No question about it, the most significant economic enemy of the wealthy (defined below) is the estate tax.
Certainly, most agree, being wealthy is good. But the complexity of the estate tax law—not to mention the entire concept of taxing wealth at death—is bad… And almost everyone, except some of the law makers in Washington, agrees.
To a large measure you can control your wealth. Unfortunately, you cannot control the estate tax law.
The purpose of this website is to educate and help the wealthy effectively deal with Estate Tax, Business Succession, Asset Protection and related subjects.
Let’s start by defining
For tax planning purposes wealthy means… You are irrevocably subject to the highest income tax rate and highest estate tax rate. Remember, either rate (or both) could change at the drop of a new tax law… A certainty.
Irrevocable, as used here, means … You have accumulated enough wealth so that come “Hell or high water,” you will never escape either of those two terrifying high brackets.
Under the current tax law, rates are scheduled to change.
In 2011 the highest income tax rate will be 40% and the highest estate tax rate 55%. (Prior to 2011 both rates vary.) Let’s turn those 2011 percentages into dollars.
Suppose you are wealthy (irrevocably in those blasted high tax brackets) and earn $1 million. After 40% in income taxes, you have $600,000 left. When you go to heaven, the remaining $600,000 will be attacked again. This time by your 55% estate tax bracket. Sorry, but $330,000 more enriches the tax collector. Your family gets only $270,000 out of that $1 million. The IRS… $730,000.
And that’s why the wealthy crave more tax education and tax help. Obviously, the tax impact rises significantly (along with variations in planning strategies) as your net worth rises. Therefore, for tax and proper planning purposes, it is essential to categorize the wealthy. To start, let’s answer the following question.
What’s the Difference Between High-Net Worth Individuals and Medium Worth Individuals?
Over the years I have read and heard dozens of attempts to categorize people of means. Let’s forget about academia and zero in on the differences as they impact the planning process (estate tax and related areas). Rather than toy with definitions, let’s begin by looking at the important differences between the two: high-net worth and medium net worth.
You bet size counts. Once you become wealthy (by our definition), every additional $1 million of wealth potentially can enrich the IRS by $550,000. When you add enough of those millions onto your net worth, you become a high-net worth individual (High-NWI).
In our practice, we don’t use a specific dollar amount as the sole criteria to determine who is or is not a High-NWI. The amount (really a range) tends to vary from individual to individual.
Although many factors impact on whether a person is or is not a High-NWI, the single most important factor might surprise you. What is that factor?… Whether this person (let’s call him Joe) has a concern that he may not be able to maintain his lifestyle. The term “lifestyle” always includes your spouse and any other person you feel obligated to or care about.
Put it this way: If you harbor even the slightest concern about maintaining your lifestyle, you are not a High-NWI, no matter how high your total net worth.
Let’s take a look at real-life
EXAMPLE OF A HIGH-NWI
Joe, a client from the Chicago area came to me for a second opinion on his current estate plan. Joe had the following assets:
|Asset||Fair Market Value*|
BASED ON OUR EXPERIENCE
When we ask clients to set their goals, it is rare that any individual worth in the $25 million to $30 million range mentions “maintaining my lifestyle,” either directly or indirectly. Interesting, isn’t it?
Sure, once in a while, even clients worth $25 million or more come up with the classic, “Want to maintain my lifestyle (and wife’s/husband’s) for as long as I live,” goal. And, of course, the lower the total wealth number goes, the more likely we are to hear the lifestyle goal.
Let’s make it clear: When a client has a concern for maintaining lifestyle, that goal preempts all other goals. And that’s okay. It is the client’s goals—not the advisor’s—that must be accomplished by the final Wealth Transfer Plan. The Plan need not be compromised, but as you will see throughout this website, a Plan centered around a lifestyle goal must be designed differently than a Plan that is not concerned with that goal.
REQUIREMENTS FOR JOINING THE HIGH-NET WORTH CLUB
There are two:
- Your total net worth is a minimum of $25 million.
- You are not concerned about maintaining your lifestyle.
Next, back to Joe and our example. Joe never gave maintaining his lifestyle a thought. The size of his income and net worth will keep him an unwilling captive in the highest income and estate tax brackets forever.
Now, let’s take a look at the most important factors/concerns that could cause a High-NWI to lose their membership in the High-Net Worth Club (even though the High-NWI has a current net worth of $25 million, or more):
- The likelihood that an asset (or group of assets) could go down in value
- Business could go bust (for example, industry on a whole is declining; new technology could make your product or service obsolete; or your product or service has become an unprofitable commodity.
- Marketable securities could crash.
- Run-away inflation (over time) could reduce the buying power of your dollar to 50 cents (or less).
- State of mind (some people are frozen with fear because of all or some of the following).
- Total collapse of the economy
- Devaluation of the dollar
- Change the law (some states already do it) to tax amount of your wealth every year, as well as income.
- Likelihood of lawsuits (real or imagined)
If you sold your business and all or most your wealth is invested in debt-type investments (CD’s, treasury bonds and the like), inflation will not only clobber your spendable income, but could significantly raise the $25 million threshold to stay in the High-Net Worth Club. Maintaining your life-style might become a necessary goal.
