Upper-Class Planning

Summary: So the super wealthy can still try to do cool stuff but what about folks that Robin Leach wouldn’t bother with? They can and should still plan, even with uncertainty the rule. Here’s some ideas:

√Non-tax planning should lead the way. Don’t let the tax tail wag your dog. Estate and financial planning should consider taxes, but truth be told taxes are the ultimate cop out. Minimizing taxes is a safe goal. You don’t have to address the kids that you don’t speak to, the shortfall in your retirement funds, and all that other unpleasant stuff. Whatever happens with the federal estate tax the reality is that only a tiny percentage of estates will ever be taxed. Some estimate only 6,000 estates in 2009 would file estate tax returns when the exclusion was $3.5 million. Not many. So, in the words of Dr. Phil, “Get real” and focus on what’s really important to you.

√Integrate estate, financial and income tax planning – holistically. ◙ Income tax rates are likely going up – so plan accordingly. Municipal bonds (but consider interest rate risks), more carefully planning to harvest capital gains and losses to minimize tax, charitable gift annuities, tax deferred exchanges of real estate, and other techniques, will all become more popular as rates rise.

Estate tax will get tougher not easier and is pretty unlikely to disappear. ◙ Budgets need to be created, and monitored, as tax and economic conditions continue to evolve. The super-rich folks can make gifts without a thought, but plenty of wealthy people who think they don’t have a care in the world could be spending/gifting themselves into financial worries. Everyone likes a quickie. Multiply your investment assets (leaving off your house, art and bottle cap collection) by 4%. Can you live on that? If you’re laughing, hustle over to your financial planner and get on the wagon. You can’t do an estate plan, make gifts, figure out how much insurance to buy, if you don’t have a handle on your financial picture. ◙ What’s this boring stuff have to do with economic turmoil and tax uncertainty? Everything. Solid broad based planning, monitored regularly, is the key during uncertainty.

√Life insurance becomes more attractive. Insurance has performed better then some asset classes and should be part of many, perhaps most, plans. If income tax rates rise the tax benefit of insurance provides is more valuable since assets will grow inside the tax advantaged insurance envelope will.  Insurance, if it is properly owned by a trust, is outside your estate whatever happens with the estate tax.

√Asset protection – litigation is always a concern trusts help. Family Limited Partnerships (FLPs) and LLCs. Even if discounts are restricted or repealed FLPs and LLCs are great for control and asset protection. Lawsuits won’t disappear. FLPs will be increasingly used to shift income to lower tax bracket family members if tax rates rise and the spread between the highest to the lowest tax brackets increases. The Code Section 704(e) family partnership rules were enacted long ago to control overly aggressive planning in that regards. Planning around its constraints will come back into focus.

√529 plans remain great. Assets are outside your estate, tax favored, etc. You can inexpensively and simply plan for children or grandchildren. If you remain the account owner you can reclaim the assets if economic or tax developments change your situation.

√Domestic Asset Protection Trusts (DAPT) have become more practical for wealthy, but not super-wealthy folks. Competition has increased among trust companies willing to serve for relatively modest fees to facilitate this planning. You can set up a trust in a slew of states: Delaware, South Dakota, Alaska or Nevada (Dick, we wouldn’t leave out Nevada!). The assets may be removed from your estate to save estate tax, and from the reach of your creditors. PLR  200944002. This is a great technique to consider with so much uncertainty affecting the tax laws and the economy. It was a completed gift even though trustee in the trustee’s discretion could make a distribution to the grantor or grantor’s spouse This is a great maneuver for those with enough wealth to worry about taxes and creditors, but not so much wealth that they can give away tons of it.  iv. The open issue is whether this completed gift would be outside grantor’s estate. Some believe that if the gift is complete is should be outside the estate. Other’s are not certain. Does this apply to a non-Alaskan resident? The ruling specifically states that person that created the trust lived in Alaska.  See also, PLR 93320065.