98% of Us Never Pay Estate Taxes

If my wife and I die on December 31, 2010, my daughters won't pay any estate taxes. Not one nickel. If I die a day later it will cost my kids 55% of my assets. The IRS wants its money, in cash, 9 months and a day later. If my assets are tied up in a business, a private equity fund, real estate, or sundry other illiquid "investments," the IRS will still insist on its cash. Which means my assets will be put up for a fire sale and the penalty of dying could be much higher -- perhaps over 100%. In which case the only "inheritance" my kids will get will be a whopping tax bill.

The name of the game is get one's assets away from the IRS now. That will save the taxes now on the principal and the appreciation between now and when you die. Figure you have a $10 million net worth now. Die today, you could get zapped with taxes of $4.4 million -- that's after the $2 million deduction. But die in ten years, when even with our miserable stock picking we've doubled our estate, our heirs are now looking at a $9.9 million tax bill.

The easiest way to reduce the value of your estate is to spend all your money or give it all to charities or do both.

The second "easiest" way is to put your money into various "trusts." They have quaint names:
+ Revocable trust
+ Credit maximizing trust
+ Life insurance trust
+ Charitable remainder trust.
+ Profit sharing sub-trust
+ Living trusts
+ Dynasty trust
+ Personal resident trust

The third "easiest" way is is to buy sufficient life insurance. In effect, your insurance company will pay your estate tax bills.

If you screw up in your planning and paperwork , there are huge penalties:
+ Your life insurance payment might itself be taxable.
+ You'll die "asset rich, cash poor."
+ Some of the trusts are irrevocable. That means you can't change the beneficiaries, even though you have a falling out with your idiot daughter-in-law.
+ Your estate might end up in Probate Court, with everybody and their uncle arguing endlessly about who gets your money. Think divorce: The arguments will only stop when the legal fees equal the value estate. This becomes really expensive if you happen to have assets in several states. You'll need lawyers there. And their fees are outrageous.

There are plenty of "gotchas," along the way, too. If you die, and your wife, age 90, remarries without a pre-nuptial agreement (even at 90), your kids could get handsomely screwed. Congress might also change the law -- like kill estate (aka death) taxes altogether, though I doubt it.

A nice man called Ira Kessler placed an ad in The New York Times last year, offering a free seminar on Estate Planning. That's where the information came from above. The seminar accomplished its purpose. It scared the pants off attendees.

I've met with estate planners. I have a good handle on this. There are several problems:

1. No one seems to have a simple step-by-step plan to take you from today to tomorrow painlessly. Everybody is different.

2. You need an estate planner to do your planning. You need to find one who's not a life insurance salesman in disguise.

3. You need a talented lawyer who can draw up all the necessary IRS-bullet-proof paperwork. Finding one who's got time for you is probably impossible today.

4. The IRS code is clear on some things. For example, your trust's goals have to be "health, maintenance, education and support." Any other words and you're screwed.

5. The IRS is not clear on most things. You can understand that. Its job is to collect money. It's not going to tell you how to plan your death so you can screw the IRS.

There is another alternative. Namely, spend all the money now. Die poor. My friend's latest mantra is "fly first class or our children will." 98% of us never pay estate taxes. That's because the 98% of us die with estates under $2 million.