If the family does not want to maintain the complex wealth system, what does the simplified alternative look like?
If the family does not want to maintain the complex wealth system, what does the simplified alternative look like?
Many families do not want to turn the family into a business that manages family assets. I have had a client worth $300 million with just a couple of investment accounts, retirement assets, and a house. One trust. Not even a donor advised fund. It is possible.
The strategy is to keep it simple during life - own liquid investments personally, avoid forming entities and never let the balance sheet become something that needs to be managed. Limit trusts to the minimum. Avoid excess tax returns.
Most wealthy families succumb to the temptations of increased returns from complicated investments and the allure of bonus depreciation. Each decision is defensible on its own. The rule has to be enforced against a stream of good ideas, each arriving with a projection showing why this one is worth the exception. Keeping it simple during life is not one decision. It is the same decision, made over and over.
Complexity usually does not increase in retirement. The people who spent a lifetime building the complexity spend their last years trying to get out from under it.
Clients already know they have too much complexity. They come to their advisors for help managing it. The world keeps adding complexity, and advisors add more of it in order to manage what is already there. Complexity begets complexity. Are we building solutions - or are we, as advisors, building a thin, impermeable layer between the family members and their money?
Life insurance, together with liquid assets, is an alternative to future governance itself. There is nothing to manage together, because nothing is held together unless the family wants to. That is a big difference.
Life insurance arrives in the form of a check, generally income-tax-free. It is easily divided and easily reinvested in any asset. If a family uses insurance trusts, each family branch can control its own trust filled with cash.
For assets outside of the taxable estate, receiving cash is the economic equivalent of an income tax basis step-up on assets that were never going to get one. Ultrawealthy families can use life insurance instead of market investments when designing a sale to an IDGT or funding a GRAT - and it sometimes works even better.
A $10 million complex asset is another $10 million problem. Cash buys the family time. Cash gives the family opportunity. The family can pay estate taxes, buy out complex assets, and divide the estate - all with cash.
Next, I’ll look at charitable gifts and selling complex assets during life, including paying the tax to get out from under them.