FREE NEWSLETTER

What’s Your Plan?

Adam M. Grossman

MICK JAGGER IS AMONG the most successful entertainers of our time. But despite his wealth, Jagger tells his eight children that they’ll need to make their own way. Similarly, Shaquille O’Neal tells his children that they can earn some of his millions, but it won’t necessarily be given to them. Actor Jeff Goldblum puts it more bluntly: “Row your own boat,” he’s said. Other public figures have echoed a similar theme.

Why do these wealthy folks take such a seemingly uncharitable view? One likely reason: They want their children to have the opportunity—and the satisfaction—of succeeding on their own. Counterintuitive as it may seem, by withholding a large inheritance, they may feel they’re doing their children a favor.

Decisions like this aren’t easy and require delicate tradeoffs. Much of estate planning, in fact, is about tradeoffs. If you’re building a plan for your own family, here are five other key tradeoffs to consider.

1. Cost. While estate planning strategies can be effective in reducing estate taxes, they can be costly to set up and maintain. How do you strike the right balance?

With the federal estate tax at 40%—and many states levying their own estate or inheritance tax on top of that—folks with assets above the lifetime exclusion amount often conclude that it’s worth spending virtually any amount on legal fees in an effort to defray that tax.

Suppose you have assets that are $1 million over the threshold. At today’s rates, that would result in a tax of $400,000—a hefty number. While legal fees can be costly, it’s unlikely that an estate planner would charge even one-tenth of that amount to put a new strategy in place. Seeing this likely return on investment, many families are happy to incur significant legal and accounting fees.

That’s one point of view, and it’s certainly logical. But not everyone agrees. Other families look at it this way: If their estate is large enough for the estate tax to apply, then their heirs will receive a healthy sum, regardless of how much estate tax is paid. Through this lens, these families decide to spend little or nothing on estate tax strategies. They accept that their estates might—and likely will—end up facing a larger tab, but still prefer that to spending large sums on legal fees.

2. Complexity. The most effective estate planning strategies also tend to introduce the most complexity. To see why, let’s look at a common structure known as an irrevocable trust.

Suppose Jane and Joe are 50 years old and have a net worth of $10 million. They’re concerned that if their assets continue to grow, their family will face estate taxes down the road. To get in front of this, Joe sets up an irrevocable trust for the benefit of Jane and their children, and moves $500,000 of stock from his brokerage account into this new trust.

At the time Joe makes this gift, the $500,000 is deducted from his lifetime exclusion, so there’s no immediate benefit. But if Joe lives another 40 years, and the stock appreciates at 7% per year, it would be worth $7.5 million at the end of his life. That’s when the benefit would be realized. The $7 million of appreciation above Joe’s original $500,000 would be free of estate tax.

The benefit, in other words, could easily reach into the millions. The downside is that irrevocable trusts introduce complexity. Drafting the documents and making the initial gift is actually the easy part. On an ongoing basis, the trust will require its own tax return each year, and Joe will need to decide on a trustee or trustees, who may also ask to be paid. This all entails additional complexity, and that’s for the most straightforward type of trust.

For even greater potential tax savings, some families move illiquid assets, such as their homes or shares in a family business, into irrevocable trusts. But moves like this dial up the complexity level even further. Suppose a family moves its home into a trust. Over time, this could deliver a tax savings. But in the meantime, the family will no longer own its own home. The trust will. To continue living in the home, the family will need to pay rent to the trust each year, and all of the home’s expenses will need to be paid by the trust. This can take a fair amount of bookkeeping, which is why many high-net-worth families decide that the complexity is more trouble than it’s worth.

3. Flexibility. Let’s continue with the above example, where Joe moves $500,000 into an irrevocable trust. If everything goes according to plan, Joe’s heirs will realize significant tax savings. But suppose Jane and Joe have a change of heart, and would instead like to use that $500,000 toward another goal—perhaps to pay for college or to help their children purchase a home. If a trust is well designed, it’ll allow for distributions during Joe’s lifetime, but it isn’t so simple. Irrevocable trusts aren’t truly irrevocable as long as the donor is still living, but for the most part, they are, and this is another key tradeoff when constructing a plan.

4. Control. Establishing an irrevocable trust requires a few additional leaps of faith. Specifically, the donor needs to feel comfortable with the distribution provisions written into the trust, and also needs to feel comfortable with the trustee. This too requires a delicate tradeoff. On the one hand, establishing a trust sooner rather than later provides more time for the assets to appreciate, as described above, increasing the opportunity for tax savings. But that also means there are more years during which a divergence might emerge between the trust’s provisions and the donor’s current preferences.

5. Equity. Imagine a family with two children, one of whom is a schoolteacher and the other a brain surgeon. If you were the parent, would you leave equal shares to each, or would you leave more to the schoolteacher? There are good arguments for both approaches.

On the one hand, the surgeon is more likely to be self-sufficient and might be happy to see a greater share go to his schoolteacher sibling. On the other hand, as I often say, brain surgeons have feelings, too. Though he might have a higher income, he might feel that it’s a matter of principle for children to be treated equitably by their parents.

There is no “right” or “wrong” on any of these questions—they’re personal decisions—but it can be a valuable exercise to think through them before creating your estate plan.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and on Threads, and check out his earlier articles.

Want to receive our twice-weekly newsletter? Sign up now.

Browse Articles

Subscribe
Notify of
12 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments

Free Newsletter

SHARE