I recently visited New York, Boston and Chicago, and in each location I used public transportation to move about, including the subway and light rail systems. Like many, I enjoy the convenience of subways as a cost-effective way to get to where I’m going without the hassle of finding a parking space or dealing with traffic.
As one stands on the platform waiting for the train, one notices signs warning not to jump down onto the tracks or to come into contact with the “third rail” which is a reference to the high voltage conductor used to power the system. Coming into contact with the third rail could result in death.
The third rail analogy also applies to politics, warning politicians not to tinker too much with entitlement programs like social security and Medicare or they run the risk of putting an end to their political career.
With all of the uncertainty surrounding the estate tax, many delay completing their estate planning for fear that the plan will become outdated in short order. Unfortunately, putting off plans because of tax law uncertainty is like playing with the subway’s third rail.
A client I’ll refer to as “Allen” visited with me not too long ago, but decided against pursuing his estate plan because “the laws are too uncertain at this point.” I’ve been practicing estate planning law since 1989 and can tell you that there’s never been a time in those 28 years that the laws weren’t uncertain. Yes, they may be somewhat stable for a year or two (or even three), but that’s about the end of the shelf-life given the American political system and climate.
The mistake is that many let the “tax tail wag the dog.” In other words, they make plans based on the tax outcome rather than on the economic or family dynamic outcome desired. Certainly the tax effect of any plan should be considered. My point is that the attorney and client should first discuss what the client’s overarching goals are.
Is the primary goal to provide for your surviving spouse no matter how much he consumes the estate for his retirement and eventual end-of-life care? Or is the goal to preserve that Captiva cottage for future generations? Do you expect to withdraw the entire IRA balance over the course of your lifetime or would you like it to eventually fund your grandchildren’s college educations? Do you hope to provide an endowment to your church, alma mater or for research against dreaded diseases? Are you fearful that leaving too much to your children could deflate their ambition or instill an entitlement attitude?
All of these and more are excellent questions to begin an estate planning discussion. Once you have answered these questions, then it makes sense to look for the most economic, financial and tax advantageous method to accomplish these goals.
Take, for example, traditional IRA and 401(k) plans. As everyone realizes, withdrawals from those plans results in taxable income to the recipient. When considering the bundles of assets that a client possesses and to whom they wish to leave bequests, it makes sense to satisfy charitable bequests with amounts that would otherwise be taxable. This is how a good estate planning attorney can use the tax law to maximize the inheritance for all your recipients.
When you consider that all the variables may change not only with the tax law – but also with your own economic circumstances – then you realize that it’s possible to create a plan that satisfies your intent and can be adjusted as warranted.
Waiting until the tax law settles down to finalize an estate plan is akin to dancing on the third rail. If you should fall ill or pass away before your plans are finalized, that’s the real tragedy. Unfortunately, Allen’s family learned that the hard way. We had drafts of his trust sitting in our office when he passed away.
Don’t let that happen to you.
The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.