TEC – NEW HORIZONS IN ESTATE PLANNING – George Daniels
AN INTERNATIONAL ORGANIZATION OF CEOs
RESOURCE PRESENTATION SUMMARY
NEW HORIZONS IN ESTATE P.LANNING
ESTATE PLANNING ISSUES
Estate planning requires a great deal of communication with the people who will be executors
of your estate. You also must preserve a lot of information to pass down to the next generation.
For example, you must write a letter to your executor concerning individual elements of your
estate plan that you want them to follow through on. Without the letter, that information might
be irretrievably lost.
You also need to talk to your kids about estate planning, whether they are six, 16, or 26 years
old. Six year olds like to know who will take care of them in case something happens to you.
Sixteen year olds like to have some say in who will be their legal guardian in case you die.
Grown children need to know about the value of your assets and what they might do for them.
One of the worst things that can happen is for grown children to suddenly receive large amounts
of money if they don‘t have the experience or knowledge to handle it. If you are going to pass
on a sizable estate, you must educate your children and train them how to lead a normal life with...,,–
a lot of money.
People disagree on many issues. Often they look at things based on their traditions, personal
background, education or training. Even though they disagree, it doesn’t mean one is right and
the other is wrong. But it can mean that neither is looking at the whole picture.
Distributing sentimental items after your death is another important issue. If your spouse
remarries, your children may never get some things you want them to have. Therefore, it’s very
important to stipulate in your will that your children are to receive sentimental items when you
die. Don’t leave everything to your surviving spouse.
Ask each of your kids if there are any special items in your estate that they want. You will be
surprised at some of the things that have meaning to your children, and it can delight them to
receive them when you die. Estate planning involves leaving your assets in a loving, kind way
to your heirs to make sure everything goes smoothly. The last thing you want is your children
fighting over your– assets and not speaking to eaeh–etherfor–ze years after you are gone.
One way to distribute your sentimental items is to have an auction (a year after your death)
where your children bid for items they want. Each child writes down what they think an item
is worth and the highest bidder gets it. They buy the asset with money they receive from the
estate. If one child has earned or inherited more wealth than the others, you can use poker chips
to do the bidding.
The point is to have some fair and equitable method for distributing your sentimental assets to
the children. Waiting six months to a year is a good idea because children are often too
emotional right after your death to make those kinds of decisions. In the meantime, a trustee
holds the items and then holds the auction at the appropriate time.
Daniels, Page 1 of 12
People with large estates typically lose the lifetime unified credit. For estates of $10 million to
$21,040,000, there is a 5 surcharge, which absorbs all of the lower brackets and takes away
the unified credit. When you reach an estate of $21,040,000, every dollar in your estate is taxed
at the full 55 . Although you get the all the income from your assets, the government takes
55 cents of every dollar when you die.
With income taxes, the higher your income bracket the more taxes you pay. Any deductions
come off the top. With estate taxes, all the credits come off the bottom so that you pay all the
upper brackets. As your estate grows, you lose all the deductions.
Trusts are a very useful vehicle for reducing estate taxes, but they are frequently misused and
underutilized. The biggest problem is choosing the wrong trustee(s). Most people set up their
spouse and the bank (and possibly their attorney) as the trustees. If your spouse and the bank
disagree, there is usually a provision that the bank wins the argument.
Ideally, you want four trustees: one to run the business, one to handle any investments, one to
handle any distribution to the family (this person needs to know the family very well), and one
to make sure the other trustees are doing their jobs properly. The fourth trustee has the right
to hire and fire the other three and is the only trustee you need automatic replacement for. This
type of setup gives you automatic checks and balances. You may combine more than one role,
but it is rare to find a person who can fill all four roles well.
Trusts can also create protection for your children. Since 50–60 of all marriages end in
divorce, it makes good sense to create a trust for your children that receives all the assets from
your estate and continues for the life of the children. The trustee decides when each child is
ready to receive the assets and when that time comes, makes the child trustee of their own trust.
By keeping the home and business in the trust, those assets are not on the table if the kid gets
divorced. If he gets sued, the trust keeps the assets away from creditors. A trust protects your
assets for the life of your children and they get the power of appointment to pass it on to their
The trustee needs to know the family well and act as a parent substitute. He or she should pass
out the assets only when the children are ready to handle them. If the child isn’t ready, the
trustee cuts off the income. You pay a higher tax, but it’s better than giving large amounts of
money to a child that isn’t prepared to handle it.
