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Drawbacks of transactional planning

By Scott Keffer

A tool here, a tool there, this advisor’s solution, that person’s suggestion. That’s transactional planning, and it can be very dangerous to your financial well being. One idea can help your cash flow, but increase your estate taxes? Another idea can help your estate taxes, but reduce your cash flow? And how will the tools interact with each other? The cost of transactional planning to you and your family can be very high.

I can remember going into Grandma’s medicine cabinet to get an aspirin, only to find a veritable drug store. One prescription here, one prescription there, but what were the side effects of taking them together? No one was really keeping track for her. And as the years went by, her needs changed. She now needed a specialist.

The situation is not that different for many people’s financial life. The latest technique, the latest tool, but who is watching out for their entire picture? Who is checking the side effects of the menagerie of planning tools? And many, because of their success, have grown to need a specialist—a wealth transfer specialist.

The alternative: integrated, total wealth control. With this new approach, let me suggest some objectives and outline the process that can help you avoid the potential dangers of transactional planning.

To begin, two general objectives everyone should have when they go through an integrated wealth transfer process: maintain or increase their standard of living and transfer all their wealth without paying any estate taxes. Impossible objectives, you say? Not really.

Columbia Law Professor George Cooper conducted and published a study as a member of the Brookings Institution in Washington, D.C. in book form titled, A Voluntary Tax? In there he writes, “For most of the past generation, the rate of tax has been as high as 77 percent. Yet, because the owners of great wealth retain estate planners skilled in legal stratagems for tax avoidance, the estate and gift tax laws have never seriously interfered with the intergenerational transfer of large fortunes.” And he goes on to write, “The fact that any substantial amount of tax is now being collected can be attributed only to taxpayer indifference to avoidance opportunities or a lack of aggressiveness on the part of estate planners (emphasis added).” And a number of the techniques that help you avoid paying estate taxes actually increase your cash flow, resulting in an increase in your standard of living.

Now, the integrated process. Steven Covey, in his highly acclaimed book, The Seven Habits of Highly Effective People, suggests that one important habit is to begin with the end in mind. This critical principle is not often applied when it comes to planning the transfer of people’s wealth.

One of the best ways to begin with the end in mind—your end—is to develop a written Financial Mission Statement. Your mission statement should detail your beliefs about wealth: why it’s important to you, your family and community. It is a statement of personal beliefs and values and should form the foundation of all your planning.

Start by dividing the statement into three sections: Ourselves, Our Family and Our Community. In each section, outline your thoughts about wealth. Here are some examples. Ourselves: “We feel our primary responsibility is to use our wealth to secure our own lifestyle. This means enough income and possessions to secure our current lifestyle, now and in the future.” Our Family: “We do feel a responsibility to conserve our wealth in order to leave our children a reasonable inheritance, although not at the expense of our standard of living. We desire that an inheritance create incentive for personal initiative, therefore we feel each of our children should receive an amount not to exceed $$$.” Our Community: “We feel a responsibility to make a difference in our community and world, though not at the expense of ourselves or family. Given the choice, we will opt out of paying taxes in favor of charitable giving. We desire to make a difference in the areas of…”

Take the time right now to draft your own financial mission statement. Someone recently exclaimed after completing his Financial Mission Statement, “Before this, we spent more time thinking and planning our vacations then we did thinking about the transfer of our wealth.”

The next step is to determine how much you need for your own financial independence. Answer the question, “How much is enough?” Answer it in terms of income, investments and possessions. Exactly how much do you need to feel at peace, to ensure your financial security today and tomorrow?

A good way to think about this is in terms of buckets: Retirement Income Bucket, Emergency Bucket, Investment Opportunity Bucket, Business Opportunity Bucket, Family Needs Bucket, Possessions Bucket. Or any other bucket you need to feel absolutely secure financially. Then, you need to place actual dollar amounts in each bucket. This then defines how much is enough for you.

Then, determine an appropriate inheritance for each one of your heirs, both in terms of total amount and how it should be distributed. This can be accomplished by asking yourself, “If I were not around, what kind of lifestyle would prove to be an incentive to my heirs, and not a disincentive?” Answer the question very specifically in terms of how much income and possessions are enough for each one. And remember, equal is not always fair.

Lastly, develop your thoughts on how you would like to influence your community. Winston Churchill said, “We make a living by what we get, but we make a life by what we give.” If you could make a difference in your community, without impacting your financial security or your children’s inheritance, what would you do? If you had unlimited resources, how would you change the world around you? A recent survey of individuals over the age of 95 asked: “What would you different, if you could?” The top three answers were: reflect more, risk more, give themselves to something that would outlast their own lives. What do you want to be remembered for? A good way to stimulate your thinking is to get a major newspaper and a highlighter. Read through the paper and highlight every area that gets you excited: religion, health care, poverty, arts, crime, education or whatever area in which you want to make a difference. Then, make a list of the organizations that have the most impact in each area. If you are not sure which organizations, there are resources to help you identify the most effective charities in each one of these areas.

Drawing from the last three steps, develop a specific list of Wealth Objectives: measurable results you want to accomplish with your wealth while you are living and after you are gone. These could include: “We want to maintain our financial independence—$$$ in annual income, $$$ in investments, $$$ in an emergency fund and $$$ in possessions. We want to use estate planning devices to create current income tax deductions. We want to transfer all of our wealth and pay no estate taxes. We want to leave an inheritance of $$$ equally to each of our children. We want to direct our taxes to family controlled charitable entities.”

To this point, you have identified what you want and why you want it. People say that this process gives them more clarity than they have ever had before, and a greater sense of purpose and security.

Once you have clarity, you need to find a wealth transfer specialist who should be able to provide you with the following: an actual wealth transfer plan completed on a recent client where they were able to eliminate all the taxes, a list of individual referrals, a list of institutional clients (it’s important that other institutions have recognized them for their specialty, a list of the planning team (a single person approach can become myopic), and an outline of their fees (ask if they will charge you only if they deliver results).

Now, you need to develop a comprehensive wealth transfer strategy. Using tools outlined by the IRS, both conventional and philanthropic, you can develop an integrated plan to control all your wealth. These tools can help you accomplish the following results:

• Control Your Affairs.

• Protect Your Income.

• Protect Your Principal From Lawsuit Judgements.

• Reduce Your Income Tax.

• Rescue Your Gain and Paper Profits.

• Leverage Your Family Business.

• Pass Your Values and Responsibility to Your Heirs.

• Eliminate Transfer Costs & Delays.

• Eliminate Transfer Taxes.

One individual recently wrote, “I believe this process could accomplish more of my financial goals than any other thing I’ve done financially thus far.” He had begun to see the difference between a transactional approach and an integrated approach.

There is a drawback—a small investment of time and money. But the results of an integrated approach to transferring your family wealth are tremendous: more control, more security and more money for you and your family. With the passage of the Taxpayer Relief Act of 1997, now is the perfect time to review your plan. What are you doing this weekend, plan your vacation or your future?

Scott Keffer is president and founder of Wealth Transfer Solutions, Inc., a legacy planning company in Pittsburgh.

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