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ESTATE PLANNING |
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Many wealthy people do not understand that there are three different aspects of their wealth, and even worse, neither do their advisors. As a result, often times, wealthy people go to their graves suffering devastating tax losses and reaping only a portion of all the benefits their wealth could have provided to them, their heirs and mankind. However, once they understand the three aspects of wealth, like a caterpillar being transformed into a beautiful butterfly, an amazing metamorphosis takes place as these wealthy people begin effectively dealing with all three aspects of their wealth. Not only does the estate planning technique discussed below make perfect financial sense, it also positions the estate owners to more fully realize the profound joy of doing good for others. They strongly sense, and rightfully so, that their lives will now "cast a shadow" that will extend far beyond their own lives and the relatively small world of their own immediate family and friends. Now, they can positively impact the lives of hundreds, thousands and maybe even millions of their fellow human beings. What kind of financial "yardstick" can possibly be used to measure this kind of overwhelming personal satisfaction and emotional fulfillment? Awareness of this estate planning technique opens doors of opportunity for those who learn how to assist their clients in considering all three aspects of wealth, what we call Family Wealth Counseling. In order to effectively provide this service, a clear understanding of each of these aspects of wealth is essential. 1. FINANCIAL ASPECT OF WEALTH The first aspect of wealth, and arguably the most recognized, is the financial aspect. This aspect addresses the material benefits that a person's wealth provides to him and his heirs. It is made up of balance sheets, profit and loss statements, bank accounts, investment summaries, tax returns, etc. Very little planning done for the very wealthy goes much beyond considering the first aspect of wealth. Most of estate planning seems to be simply a matter of "running the numbers" and doing whatever can be done to improve those numbers. As most professional advisors are analytical types, it is understandable that most of their planning is done at this analytical level. But, Family Wealth Counseling should not stop with merely looking at a balance sheet and a tax table to determine a plan of action. If the planning process only addresses this Financial Aspect, these affluent people will not realize the most benefits from their wealth. 2. SOCIAL ASPECT OF WEALTH "Social Capital" can be defined as that portion of an individual's wealth that goes, on a voluntary or involuntary basis, to support the general welfare of the community. Most professional advisors who regularly work with wealthy people do not focus on the far-reaching ramifications of Social Capital in America. Consequently, they seldom, if at all, adequately explore with their clients the issues and opportunities associated with Social Capital. The United States has designed its tax laws so you cannot keep everything you accumulate for yourself and your heirs without leaving something to support the general welfare of the country and mankind. You cannot enjoy all the benefits this country has to offer, including the opportunity to become wealthy, without putting something back. Since the only two things that are said to be certain in life are "death and taxes," most people think there is nothing that can be done to eliminate estate taxes. So they grudgingly accept what they consider to be the only option for disposing of their Social Capital...paying it all to the Internal Revenue Service. However, to many people's surprise this is not the only option for their Social Capital. In fact, paying the Internal Revenue Service is what we call exercising the "default option." You do nothing and the Internal Revenue Service will collect all your Social Capital without even so much as sending you a "thank you" note. People actually have two options, (1) the default option which is to give it all to the Internal Revenue Service, or (2) the self-directed option which allows you to give it all to charitable organizations of your choice. The amazing fact is that the government has designed the income and estate tax laws in such a way as to actually reward you for making the effort to exercise the self-directed option for your Social Capital. Consequently, you end up with more personal capital during the rest of your life, and your heirs are able to "recover" the otherwise lost Social Capital through the use of a Wealth Replacement Trust. The controlling of a person's Social Capital can have a vastly greater impact on the healing and helping of this nation and the world than a single political vote could ever hope to accomplish. It is commonly acknowledged that a large portion of the American population has lost faith in the effectiveness of the political system to address the problems that face this country. But, despite the ineffectiveness of the current political process, money still talks. And, the more money there is, the louder it speaks. If the advisors would only show the wealthy how to personally control their millions of dollars of Social Capital as they believe best, the collective impact will be staggeringly powerful. Individual Americans can exercise the right to decide what is important, what is in the best interest of this country and what issues they want to address and resolve. Much of this can be done apart from the cumbersome and inefficient tax