Daniels, Page 3 of 12
2. Lifetime Unified Credit.
You and your spouse can each gift $650,000 once in your lifetimes. If you hold this credit until
your death, it may not be there. Congress is always considering changing the law or doing away
with it altogether. It makes more sense to use it now, so the asset can grow for the recipient.
If you give it away now, it will be worth much more when you die.
If you have a $1 million estate, the government gets $550,000 and your heirs get $450,000. But
if you gift $645,000 to your heirs, you only pay tax on $355,000. This increases the amount
your heirs receive by 140 . Lifetime gifts are very effective if you use them during your life.
3. Giving Ownership Of Assets.
There are many ways to avoid estate taxes by giving away ownership of the assets. The
following are two examples:
Assume your children buy a piece of land for $10,000 (preferably using their
money). You lease the land from them for 30 years and put $5 million of
apartments on the property. In 30 years, the land and apartments will probably
be worth $15 million. Because leasehold improvements go with the property, at
the end of the lease your children own the apartments. Because the transfer is
within the family, the IRS imputes a gift. The gift occurred when you created
it, but the gift is valued when it is transferred. According to the IRS, the future
value of apartment buildings is zero (because of depreciation). So the value of
your gift is zero.
Assume you take $200,000 and your top executive takes $150,000 year out of
your company. Instead of paying those salaries directly from the corporation,
create a management company. You work for the management company and
don’t own any shares (your children own it). The management company pays
your salary and your key executive’s salary and charges your corporation
$400,000 a year. That creates $50,000 profit for your children. This is a way _
to circumvent estate taxes if your estate is growing so big that you can’t give it
In most limited partnerships, the limited partner has no power at all. You can create a limited
partnersh ip that you own 100 . The general partner has all powers, can’t be sued by the
limited partners, has the right to set his own fees, and has total control over investments and
Daniels, Page 5 of 12
Next, give the $9,000 to a family partnership, irrevocable trust, or some other entity set up for
the benefit of the family. That entity then buys $900,000 of life insurance. This policy hasn‘t
cost you any more than if you bought the $1 million policy in the standard manner, but the
estate tax differences are significant.
When you die, the $900,000 goes to a trust for the benefit of your family. There is no
alternative minimum tax, no estate taxes, and no income taxes. The only tax the family pays
is on the earnings from the $900,000. With this method, you skip $1 million in taxes.
Suppose your family lends the $900,000 to the corporation in exchange for a note at 9 . The
family gets $81,000 of taxable income. The stock goes into the trust and receives a full step-up
in basis on the date of your death. The trust sells the stock back to the company and the
$900,000 in cash goes to your family.
Your family now has $900,000 in cash, $81,000 a year in income, and the note. When the
principal of the note is repaid, your· family does not have to pay tax on it. This method allows
you to take $900,000 in cash out of a C-corporation tax-free. Your family now has $1.8 million
of assets and an income stream, all for $900,000 worth of insurance.
Life insurance is a great way to fund buy/sell agreements, but again, it must be set up properly.
Assume you have a $3 million company with three partners, each owning $1 million in stock.
Normally, you have $1 million in life insurance for each partner. When partner C dies, $1
million comes into the company and partners A and B now own the company 50/50. The value
of their shares is now worth $1.5 million each. The insurance agent comes back and tries to
sell them another $500,000 each in insurance. But they are older and may not qualify. Or, the
agent could have sold $1.5 million to each in the beginning to cover all bases.
A far more effective approach is to buy a policy covering all three lives that pays $1 million at
the first death, $1.5 million at second death, and nothing at the third death. With this approach,
you have only bought $2.5 million (instead of $3 million or $4 million) of life insurance and
saved money in the process.
Insurance companies spend a lot of money on direct and indirect marketing and on supporting
their agents. Instead of buying through an agent and paying full price, you can go directly to
many companies and they will carve out the overhead costs and let you have the insurance at
a 30 discount. You get the same policy, same mortality charges, and same investments
backing it. These policies are typically fully surrenderable with no surrender charges.
