarding this division of wealth, the
first one being that taxes are inevitable. The common belief is that the day after you and your
spouse die, half of your estate becomes personal and half becomes social, which isn’t necessarily
true. The other misconception is that you can’t pass on your personal capital to your heirs. With
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During the first three years of the plan, Jim transfers cash assets into the asset replacement trust and
continues making gifts of stock to the children. Then he takes stock from his company and makes
gifts into the enhanced income trust for 25 years. For that, he gets $640,000 of tax savings over
his lifetime. He also gifts the qualified plan to charity because nearly 80 of it would go to the
The corporation starts a program of redeeming the stock. (It gets the cash from the income that
was previously paid out to the owner in salary.) At the end of25 years, the only stock left is
owned by the son and the key employee. By the end of 16 years, the son owns controlling interest
in the company. This process is called a “charitable stock bailout.” It allows Jim to get out of the
corporation and pass the company on to his son while still getting his retirement income.
When Jim dies, $625,000 goes to the family trust and the balance goes to the marital trust. As a
result of gifting all the stock, the $9.4 million company is no longer part of his estate. When his
wife dies, the family trust goes tax-free to the children. The son who gets the business gets
$4.8 million and the other four kids get $125,000. The marital trust brings them up to $250,000
each. The deferred gifts Jim made over 16 years to the trust (funded with his tax savings) drop $18
million down from the asset replacement trust (none of which has ever been taxed) to equalize the
Finally, the family foundation gets set up, taking everything from the enhanced income trust.
Anything left in the marital trust can be used to pay the IRS. The children each get about
$4.8 million and the IRS gets nothing. The children can then use the family foundation to give
away a lot of money to charity.
Family foundations can be a wonderful tool to create family unity. The foundation pays for the
children to come together once a year and talk about how to distribute a lot of money to charity.
However, don’t give your kids a lot of money and expect them to give away a lot without training
them in how to handle money.
This family wealth plan:
- Reduced estate taxes from $8.6 million to zero.
- Reduced income taxes from $2.6 million to $600,000
- Eliminated all capital gains taxes
- Eliminated all estate taxes
- Gave the business to the son and key employee
- Gave equal distribution of wealth to all five kids
This case study represents how family wealth planning can be used to achieve financial, social and
spiritual goals that were otherwise impossible with traditional estate planning. The key is to be
very clear about what you want to accomplish and why, and to adopt the mindset that you would
rather support the charities of your choice rather than Uncle Sam.
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• Family Foundation
A family foundation is usually set up as the beneficiary of the enhanced income trust. It allows you
to create an endowment that your family completely controls, support charitable activities that you
choose and receive compensation for your charitable work.
• Asset Replacement Trust
This is also called an “irrevocable life insurance trust.” If you own your life insurance policy, it
gets included in your taxable estate. Putting it in an asset replacement trust takes it out of your
estate and avoids estate taxes. Traditional planning uses the income from the policy to pay your
estate taxes when you die. But if you have no estate taxes, you can give the insurance to your
children. Any gifts to your children in this trust are not taxable to them.
• Life Estate Agreement
A life estate agreement deals with assets your children don’t want (such as an old home). It allows
you to keep the asset while you are alive and give it away when you die. You get a major income
tax deduction today for a gift you don’t have to give until you die.
These tools may seem too good to be true, but they are perfectly legal, bona fide estate planning
tools. All attorneys and tax accountants know about them, but they may not know how to use
them creatively and to their full effectiveness. Like any tax tools, you can use them conservatively
or aggressively. It all depends on your philosophy and what you want to accomplish with the
Despite the fact that it loses millions of dollars to charity, the government doesn‘t oppose these
tools. It recognizes that the private sector has to get involved in supporting the general welfare of
the country. These tools encourage and motivate the private sector to contribute to the good of
Like any laws, these tax laws can be changed. Congress may start to limit some of these in the
near future. If they do, they will “grandfather” the laws. Do your family wealth planning based on
the laws as they are today, and then deal with them if and when they change. It doesn’t make any
sense to plan based on what might happen five to 10 years from now.
When putting together an estate plan, you may not know what charitable organizations to give to
or how to give to them. Or, you may change your mind about a charity after the plan is set up.
The reality is that charities come and go. In addition, your inclination to benefit a particular charity
may ebb and flow. The beauty of these trusts is they give you the right to name any charity you
want and to change the charity at any time. That part is not irrevocable. You have total control
about who the money goes to.
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serves as a consultant for
the National Center for Financial
Education, Inc., a nonprofit corporation for
public education dedicated to helping consumers do a
better job of spending, saving, investing, insuring and planning for
their financial future. In 1982, Hokanson and his partner broadened their
financial services by forming Creative Planning, Inc., a registered investment
advisor with the Securities and Exchange Commission that provides
comprehensive personal financial and family wealth planning.
Hokanson is a member of the International Association
of Financial Planners and the Institute for
Certified Financial Planners.
Creative Planning, Inc.
5340 College Blvd.
Overland Park, KS 66211
(913) 338-2525 • (913) 338-4507 fax
5469 Kearny Villa Road, First Floor. San Diego, CA 92123-1159
(858) 627-4050 • (800) 934-4540 fax
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