As part of the massive new tax law are provisions which brought back to life the tax on estates, or the so-called Death Tax.
There were some politicians who tried to kill it once and for all, but the call for economic class warfare is just too strong of a political issue.
The new law basically now allows a lifetime exemption of up to $5 million ($10 million for married couples). And for the first time, this exemption amount will apply to estate, gift and generation-skipping tax. And the maximum marginal rate is 35 percent.
So Congress found a way to keep the estate tax-planning industry happy, appease those political believers who have as their foundation article of faith that anyone with money left over from paying income tax should be punished, and continued to perpetuate a net revenue loser for the government. All in the name of political compromise.
The Death Tax is still here and we have to live with it. And as an estate-tax and wealth-protection practitioner, my business continues to be generated by people who are scared of losing a lifetime of their hard-earned wealth to the government because of estate taxes.
What is instructive about this new estate-tax law? To me, it highlights the absolute necessity for effective planning to be flexible. Congress can change the tax law anytime.
There are no lack of estate-tax planning techniques and maneuvers. Clearly, it's a two-step process. First, building the family wealth; then, second, reducing the amount exposed to the estate levy and other taxes by engaging in effective wealth-transfer strategies during life. To do this raises serious questions.
Essentially, it is not a question of whether or not to transfer assets to the next generations, but only a question of when and how. Many of my clients opt for a plan which they refer to as "SKI" — or the “spend the kids’ inheritance.”
Let's remember that estate planning isn't just about money. It's about using that money to help the lives of people. Research generally shows that 60 percent of wealthy families exhaust the greater part of their estate by the second generation. By the third generation, 90 percent of the family inheritance has disappeared.
An awful lot of the succeeding generations just don't grow their core business or sell at the right time. Their failures in having the ability to make good investment decisions or monitor their professional investment advisers are almost a given.
And if nothing else bad happens, just the growing pool of inheritors diffuses the wealth so widely that no single family member has a significant share. That is, unless they build on what they inherit.
Then, of course, there are the difficulties when most of the family business interests and money are tied into charitable structures. Private foundations somehow take on a life of their own. There is a whole industry devoted to convincing people that they have an obligation to give their wealth away to strangers so that the charitable managers can live extremely well-paid lives and basically be unaccountable to anyone. Philanthropic planning is, in reality, among the most difficult to effectively plan of all.
The new incarnation of the Death Tax just reminds us that building and managing the survivability of multigenerational wealth is going to take careful, professional estate-tax planning to meet evolving circumstances.
It is up to you to decide if you want your wealth to survive to benefit your family and your businesses, or would you prefer to just fund the government redistribution of your money to politically favored voting constituencies.
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