system without so much as establishing one lobbying group, or PAC, or spending even one dollar to put the "right" candidate in office. Americans can effectively circumvent the unwieldy, bureaucratic political system and go right to the need itself. Consequently, the destiny of our country can be returned to the hands of its citizens. Since the government cannot and will not create all the needed solutions to America's problems, the wealthy of this land, over the next 30 years, can take matters into their own hands and do it themselves. As they elect to personally control their Social Capital, as they pass their $10+ trillion in accumulated wealth on to their heirs, they have the financial capacity to literally transform this nation. If their Family Wealth Plans are set up to control their Social Capital, it is beyond imagination what good can be done to restore this country to its previous moral, social and financial greatness. If done properly, it need not cost these wealthy families one penny of their accumulated wealth. In fact, they will end up wealthier in the process. Once the issues and opportunities associated with Social Capital are fully explained, clients will undoubtedly choose the option of personally controlling their Social Capital instead of relinquishing that right to the federal government to do it for them through what we call the "default option." 3. EMOTIONAL ASPECT OF WEALTH This aspect is the most intimate and critically important aspect of wealth. It is this aspect of their wealth that each person must struggle to answer the nagging question, "What is the purpose of my work and wealth?" During the first half of a person's life, this question seems relatively easy to answer..."To become financially independent". But, as people find themselves moving into the final few chapters of their lives, having already accumulated far greater wealth than they ever imagined possible, often the pat and simplistic answer of their youth no longer seems adequate or satisfying. Unfortunately, wealthy people seldom discuss these emotional issues with any of their existing financial advisors. In fact, many advisors believe very strongly to the contrary that it is definitely not their place to bring up and discuss these intimate and personal issues with their clients. Is this because it really is inappropriate to bring up these issues, or is it that the advisor simply feels too uncomfortable with the topic to do so? Advisors seem to rationalize that if the client is really interested in these topics, they will bring them up for discussion. But, how can a client bring up such sensitive issues with all the accompanying planning considerations if they do not even know what questions to ask or what tools exist? Who will tell them? Who will challenge them? Who will help them dream beyond themselves and their fleeting mortality and find the significance they desire out of the wealth they possess? King Solomon, one of the wealthiest men who has ever walked on this planet, pessimistically concluded that there was no purpose to wealth and it was all "vanity and chasing after the wind." He never came to a satisfactory answer to this most profoundly difficult question. He candidly confessed that his fabulous wealth was consumed solely "for myself." And consequently, he died a very rich, very miserable, very frustrated old man. In another ancient writing, a first century author encourages the wealthy, "to be generous and to share...so you may take hold of that which is life indeed." Life is not found in what people keep for themselves, but in what they give to others. And, of course, no one can overlook those well-known words that have survived from antiquity, "It is more blessed to give, than to receive." All of these statements address this Emotional Aspect of wealth that must not be overlooked by those who have accumulated substantial material possessions. These concepts were fundamental, philosophical tenets that drove the thinking of the founding fathers of this country. Thomas Jefferson, the man who penned our Constitution may have said it best, "I deem it the duty of every man to devote a certain portion of his income for charitable purposes...to do the most good of which he is capable...best insured by keeping within the circle of his own inquiry and information the subjects of distress to whose relief his contribution should be applied." In the 1800's, Andrew Carnegie, businessman turned philanthropist, continued this charitable philosophy of life in his book The Gospel of Wealth. Carnegie, a dyed-in-the-wool capitalist, challenged the wealthy of his day with these provocative words, "An ideal State is one in which the surplus wealth of the few will become...the property of the many...administered for the common good. The public verdict will then be: 'The man who dies rich... dies disgraced.'" Yet, despite this country's unique, philanthropic heritage, a 1989 study entitled "Variability of Charitable Giving by the Wealthy," by Gerald Auten and Gabriel Rudney, discovered that "regular, habitual giving is not the standard behavior among the high-income people", and that "large proportions of high income individuals give less than one percent of their income." Is this lack of charitable involvement on the part of the wealthy a lack of interest in doing good? Or, is it possibly far more a lack of proper understanding of how and why to do it? When the wealthy of this country are given a full and proper perspective on these issues, they will not only increase their giving, they will also find indescribable joy in doing so and without they or their families suffering a loss. But, who will assist the