“Mommy, Can People Die From Diabetes?”

Unfortunately, the answer is “yes.” The question above was sent to me in a heart-tugging letter seeking donations to a well-known diabetes charitable foundation. My wife and I both have diabetes, so we can relate. I ended up sending a check.

Later, my creative mind could not help but to change the quote to, “Can people die from taxes?” People can’t die from taxes, but when they do die, the estate tax robber can kill the family wealth.

Fortunately, you can escape the estate tax collector (the IRS). Planning ahead is essential though. The sooner you do it, the better.

You are about to read the true story of Joe (a reader of this column), whose estate tax planning came later in his life. The story starts with an e-mail dated Wednesday, December 12, 2006 that began, “I am 70 years old, and I recently sold my principal business. I am in poor health and may not live another year. My wife is 70 and in normal health. I have no estate plan. I would like you to help me prepare one.”

Before a week had passed, my network of professionals had started the planning process via phone, fax, e-mail and courier. It should be noted that on the rare occasions when we get a terminally ill client, all the necessary professionals (in this case my lawyer, my insurance consultant and I) put everything else on hold. The ill client’s needs come first. By the following Tuesday, we had pinpointed Joe’s goals and had an accurate personal financial statement.

Here are the significant assets Joe owned: (1) $10.3 million in stocks, bonds and cash (mostly cash from the sale of his main business); (2) three other businesses that had a total value of about $3.8 million (the most valuable—Nice Co.—was run by Joe’s son, Sam, while the other two, Okay Co. and Good Co., were run by long-time employees Frick and Frak); and (3) various other assets (including a residence and 401(k) plan) worth a total of $2.2 million.

Neither Joe nor his wife, Mary, had any life insurance. Joe told me that he and Mary—prior to his current illness, which was discovered in the fall of 2006—had always enjoyed good health.

The network lawyer did a hurry-up will trust and family limited partnership (FLIP). Joe signed both before Christmas. The hope was to fund the FLIP with the bulk of the cash, stocks and bonds and to make two quick gifts to Sam and his sister, Jane—one before the end of 2006 and the second on January 2, 2007.

The first problem came when Joe went to the big business in the sky the day after Christmas. Too bad, there was no time to even complete those two estate tax saving gifts. The second blow came when we found out Mary is uninsurable.

Getting Joe’s will signed before he died turned out to be our single stroke of luck. The blessing of the marital deduction got all of Joe’s assets (except $2 million that went to the family trust estate tax free) into trust for Mary. Now we are in a position to do the same planning for Mary alone that we would have done for Joe and Mary if both had lived. Simply put, our quick work paid off.

Just using the following basic strategies for Mary will cut the estimated estate tax burden by about 50 percent (remember, there is no estate tax liability due because of Joe’s death, courtesy of the marital deduction):

• The FLIP (future gifts of the FLIP interests will be made every year to Sam, Jane and the three grandchildren).
• An intentionally defective trust to transfer each business (Nice Co., Okay Co. and Good Co.) to the proper new owners (Sam, Frick and Frak).
• A qualified personal residence trust to remove the residence from the clutches of the estate tax collector.

Because insurance is not available, a charitable lead trust (CLT) is a great alternative to do the same tax-free tricks as life insurance while eliminating the impact of the estate tax. We are working with Mary to determine the exact type of CLT to be used and the amount to fund the trust.

One final note: Sam is not about to follow in his dad’s footsteps. He has already started his tax planning.