Test your knowledge of wealth preservation

By Scott Keffer

Who did a better job at preserving wealth: Alwin Ernst, one of the founders of the accounting firm Ernst & Ernst; Elvis Presley, the famous entertainer; Charles Woolworth, the co-founder of F.W. Woolworth Co.; Lawrence Wein, attorney, founder and Senior Partner for famous New York law firm Wein, Malkin & Bettex; Henry J. Kaiser, the prominent American industrialist known as the father of modern shipbuilding; or Henry J. Kaiser, Jr., son of the industrialist who multiplied his dad’s fortune 900 percent?

I have often said, “Wealth preservation means that you successfully enjoy, protect, and pass on your real wealth for the positive benefit of the people and the work you love.” Wealth preservation goes far beyond traditional estate planning.

Henry Ford said, “The highest use of capital is not to make more money, but to make money do more for the betterment of life.” I would expand that to say the betterment of life for you, your heirs and any work that you want to continue after you are gone.

Everyone is in the process of accumulating wealth – your wealth pile. Everybody wants to know, “Do I have enough wealth?” Or they may wonder, “What if my health changes?” Or, “What if the market goes south again?” It’s all the same question. What they really want to know is: “What will happen to my wealth pile over time?”

Therefore, it’s important to have the technology to simulate your wealth over time, what we call The Future Wealth Simulator. Notice that I called it a simulation – not a projection. I used to call it a projection; the problem was that most people thought the technology projected their future wealth. There is no way to fully project future wealth. I believe in the 5/100 rule. Anything projected past 5 years is 100 percent incorrect.

However, simulating wealth over time exposes trends, dangers and concerns not seen in the short run. In addition, it provides the best decision-making tool – allowing you to compare the comprehensive impact of alternative strategies. Lastly, once new strategies are put into place, the simulation allows the benchmarking of progress in the future. No one ever goes off course instantly, it happens over time. Having a system to benchmark future progress is critical to staying on course.

Think about this: out of your pile of wealth comes your living and giving. In other words, every year you withdraw whatever it takes to support your lifestyle. Now, if you knew for certain that you could live the kind of lifestyle that you want and that your wealth pile would still continue to grow – if you knew that for certain – wouldn’t that growth in your wealth pile be surplus wealth?

That begs another question: To whom do you want to give your surplus wealth? If you know for certain that you have more than you need for your lifestyle, now and in the future, what do you want to do with the surplus wealth? Pass it on to your heirs – children and grandchildren, maybe others?

There is a problem, however. The IRS has erected a tax wall that stands between you and your heirs. Currently there’s a potential door in that wall, where you can move assets through tax-free. Congress determines how big that door is going to be. Over time, it’s going to fluctuate up and down. It has been as low as $60,000. Today you can move $1 million during your lifetime through that door – and potentially $1.5 million when you pass away. There’s also a window, an annual window that allows you to move $11,000 per year without paying estate and gift taxes.

Other than the window and door, your assets must go through the Tax Toll to go to your heirs. On typical assets, the toll is essentially one-half of the every dollar that passes through. On what we call your “Red Assets,” your retirement monies, there is a double tax toll levied that can confiscate up to two-thirds of every dollar that passes through.

So, if you are adding dollars to your wealth pile that you are never going to use, ultimately it’s a 50-50 split between the IRS and your heirs. For your Red Assets, it is a 70-30 proposition – two-thirds to the IRS and only one-third of your retirement monies would go to your heirs!

So why are you doing that? Wouldn’t it be better if you could systematically transfer your surplus wealth to the other side of the tax wall? Yes, of course it would. However, your heirs will face some of the same issues that you face. Estate taxes are one. Now, everybody asks me, “Aren’t estate taxes going away?” You know what the answer is? I don’t know. Nobody does – but here are the facts. The estate tax has been around since the late 1700s. Between the 1700s and the 1900s, it was instituted three times and repealed three times – and the sole purpose of the estate tax was to produce revenue.

When the 1900s hit, there was a change. In addition to needing revenue, there was this political backlash out of Europe against aristocracy. Rough-riding Teddy Roosevelt captured the view of many at that time when he said, “We need to put an increasing burden on the backs of the wealthy.” At that point in time, it was transformed from a revenue-only tax to a political tax: its purpose was about wealth redistribution.

Do you believe that Congress has changed either its need for revenue or its political mind set about wealth redistribution – permanently? That is my answer to the question of whether estate taxes will go away.

In addition to estate taxes, the inheritance to your heirs needs to be protected from the second form of wealth distribution: lawsuits! On the average, there are 41,000 lawsuits filed every day in the United States. If you read the opinions of many judges these days, there is a prevailing mindset that they need to “take from those who have” and redistribute it to “those who don’t.” It’s an ever-escalating danger.

Here is another concern: There’s a 50-50 probability that divorce will happen in the generations to come, children or grandchildren. Do you want your wealth moving outside of your bloodline? If not, you must protect your inheritance from loss due to divorce.

The last concern is just plain bad decisions by heirs – maybe bad personal decisions or bad financial decisions.

So the surplus wealth that you transfer to the other side of the tax wall must be protected. You’ve got to build a wall around that wealth to protect it, in addition to protecting yourself from some of these very same things.

Then the question always comes up, “I like the concept, but what if we need some of the surplus wealth?” So you want to make sure there is a ripcord. The ripcord should allow two things: virtual control and access. Then we’ll use charity to take care of problem assets – such as Red Assets and assets with capital gains. When done correctly, the amount of assets that pass through the Tax Toll should be zero. That is right, absolutely nothing.

That is what the mega-wealthy have been doing for a century – eliminating the estate tax by keeping assets from passing through the Tax Toll.

People’s next question is always, “So, how do you make that happen?” There are currently 104 tools, tactics, strategies, options and opportunities to make that happen. The real question for individuals is which four to eight of those 104 make sense for them. How many of these strategies does your current plan employ?

By the way, Elvis Presley left an estate of $10 million and lost $7.3 million to taxes and costs, or 73 percent; Charles Woolworth lost $10.3 million, or 62 percent; Lawrence Wein lost $22.5 million, or 61 percent; Alwin Ernst lost over $7 million to taxes and costs, or 56 percent; Henry J. Kaiser lost $2.4 million, or 44 percent; and Henry J. Kaiser, Jr. lost only $1 million, or 2 percent.

So, how did you do on the wealth preservation test? Better yet, how will you do in real life at preserving your wealth pile? I hope better than most of these well-known American millionaires. To know for sure, hire a wealth preservation specialist to audit your plan and help you accomplish what Henry Kaiser, Jr. accomplished – preserve 98 percent of your wealth pile.

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