Why Knowledge and Action can save millions of dollars in
taxes
Equal under the law is one of the core principles of the
American legal system. It’s been a revered keystone of our body of laws and
taxes for over 200 years. With that in mind, it may surprise you that there are
effectively, two sets of federal estate tax laws
But there is one set for those who are either ignorant of
them or who take no action and another for those people who both understand
these laws and act to take advantage of the tax-saving opportunities provided by
them. Which set of laws a family chooses to use when transferring assets makes a
tremendous difference in the size of their estate taxes.
Section 2001 of the United States Tax Code defines how
federal estate taxes work. It mandates that estates which have assets in excess
of $1,500,000 will pay taxes on that excess at rates which can go as high as
48%. This is the set of laws which impacts those who either don’t understand
them or do nothing about them.
The alternative set of laws is defined in Section 664.
This section provides a variety of opportunities that can protect estates of $1
million, $10 million, $100 million or more from paying any federal estate taxes
at all.
How these two sets of laws work - and the very different
ways that they can impact wealthy families - is well-illustrated by the stories
of Joseph Robbie and Jacqueline Kennedy Onassis.
Fumbling the Ball
Joseph Robbie was a successful businessman, an attorney and an avid sports fan.
He combined his good business sense and his love for sports in his ownership of
the Miami Dolphins, one of the NFL’s most successful teams. But in March, 1994,
Financial Planning magazine reported, "the year’s biggest loser in the National
Football League is the Robbie family, the former owner of the Miami Dolphins.
Torn apart by family rift, general mismanagement and estate taxes reportedly in
excess of $45 million, the family was forced to sell the team, one of the most
valuable franchises in professional sports, at a bargain-basement price."
Robbie’s estate was somewhat less than $100 million and
almost 50% of it vanished in federal estate taxes. It compelled his family to
sell the Dolphins at a fraction of its value. Strife and bitter resentments
developed within the family because of the actions they had to take to pay the
taxes. The real tragedy is that it all could have been avoided.
"If that $45 million could have been paid with a life
insurance check," concluded Financial Planning, "it would have certainly changed
the financial complexion of the family’s situation."
Smart and Elegant Planning
Four months later, the death of Jacqueline Kennedy Onassis also generated
articles about her estate. But, in stark contrast to the Robbie family’s tale,
the press told of Ms. Onassis’ wise and careful planning.
Fortune magazine reported, "she left behind, to the rest
of us, a model of smart estate planning. At a very basic level, the fact that
she had a will may be the most important lesson of all. A surprising number of
smart people don’t make a will and that opens the door for the government to
have a potential field day. On a more sophisticated level, the Onassis will
makes smart use of estate planning vehicles like trusts to pass money on to
heirs and charities while reducing the bite from estate taxes."
Fortune summarized the terms of the Onassis will in a
sidebar titled What Jackie did . . . and why it was smart:
1. Left gifts of cash to friends and specified that the
estate taxes be paid out of the rest of her estate. That was smart because if
the will does not direct the taxes be paid by the estate, the value of a gift
could be cut in half by the taxes due.
2. Specified exactly who would inherit each of her real
estate properties. That was smart because homes are laden with emotion and
should be disposed of directly, not lumped into total assets.
3. Put the bulk of her estate into a charitable lead
trust. The trust gives money to charities for 24 years, then the rest goes to
her grandchildren. That was smart because a charitable lead trust is a good
way to give money to heirs who don’t need income immediately. The donation to
charity reduced the estate taxes.
4. Gave her personal property and letters to her
children and requested that they respect her wish for privacy. That was smart
because when giving personal property, one should make their wishes known but
give the beneficiaries some flexibility.
Stark Contrast
While her estate exceeded $200 million, less than 3% of it was reportedly lost
to federal estate taxes. By contrast, the Robbie’s lost $45 million from an
estate which was half the size of Ms. Onassis’.
Fortune concluded its Onassis estate article, "One nice
thing about writing a will and thinking about your estate - it is a chance to
leave a final word in black and white. You could see the thought beyond the
legal verbiage and that’s what a last will and testament should ultimately
reflect. It’s a rare look at how a good estate plan is done."
The Robbie articles conclude less happily. "Good planning
can help contain and eliminate the damage estate taxes cause." notes Financial
Planning. "The ways of minimizing the effect of estate taxes range from holding
life insurance in an irrevocable trust to gifting out portions of the estate to
creating charitable trusts. Clients should realize that the tax collector is
waiting to make a big hit on an estate. In the case of the Robbie family, being
blindsided by estate taxes meant fumbling away the team."
These stories end so differently for one simple reason:
Jackie Onassis decided to use the provisions of Section 664 to reduce her estate
taxes to approximately 3%. Joseph Robbie chose to take no action at all. His
inaction allowed Section 2001 to tear his estate and his family in two.
Two sets of laws.
Two different stories.
Which one will be in your family’s future?
Call us today so we can help you avoid potential problems
in your financial future.
|
