I once joined a meeting between a financial advisor and a client who had a $100 million estate. The advisor was sounding the alarm bell about the federal estate tax and proposing that the client purchase tons of life insurance. The client shut down the conversation, briskly stating that he wasn't concerned about the estate tax. His kids would inherit millions, and he didn't want to buy more life insurance.
I stepped in to shift the focus of the conversation with two questions: How do you want to be remembered? And what, besides money, do you want your children to have from you?
Many advisors get so caught up in calculating their clients' potential estate taxes that they lose sight of the people affected by the estate plan. They fail to ask the other important questions not related solely to the estate tax.
I'm not downplaying the estate tax, just trying to lessen its power on how we practice financial planning. Right now, your clients can enjoy a $2 million estate tax exemption per person–$4 million per married couple–for the next three years. That amount currently is projected to be $3.5 million per person in 2009. But the estate tax exemption is a moving target, having been repealed and reinstated seven times.
The strategy I'm about to share will work for high-net-worth clients at any exemption level and any tax rate. The technique will even work if there is no tax at all!
Let's use the following scenario:
o Husband, 76;
o Wife, 74;
o Three children, two of them married;
o Six grandchildren;
o Estate value = $20 million; and
o No formal plan for passing along the husband's and wife's wealth.
This scenario may seem unlikely, but I have seen it all too often. Everyone has an estate plan in place, but only some are by design and the rest are by default. Without going through numerous calculations, we can assume that there is roughly an $8.2 million estate tax liability. So, if both parents are deceased, the children would share in about $11.8 million, or roughly $3.9 million per family member.
Now, let's look at this scenario from an estate planning (rather than an estate tax planning) perspective. For this example, we will assume zero growth on the estate.
