Estate equalizationArticle added by Ed Morrow on February 27, 2013
Ed Morrow

Ed Morrow

Middletown, OH

Joined: October 29, 2005

The taxation and regulation of estates in the United States and worldwide has fluctuated and it will continue to do so. There are several outside factors of which we should be aware. They explain why estate planning is so important, especially for business owners, and why it will grow even more complex.

Tax the non-voters

People who have died don’t vote anymore and they are not likely to make political contributions. So legislators have no reluctance to raise taxes on them. They often carelessly adopt legislative provisions that make estate administration more complicated. The most expert of estate lawyers oppose these complications, but less qualified attorneys think that government regulatory confusion will add to their billable hours.

Think of it this way. If you are a business owner with a substantial estate and your taxes were suddenly increased by 25 percent, you’d get angry. You’d contact your legislators and you would certainly contribute toward the party opposing the tax increase. But if you were “in the ground,” you and you executor would do nothing.

Families grow more complex

The percentage of families that have complex structure from multiple marriages is increasing inexorably. This makes it far more difficult to express the natural goals of the business owner — balancing the interests of an ongoing business with that of a multi-generational family. This complexity makes it easier for a business owner to simply procrastinate.

Business structures also grow more complex

Many businesses are now segregating their holdings, encouraged to do so by their attorneys and accountants. This is great tax planning and often has legal benefits for current asset protection, but it does mean that more forms of ownership are being used by business owners, such as proprietorships, partnerships, limited liability companies and charitable, domestic and offshore trusts. Those with entrepreneurial spirits often keep forming new businesses right up to the end of their lives.

People are living much longer

Centuries ago, it was common for persons to have short lives and to support themselves with a “work until death” philosophy. That is no longer realistic, and people now want longer and better lives. This is dramatically influencing medical and pharmaceutical advancements. For example, male life expectancy for U.S. children born in 1900 was 49.6. In 1935, when Social Security positioned retirement at age 65, life expectancy was only 60.8, so only a minority were expected to collect retirement benefits.

Today, that life expectancy has increased to 76.3, according to U.S. Department of Health and Human Services. But these are averages, and do not reflect that those people with greater assets receive better medical treatment and lifestyle conditions, and therefore often live much longer. Governments everywhere have seriously underfunded retirement reserves, and calling them a “trust fund” is only a cruel joke. The key issue is that more and more money will be required for retirement and medical treatment for the aging population.

The combined effect

Estate duties will increase substantially in the future. This makes it imperative that all families, even if not now considered to be “affluent,” should establish an estate plan and take advantage of the steps that are achievable today.
Why is equalization an issue?

When a business owner is asked, “Do you want to treat all your children equally?” the immediate response is often, “Of course." But equal is not the same as identical. Let’s see how this goal could complicate the business operation, succession and generational planning.

Sam the Sandwich Man created small food stands that feature a simplified menu and appeal to vacationers, tourists and local consumers who don’t want a sit-down, linen-cloth table. His two children worked in his stands as they were going to high school and college. His daughter majored in food and restaurant services and joined him right out of college. As Sam expanded, she helped open the new outlets and increased the quality control and buying.

However, her brother was interested in teaching and acquired a masters in literature. He is now embarked on a career to acquire a doctorate, to teach at the university level and write mystery novels. He has no interest in the food stands, despite their growth in profitability and value. He doesn’t want to own or operate a food stand. His sister remembers all too well how her brother hated building sandwiches and watching the fry cooker.

Sam’s net worth is primarily the value of the food stands, and he has no interest in selling them out from under his daughter. But how can he treat his children equally? This seems impossible, but is actually achievable.

Art’s Auto Dealership has a different equalization problem caused by the premature death of Art’s wife. He now owns four dealerships, three of which are doing well, and the other needs to be moved into a new modern facility, which will require him to borrow several million. Art remarried several years after his wife’s death. His two sons are in the business, each managing a dealership. But his estate is complicated. His parents are in their late 70s and their health is not good. They might live a long time, but are already requiring Art's support. His new wife gets along very well with his sons, who are about her age. She wants no role in the dealerships and has several charitable interests, plus the expectation of educating her 12-year-old daughter by her first marriage.

When asked about his goals, Art says, “I want the boys to have the dealerships, my parents cared for, Gloria to be comfortable, and I want to be sure Susie has the money to go to college.” Art is worth several million, but it is all tied up in the dealer properties and the four closely held corporations, each of which has bank debt for which he is personally liable. When he started planning for the new dealership, his banker said, “Our rules now require that your wife, Gloria, will also have to sign the loan agreements.” Art and Gloria weren’t pleased with that news, since she has only a modest net worth from her divorce settlement.

Is this such an unusual situation? No, it is rather common for families and businesses to have convoluted circumstances and complex objectives. Can Art’s estate be structured to accomplish his objectives? Yes, but it will take time, patience, an understanding banker, creative funding and professional services.

Ingrid’s investments have created a different equalization problem. She is retired, and her parents are in their 80s and enjoying excellent health. Two of her grandparents lived to 100, and her parents are active and very fit. Ingrid’s two children are currently happily married and doing very well financially. She has been a very active supporter of a church-related school and volunteers often to help the administration and fill in when a teacher is suddenly absent. She wants to leave a substantial portion of her estate to the church to build a new facility. But she also knows that her parents, and even herself, might have expensive medical complications. Her children have no special tie to the school, so she realizes that if she gave everything away, they would be hurt and offended.

Ingrid asked, “How can I protect myself and my parents, build a new classroom building and leave a generous amount to my children? When my late husband sold his rubber molding plant he left me well fixed, but how do I balance those three interests?” It will be possible to accomplish this and even get some help from the federal government in the form of income tax reductions.

Achieving equalization

This requires gathering and organizing all the facts, including the way that each asset is currently being taxed and how those taxes might be reduced. The initial goals need to be more specific and re-defined to provide for other family members and to coordinate with the succession and operation plans for business interests. While most objectives are achievable, the final plan will require communication, documentation and funding.
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