wealthy in understanding these concepts and using the proper estate planning tools and techniques to achieve such satisfying results? There are relatively few professional advisors who are intimately familiar with the philosophy and the tools that will enable clients to effectively integrate these options into their overall Family Wealth Plans. Advisors must help their clients think through these issues. They must ask some pointed questions like. "If you could turn a $250,000 capital gain tax liability into a $1 million gift to charity (or a $375,000 estate tax liability into a $1 million gift to charity), who would you give that money to and what would you have them do with it?" Or, "If you could really make a difference in just one area of life, what would it be?" Or, "How much wealth is enough for your heirs?" Tragically, far too often, a client initially answers these kinds of penetrating questions with nothing more than a blank stare. This response makes it unmistakably obvious that none of their other advisors had ever asked them any of these deeply personal and profoundly important questions. Yet, once this new Emotional variable is introduced into the estate planning equation, the entire planning process is instantly transformed into a much loftier, and far more noble, activity. As clients begin to address these aspects of wealth in the planning process, they become excited and enthusiastic over how powerfully their newly designed estate plan leverages their wealth to everyone's benefit. For them, the thought of doing estate planning is no longer drudgery, no longer something painful to contemplate, and no longer something to be postponed as long as possible. MAKING A PROFIT GIVING IT AWAY How can you actually become wealthier by giving away some of your wealth? Let me give you a quick example. Mr. Wilson, a senior executive with a major Fortune 500 company, had just retired. During his 33 years with the company, he had exercised every one of his stock options and had accumulated over $1 million worth of company stock. Of course, his cost basis was minimal. The stock was paying a 2.5% dividend per year ($25,000), which was far below what he could generate in a well-balanced investment portfolio. He also found his portfolio far too heavy in one stock and realized that he needed to diversify. If he sold the stock, he would pay $250,000 in capital gain tax. Additionally, the remaining $750,000 would be included in his taxable estate, and the Internal Revenue Service would "lop off" another $375,000 in estate tax at his death. So Mr. Wilson would have only $750,000 to enjoy while he was alive, and his heirs would have only $375,000 to enjoy after Mr. Wilson was dead. The cost for trying to keep it all for himself and his heirs would equal $625,000 of the $1 million worth of company stock...quite a penalty for neglecting philanthropy. Instead of losing $625,000, Mr. Wilson decided to transfer his stock into an Enhanced Income Trust. For doing so, he received a current charitable income tax deduction that saved him $50,000 of income tax that year. Then the trust sold his stock, avoiding all capital gain tax on the sale, leaving intact $1 million to invest and produce earnings of $70,000 per year for Mr. Wilson, 180% more income than the original $25,000 stock dividend per year. With the $50,000 income tax savings arising from Mr. Wilson's charitable income tax deduction he funded a Wealth Replacement Trust. An insurance product was acquired which made $1 million of cash available in the Wealth Replacement Trust when Mr. Wilson died. The "cherry on top of this cake" was upon Mr. Wilson's death, the Enhanced Income Trust terminated and $1 million of cash was distributed to charities selected by him. Since Mr. Wilson was willing to "give something away," he actually ended up substantially wealthier during his lifetime ($70,000 vs $52,500 per year, a 33% increase). His heirs ended up wealthier (a $1 million inheritance vs a $375,000 inheritance). And charities ended up wealthier (a $1 million charitable gift vs no charitable gift). How do you think Mr. Wilson felt about this alternative? Do you think he minded being philanthropic? No; on the contrary, he thoroughly enjoyed making a profit giving it away. Who wouldn't? UNIQUE CHARACTERISTICS OF AN ENHANCED INCOME TRUST ("EIT") |
| MR. WILSON'S USE OF AN ENHANCED INCOME TRUST ("EIT") |
| Description Stock Owned by Individual Fund Enhanced Income Trust With Stock Capital Gain Tax on Sale of Stock Net Asset (Held by Individual) Income to Individual @ 7% Income Tax Deduction for Individual Income Tax Savings Realized by Individual @ 40% Fund Wealth Replacement Trust With Income Tax Savings Individual's Gross Estate Government Controlled Social Capital (Estate Tax) Net to Family Controlled Social Capital Net to Heirs Net to Family Controlled Social Capital and Heirs |
Without EIT $1,000,000 $0 $250,000 $750,000 $52,500 $0 $0 $0 $750,000 $375,000 $0 $375,000 $375,000 |
With EIT $0 (1) $1,000,000 $0 $0 $70,000 $125,000 $50,000 (2) $1,000,000 $0 $0 (1) $1,000,000 (2) $1,000,000 $2,000,000 |
| THE IMPACT OF USING AN ENHANCED INCOME TRUST |
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| IN SUMMARY: YOU CAN MAKE A PROFIT GIVING IT AWAY |
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Footnote: The Internal Revenue Service name for what we call an Enhanced Income Trust is a Charitable Remainder Unitrust (CRT). Some of the rules applicable to this trust can be found in section 664 of the Internal Revenue Code. The name Enhanced Income Trust is a regitered trademark of Philanthro Dynamics, Inc. |
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