ONE MORE IMPORTANT CONSIDERATION
Over the years we have noticed that most High-NWIs become charitable (but were not before) when their wealth reaches or exceeds about $25 million. Those who were charitably inclined to start, substantially increase their charitable giving. Not a perfect barometer, but in practice seems to be near perfect to determine the client’s charitable state of mind (as opposed to dollars that must be kept for a rainy day).
Joe, in the above example, went from annual charitable gifts of about 1 percent of income to about 5 percent of income when his wealth reached about $30 million. Interesting, he’s now talking about giving 10 percent of his total wealth to charity… in addition to his regular annual gifts.
So, let’s take a quick look at the rather simple Wealth Transfer Plan we created for Joe and his wife Mary (also his family—kids and grandkids—and business… and charity too).
An Overview of Joe’s Wealth Transfer Plan
The following overview does not give you the details, reasons and explanations of why certain Strategies were used. That information is generously dispensed throughout this website (particularly in the “Tutorial” starting on the home page). The purpose of what follows is to quickly show you the results of what The System, as taught on this website, is capable of accomplishing.
Quickly. And easily. No matter how much you might be worth (whether more or less than Joe).
For convenience, Joe’s asset schedule is repeated, along with the main Strategies used to create his Wealth Transfer Plan.
|3. Rental R/E||12||FLIP/IDT/CLAT|
|Total Net Worth||$92|
**IDT (intentionally defective trust); FLIP (family limited partnership); CLAT (charitable lead annuity trust); 50/50 (Joe’s revocable trust owns 50% of each of the two residences and Mary’s trust owns the other 50%); Subtrust (purchases life insurance); Charity (balance in 401(k) and IRA accounts when Joe dies will go to charity).
A total of $30 million of second-to-die life insurance was purchased in varying amounts by the Subtrust, IDT and CLAT.
Results of Joe’s Plan
If we assume that there will be no appreciation in the value of Joe’s assets, no inflation and that all income would be spent, then Joe’s Plan (after he and Mary are gone) would produce the following results:
|To his family, all taxes paid in full||$97 million|
|To charity||$17 million|
The Plan is set up so Joe will have absolute control over all of his assets—including his business—for as long as he lives. Also, all assets are protected from the claims of creditors and possible lawsuits.
It should be pointed out that the Plan freezes the three largest assets—business, liquid and rental real estate—owned by Joe for tax purposes. But, in reality, the assets most likely will grow in value, and Joe and Mary will not spend all of their income. Simply put, the FMV of Joe’s assets will grow… not for tax purposes, but in intrinsic value. Yet, this growth (estimated at 6% per year), which means the amount of Joe’s wealth will double in 12 years, will not be subject to the clutches of the tax collector.
Want to Learn More?
Read Irv Blackman’s manual/book, “Tax Secrets of the Wealthy.” Click Here. The manual/book explains in detail and step-by-step how to use The System to create your own Wealth Transfer Plan. Because you are a member of the High-Net Worth Club, the manual/book will not only save you millions of dollars in taxes, it will show you how to create millions in tax-free wealth. Click Here
Usually, there is not much difference between a medium-net worth individual (Medium-NWI) and a High-NW individual. A Medium-NWI just has not reached the $25 million minimum necessary to be a HIGH-NWI. We usually classify, an individual with a net worth of more than $10 million, but less than $25 million as a Medium-NWI.
You’ll find this fact interesting: About half of our Medium-NWI clients have concerns about maintaining their lifestyle. Everything said about the lifestyle subject in the High-NWI section earlier, applies here.
An example is the best way to grasp how a Wealth Transfer Plan is designed, using The System, for a Medium-NWI. Irv Blackman has written a Special Report titled “Insider Secrets of How to Win the Estate Tax/Business Succession Game… Every Time.” The Report is centered around a real-life client whose net worth is $21.1 million. The Wealth Transfer Plan created for this client (his family and business) produces the following after-tax results:
|To his family, all taxes paid in full||$28.5 million|
|To charity||$ 3.7 million|
Take a moment to review “Continuing Your Education” in the “Section summary” of the “tutorial Letter.” Click Here. You’ll learn what is in the Special Report and why it is important to your tax and economic health to read it. Click Here.
Sometimes one term—Super Wealthy—is used to describe both the Mega-Wealthy and Billionaire, but the two are divided, based on net worth as follows:
|Mega-Wealthy||$100,000 to $1 billion|
|Billionaire||$1 billion or more|
The Super-Wealthy—and the special planning opportunities available to them—are discussed in separate sections of this website (Click on “Applying The System to the Mega-Wealthy”; “Personally Designed Philanthropy”).
Free special report:
How to transfer your business (to your kids), yet keep control
When closely help with business owners call me for help with their business successions plan they typically have two goals:
- Get their business out their estate (particularly when it is growing in value) in a tax effective manner
- keep control for long as they live
it is a rare that the business owner finds an advisor who knows how to accomplish both goals.
this special report shows you how to keep absolute control of your business while transferring it to your successors.
Free Special Report:
How to legally eliminate your state tax liability
When people of means contact me to help do their estate plans (or review their existing plans), they typically have two goals concerning their estate tax:
- Reduce their potential estate tax liability
- Make sure there is enough liquidity to pay the potential estate tax liability
Well, my goal and the goal of this special report is to show you how to eliminate your potential estate tax liability whether you are young or old , married or single, insurable or uninsurable.
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