Many insurance companies today are boosting their profits and surpluses in order to get higher
ratings. That money has to come from somewhere, and it comes from your pocketbook. This
doesn’t mean you should necessarily use insurance carriers with lower ratings. But it does mean
you should look into how strong a company really is and how it allocates its assets.
Carefully scrutinize what kind of investments your insurance company is making. Get your
insurance company to give you a list of their foreclosed real estate, bonds that are in default,
and other investments and base your buying decision on that information.
Daniels, Page 7 of 12
As a minority shareholder, when you die, if your shares aren’t redeemed the stock has no value.
Try to get a unilateral buy/sell agreement, where they majority shareholder agrees to buy back
your shares when you die. You also want to have a “bring along, come along” provision, which
means that if the majority owner sells his shares, yours have to be sold as well for the same
If you own 100 of your company, set up a salary continuation agreement whereby if you die
or get disabled, your salary stays in the company. In addition to providing a revenue stream to
you or your spouse, salary continuation has a hidden benefit.
Assume your company is worth $5 million. When you sell it, typically you get $3 million for
the company, $1 million for a non–compete clause, and $1 million as a consulting agreement.
The purchaser gets to fully deduct the last two as compensation. If they weren’t deductible, the
buyer would probably only pay about $4.2 million.
When you die, you can’t enter into a non-compete or a consulting agreement. Therefore you
need an employment contract that says your compensation will be continued to your spouse for
the rest of his or her life, and if you become disabled, the income goes to you for the rest of
your life. This provides a negotiating chip with the buyer. Typically, you could negotiate $2
million of compensation to you that allows the buyer to pay you $5 million for the company
instead of $4.2 million. An employment contract is most effective when you are selling the
company post–death or post-disability.
Most business owners don’t fully assess the risk of running their companies. Due to unforeseen
circumstances, your company could go under overnight. To protect against that happening,
draw some money out of your company, create other assets, and get them into a family
partnership or other vehicle so that if your main company goes down, you can restart. It’s much
easier to borrow money and restart if you have some capital to work with. When you’re broke,
it’s very hard to come back.
If you fall into a coma or become incapacitated, you can’t sell a jointly owned home without
both signatures. If you own all the company stock, your spouse can’t vote or sell the stock.
So it’s important to make provisions ahead of time that take care of you and your family in case
the unthinkable occurs.
First, assign a “durable power of attorney” to a trusted small group of people. Have your doctor
and two other people (not family members) determine whether you are capable to handle your
affairs or not. If you are incapable, this group gets the power of attorney to handle the business,
make the investments, handle distributions, and hire and fire these people. Ideally, these are
the same people as your trustees.
Daniels, Page 9 of 12
Instead, create a charitable remainder trust and make yourself the trustee. (Create your own
document, don’t use the public ones.) The trust gets the stock, real estate, or whatever the asset
is and sells it for $1 million. The charity doesn’t have to pay any capital gains tax. Investing
the asset at 10 earns $100,000 in income, so that at the end of the year, the trust has $1.1
You begin to draw out more than what the asset is earning on an annual basis, say 14. The
amount you draw up is based upon your age, health, and how long you expect to live. Over
time, this will deplete the asset. The goal is‘ to have slightly more than 5 of the asset left
when you die. As long as you have made a donation that is expected to at least be over 5 of
the initial contribution (in this case $50,001), it is considered a bona fide charitable remainder
trust. When you make the contribution of $1 million, you get a deduction for the 5 donation
to charity up front in the first year, in this case $50,001.
There are three ways you can wreck this deal:
Dying too soon. If you and your spouse die the day after you create the trust,
the charity gets it all and your heirs get nothing. If you sold the asset in the
normal way, your heirs would have gotten about $320,000 after capital gains and
estate taxes. Instead, take $4,000, put it in an irrevocable family trust, and buy
$500,000 of second-to-die life insurance. If you and your spouse die, your heirs
get $500,000. If you live a normal life expectancy, you can take most of the
money back out and your heirs still get the $500,000 when you die.
Using the wrong attorney. Certain assets can’t be put into this kind of a trust.
Use only expert attorneys who do nothing but this kind of work.
Pre-negotiating the sale. If you pre-negotiate the sale before you make the
transfer, the IRS rules that as tax avoidance and you have to pay the capital gains
tax. Plus, the $1 million stays in the charitable trust and you can’t get it back.
Daniels, Page 11 of 12