In recognition of Buddy Ozanne’s 50th work anniversary, we are continuing to share some of the wisdom and insight that Buddy has accrued over the past five decades helping families achieve their financial goals. Below is another example of a real-life planning scenario that offers lessons for families – and for married couples in particular – that are still relevant today.
The Dos and Don’ts of Generational Wealth
Written by Buddy Ozanne
When it comes to wealth, many families spend lots of time earning it, spend some time creating plans to pass it down, and spend little or no time discussing those plans with loved ones and future generations. This understanding has guided my estate planning conversations with countless individuals and families. In the fall of 1989, I traveled from Dallas, TX to the Midwest for a first in-person meeting with potential clients, a married couple in their early 70s. For the purposes of this piece, I will refer to the clients as Mr. and Mrs. Miller.
Meet the Millers
Mrs. Miller was deeply interested in my perspective and my assessment of her estate documents. However, Mr. Miller was thoroughly convinced that his estate plan was completely “in order,” and in our initial phone conversation, he said, “I don’t know why I was referred to you. I already have my estate planned and the documents drafted by a prominent and well-respected estate attorney.” Once I arrived at their home, Mr. Miller reiterated that he really wasn’t sure that I could be of much help, and he re-told the story of how he and his wife had an excellent estate attorney and had given the attorney the instructions to leave everything they owned to their grandchildren. The attorney drafted wills that did precisely what was requested without consideration or explanation of the tax consequences. The couple left everything that they owned to each other, then directly to their grandchildren, effectively cutting their children out. Mr. Miller explained that his father-in-law had left his estate in this manner, skipping he and his wife, so he felt that their kids had plenty already.
Kill Them on Paper
Over the years, I have learned a technique to demonstrate the tax implications of this type of estate planning. We sometimes refer to it as “killing someone on paper” because it demonstrates the tax liability accrued by an estate when someone dies without a carefully prepared plan in place. I handed Mr. Miller a yellow legal pad and asked him to write down some figures. I then pulled out my federal income and estate tax tables and began to do some calculations. In 1989, the estate tax exemption was a mere $600,000. Once we applied income tax, estate tax, generation skipping transfer tax, and the excess accumulation excise tax to his large IRA (rolled over from a company profit sharing plan), the combined effective tax rate was more than 80%! When we reviewed the legal pad that showed the total estate and income tax amounts that would be due on their deaths under their current estate plan, they were both very concerned. Mr. Miller exclaimed, “Why, that’s way too much! My attorney didn’t show me these numbers!”
Mitigating the Tax Problem
We continued to discuss these tax implications, and it became clear that Mrs. Miller had never wanted her estate to skip over their two adult children. Mr. Miller shared that he thought they agreed on their plan. I do think the husband was well-intentioned and had misunderstood or misinterpreted what he believed to be he and his wife’s shared wishes. After the couple discussed both of their desires for their estate at length and in great detail, I shared with them that with a little planning, including a little inter-generational blended with some skip-generational planning, we can greatly reduce the potential tax liability. I added that if they included some charitable planning, they might be able to eliminate the tax altogether. This couple deeply loved their church as well as their children and grandchildren. The solution addressed all of their concerns and wishes and, more importantly, represented both of their desires.
Following an extended planning session, we solicited an attorney to draft two trusts: one trust left the wife’s separate property in trust for her children for their lives, then continued for the grandkids’ lives following her husband’s death, and the other trust for Mr. Miller left the maximum amount without incurring estate or generation skipping tax for their grandchildren following his wife’s death. The couple also decided at that time to leave all of the taxable excess of their estate in a charitable lead trust which provided income to their church charities for a period of 20 years. At the end of the 20-year period, this charitable trust reverted to their kids’ and grandkids’ trusts. The future value of the charitable lead trust’s income stream was enough to eliminate the estate tax, even though the family (especially the grandkids) got the assets back following 20 years.
The Importance of Family Meetings
Once the family’s estate plan was completed, the couple hosted a family meeting where their estate attorney and I explained their plans, including their children’s benefits and responsibilities. Bringing the family together for productive conversations about the family’s wealth transfer plan began a regular schedule of family meetings which helped ensure the plan’s success. The wife was the family’s investor. She loved to do research on individual companies and consult with advisors. She did a great job of communicating the value of long-term investing. The husband was very frugal, and he did a good job of communicating the importance of good financial stewardship. Over the past three decades, we have conducted numerous meetings with three generations of Miller family members, both prior to and following the parents’ deaths. These meetings have fostered a deep understanding of the family’s values and expectations. And, after including their children in planning discussions, the father eventually amended his trust to provide income to their children for their lives and then for the benefit of the grandchildren, just like his wife’s trust.
The family’s plan has evolved to keep pace with ever changing estate planning laws and tax legislation. As the federal estate tax and generation skipping tax exemptions increased, the family was eventually able to do away with the charitable lead trust altogether and avoid the estate tax. This has allowed the children and grandchildren to engage in planning their own charitable intent.
Successful Multigenerational Planning
My colleagues and I firmly believe that good multigenerational wealth preservation can only be achieved when all members of the family are engaged in planning and informed about the plan’s structure and purpose. Both partners of a marriage should be willing to speak freely about their wishes and intents. I share with clients that any planning that does not include both spouses would be a waste of time for all parties. The non-participating spouse will likely not be happy with the structure of the estate plan and may request another meeting to review and make changes, or the non-participating spouse may refuse to sign the documents.
Another key to success in multigenerational wealth preservation is communication. Clients who are successful in transferring and preserving family wealth over multiple generations communicate their plans with their heirs. They communicate and celebrate what it took to accumulate their wealth. They communicate how to manage wealth and how to choose the right advisors in that endeavor. Heirs who have been prepared to inherit wealth may make some mistakes…we all do; however, preparation minimizes those mistakes and generally softens their impact. Over fifty years of estate planning experience has given me the insight to help our clients prepare their families to act as good stewards of their largess. And, our firm has endeavored to transfer our lessons and intellectual capital in wealth management to the next generation of management here at Probity Advisors.