 
|
Protecting Your Financial LegacyAnd learning from the wealthy who failed toBy Scott Keffer
J.P. Morgan built his family fortune into a financial and industrial empire, forming the U.S. Steel Corp. He financed manufacturing and mining, and controlled banks, insurance companies, shipping lines and communications systems. No one would argue that he was a brilliant businessman—yet he lost 69 percent of his fortune to taxes and fees at his death.
Interestingly, his story is not uncommon. Alwin Ernst, co-founder of the famous accounting firm Ernst & Ernst (now Ernst & Young), lost $7 million, more than half of his estate; Elvis Presley sang his way to $10 million, but lost 73 percent; and Charles Woolworth, co-founder of F.W. Woolworth Co., lost $10.3 million, or 62 percent of his estate, to taxes and costs.
The lesson for all of us: Never assume that our success in accumulating wealth translates into success in preserving it.
 A First-Hand LessonI learned this lesson firsthand. As a college student, I received word that my grandfather had died. The fact that he was a retired executive of Chase Manhattan Bank didn’t mean a whole lot to me. He was my grandfather. If you could draw a picture of a grandfather, he would fit it to a T—silver hair and little round spectacles. When he died, my grandmother inherited a portfolio of stock from him that supported her very comfortably for the rest of her life.
A few years later, having been trained by some of the country’s most-renowned wealth preservation professionals, I decided to talk to my grandmother about preserving what my grandfather had worked so hard to accumulate. Now, imagine this conversation: “Grandma,” I began, “here is what you need to do: Take your entire portfolio of stock and put it into a family limited partnership in exchange for limited and general partnership shares. Sell the limited shares to a defective grantor trust in exchange for a private annuity that will pay you income for the rest of your life. When you die, the balance of your estate will go to a private family foundation and there will be no federal estate tax due! You’ll be better off—and we’ll be better off. What do you think?”
Her eyes squinted and her head tilted as she stared at me incredulously.
I learned a couple of big lessons from that encounter: In response to my misguided but well-intentioned efforts, my grandmother did absolutely nothing! Sadly, upon her death a few years later, my father and aunt wrote a check to the State of New York for more than $1 million and one to the IRS for more than $3 million from the estate she left. I couldn’t help but wonder, if my grandmother knew that more than $4 million of her estate was unnecessarily lost to taxes, wouldn’t she be regretful?
Don’t Put Off Today...
One of the biggest villains of wealth preservation is procrastination. Like gravity, procrastination holds us to a course of action that is not necessarily good.
Burbank, Calif., estate planning attorney Bob Bowne II agrees: “A lot of people put this off perhaps because they resist thinking about their mortality, but in the end, the creation of an integrated estate plan won’t create anxiety. Just the opposite—it creates peace of mind.”
The Tax Mountain
Another significant issue that wealthy individuals should address is estate taxes. While this article is certainly not a forum for tax advice, here are a few things to consider:
First, current law has established three milestone dates that impact estates valued at more than $1 million. In the first period, which lasts until 2009, estates valued at less than $2 million are now potentially tax-exempt. In 2009, that cap jumps to $3.5 million, and in 2010, there is no cap at all.
However, there is some bad news: In 2010, your heirs could pay capital gains taxes on inherited assets instead of paying estate taxes. And in 2011, the estate tax exemption drops back to $1 million. Your plan should remain flexible enough to correspond to these and other future changes.
Also, in terms of gifting to others while you are living, the cap is $1 million, in addition to $12,000 per person each year, before you would be required to pay gift taxes. That part of the law also changes in 2010, so you should coordinate your annual gifting with that in mind.
Once the value of your estate surpasses these exempted amounts, the tax rate is 46 percent. What’s more, retirement assets such as your IRA, 401(k) and pension can effectively be taxed twice—once for estate taxes and then once for an income tax called Income in Respect of Decedent—potentially removing up to two-thirds of every retirement dollar from your estate.
Taking Control
Why not proactively transfer your surplus wealth to your heirs and protect it from unnecessary estate taxes, creditors and litigation—while still legally maintaining control of your assets and accessing all the income and principal you need?
Joe Robbie’s family wishes he had. How did this brilliant attorney and successful business owner fail to preserve his wealth?
Joe Robbie was an American success story. In 1965, Robbie co-founded the Miami Dolphins, a franchise that turned into one of the highest-profile and most lucrative teams in professional football. Like many owners of family-run businesses, Robbie planned to have his family follow in his footsteps when he was gone. Unfortunately, he didn’t plan well enough to avoid estate taxes altogether or provide the cash necessary to pay them.
Robbie, who died in 1990, passed his storied franchise and the stadium he built—which bore his name—to his wife through the marriage deduction. When his wife passed away soon afterward, a staggering estate bill estimated at $47 million forced the family to sell Robbie’s legacy—both the team and the stadium.
Since then, the value of the Dolphins and the stadium—no longer named after Robbie —has almost doubled. Even worse, however, Robbie’s intentions were defeated; his children never fully reaped the success he worked so hard to build.
Beating the Odds
Karen File, an associate professor at the University of Connecticut’s Business School, and Russ Prince of Prince and Associates recently conducted a national survey of the heirs of successful business owners who received a business from their parents and subsequently lost it. Ninety-nine percent reported “an inadequate estate plan” as the primary reason for losing the business.
As I learned from my grandparents, the skills it takes to accumulate wealth are not the same skills it takes to preserve wealth. Albert Einstein put it this way: “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”
Henry J. Kaiser, the father of the American shipbuilding industry, lost $2.4 million, or 44 percent of his estate, when he died. His son, Henry J. Kaiser Jr., grew his inheritance to $55 million and only lost $1 million, or less than 2 percent. How did the son succeed in preserving his wealth? Not by accident.
Better yet, how will you do at preserving your wealth?
Scott Keffer is the founder and president of Wealth Transfer Solutions Inc., a legacy planning company in Pittsburgh.
|
|||||
