■ Root Canal Estate Planning: - Most clients use the root canal method of estate planning. Wait 5, 10 perhaps 15+ years between appointments. Do you complain about your estate planning being very complicated? Do you gripe about the costs? Is it a frustrating process? That may largely be due to your using the root canal method. Why don’t you try skipping your semi-annual dental cleaning for years too! Just wait until a tooth hurts like the Dickens, call your dentist and wind up at the endodontist for a root canal. Ouch! Maybe if you went to your dentist and estate planner regularly things could be different. You can’t expect to avoid the dreaded root canal if you don’t take care of your teeth. Ditto on your estate plan. Annual visits to all of your advisers is the way to root out problems before they become more complex and costly. Regular care is what would make your planning less painful. If there is an error in a trust, or a required formality overlooked, annual meetings can often provide an opportunity to correct a problem and get everyone back on track before small potential problems become more significant, costly and time consuming to address.
■ Jigsaw puzzle: Starting with the big picture is usually the way to tackle a complex situation. To really plan properly you and your advisers need the mile high view to make sure the global decisions are logical and coordinated. Then you can drill down to get the details. A gardening website summarized it all: “Shrubs require consistent and routine trimming to maintain a healthy and well-manicured hedge. Occasionally a hedge is neglected and becomes overgrown. With the proper pruning technique, an overgrown hedge can be restored. Depending on how out of control your hedge is, it may take a few years of trimming to completely train it.” If your estate plan looks like a jungle, you might have to opt for the Jigsaw approach. Focus on identifying the corner pieces. Perhaps the succession plan for your business or getting your life insurance into a trust. When you’re able to solve a few pieces at a time (i.e., able to add a few corner pieces) the rest gets easier. Pick independent planning steps that can be handled relatively independently to chip away. These are the pieces of the puzzle that just looking at them you know where they fit. With the corner pieces and a few obvious puzzle pieces in place, often even the most complex or messy plans can take shape. This can be a lot more efficient and palatable than struggling beyond reason trying to pull all the disparate parts together from the get go in one comprehensive plan.
■ Rocket Ship: If you shoot a rocket ship to the moon and are an inch off in your aim at launch, you could miss the moon by 100s of miles. So to with a budget and financial plan. If you’re overspending today, 20 years from now you may be wiped out. Even for very wealthy people, spending at too high a rate, which may seem inconsequential today, could have a devastating impact over time. When Elton John sang his famous song about financial planning, he crooned “And I think it's gonna be a long long time.” He was right on target. The compounding of excess spending over a long long time is ruinous. So focus on the details and even the small issues today. You can put it off, but one belt notch of tightening today may save 3 tomorrow.
■ Oxygen Mask: When you’re on an airplane the flight attendant tells you that if the oxygen masks fall, put yours on first before helping anyone else. (Don’t ask your anesthesiologist ‘cause she might say put the mask on a child and certain other people first, and that would ruin our analogy). So too with planning. Some number of folks are so preoccupied getting enough money and help to their kids they forget about taking care of themselves first. It is a wonderful thing to be generous and helpful to your children or other heirs, but not to the point you have to ask them for money so you can step up your meal plan to something more enticing than a Happy Meal. Put the oxygen mask on your financial planning first. Sure, funding irrevocable trusts is a great way to save estate tax and keep your CPA filing annual tax returns. But if you’re not a beneficiary of that trust, how can you get access to money if you need it? Read Murphy’s law below.
■ Murphy’s Law: What can go wrong will go wrong. The key questions in every plan is “what if.” What if this, what if that….keep asking what if until the reply is “I really don’t care.” Asking what if questions and considering planning to address them is vital.
■ Sailboat: You cannot sail a boat straight into the wind. The sail will flutter and you won’t get anywhere. You need to tack back and forth constantly readjusting to hit your target. Planning is like that too. There will be years you just have to overspend your budget (yes, even uber-wealthy folks need a budget). In some years you just cannot afford the time or emotional investment to undertake certain important planning tasks. No problem. Make up for it next year by tacking in the other direction. Being reasonable with yourself, and flexible but diligent in your planning, is the realistic way to stay on track.
■ Cream and Milk: - GRATs, grantor retained annuity trusts, are tough for some folks to understand. Perhaps thinking of the milk and cream from a freshly milked cow will help (you have milked a cow haven’t you?). The cream rises to the top of the milk. In a GRAT you get the milk and the cream that rises to the top over the mandated 7520 federal interest rate is what get’s skimmed off for the kids.
■ Waterbed: – Grantor trusts (you as the person setting up the trust pay the income tax) seems like an odd concept to many people. But grantor trusts are one of the hottest planning techniques for wealthy taxpayers (well today -- the Pres wants them out). Grantor trust status is the core of a DAPT (domestic asset protection trust) or Dynasty trusts. The waterbed analogy might help. If you push down on the foot of the bed, the top of the bed rises. The overall volume in the bed doesn’t change. In a grantor trust you pay the income tax on income earned by the trust so the assets in the trust, like the top of the waterbed, rises. The assets in your name decline. But you haven’t lost out on any wealth, just redistributed it.
■ Tylenol vs. Advil: Everyone has taken both Advil (a non-steroidal anti-inflammatory agent, NSAID) and Tylenol (Acetaminophen) for a headache (perhaps after reading each issue of this newsletter with the cramped type and odd attempts at humor). But do you have a clue how each drug helps that headache? Nope. But that doesn’t mean they don’t work. They do. And you (and everyone you know) takes them without having a clue why they stop that headache or pain. You should know dosages, possible side effects to be concerned about, drug interactions to avoid, etc. But do you really need to understand how it works? But then when it comes to a complex estate planning technique like a defined value clause, a Graegin loan, or a split-dollar loan, you feel you need to understand all? Certainly you should understand the big picture. What you are doing, what your options are and generally how they impact you. But bear in mind the Tylenol/Advil analogy. Don’t let the impracticability of understanding a complex tax, estate or investment strategy or technique to the degree your adviser does, dissuade you from taking steps that are in fact prudent and appropriate for you.
■ Weakest Link: Everyone remembers the TV show, but the same paradigm applies to an estate planning team. Most folks are reticent about letting their advisers (CPA, business attorney, estate planning attorney, insurance consultant, wealth manager, etc.) really coordinate as they should. The best crafted irrevocable trust plan can be undermined by any adviser not addressing his role properly. If the trust is drafted impeccably, but the CPA fails to file an election required to maintain the S corporation election for S corporation stock given to the trust, the results can be disastrous. Ditto if a brilliantly drafted Grantor Retained Annuity Trust (“GRAT”) is drafted, and the income tax returns are filed perfectly, but the investment location decisions are misunderstood by the wealth manager. Avoid the weakest link in your plan by coordinating your advisers. It may only take an hour web conference a year, but the benefits will far outweigh the costs, often exponentially. You have an important responsibility in assuring the success of any planning, and a that responsibility is not being fulfilled if you do not participate in regular reviews of your plan and documents and coordinate your advisers.
■ Annual Physical: Annual reviews are essential to the success of any plan. You have not had a meeting in nearly 10 years. Regular maintenance is essential for an estate plan, e.g., maintaining an insurance trust, no different than an annual physical or periodic service on your car. Failing to do so will substantially increase the likelihood of your goals not being met. It is especially important given the rapid changes and continued uncertainty in the tax laws. Estate planning is an ongoing process, not the mere signing of documents. You have an important responsibility in assuring the success of any planning, and a that responsibility cannot be fulfilled if you do not participate in regular reviews of your plan and documents and coordinate your advisers. If this sounds like the root canal message above. It is!