Just a couple days ago, I was sitting with a client, two of his grown children, a CPA, a lawyer and my partner in crime, the other “Free Money Guy,” Mark Perkins. We were wrestling with the potential changes in the tax laws, specifically the changes to capital gains and inheritance taxes being discussed in Washington.
Don’t get me wrong — I have no problem with addressing the massive disparity in wealth that is now the norm in this country. The notion that 400 families increased their wealth by trillions of dollars while millions of people lost their livelihood — and in hundreds of thousands of cases, their lives — is obscene. I think it’s entirely appropriate that issue be addressed.
The thing about the proposed tax changes is, it’s not that. In my mind, the proposed changes are a direct attack aimed at the upper middle class, and that’s toxic.
In this particular case, a working-class family hit it big in business. They began with a small sheet-metal shop that, through hard work and some savvy business acumen, grew to be a multimillion-dollar business. In the end, the founder was able to sell it for several million dollars, and they have enjoyed a wonderful retirement.
With the Tax Cut and Jobs Act, they believed there was an opportunity to pass the bulk of their estate along to their grown children, grandchildren and great-grands.
Now they are not so sure. Should these proposals become law, my clients stand to lose half their estate. That brings us back to the reason we were meeting: We needed to come up with a strategy to avoid a devastating tax hit for doing nothing more than being good productive citizens who have the bad form to be humans with finite life spans.
We met for nearly two hours, considering all kinds of strategies. Should we move assets into an irrevocable trust? That would take assets out of the estate, but it would also cut my clients off from their property. Maybe a Spousal Lifetime Access Trust, or SLAT, which is very similar to a credit shelter, or bypass, trust except the spouse continues to have limited access to the assets.
Lots of ideas were bandied about. But the thing that stood out to me was that even with all of the experience (nearly a century’s worth) around that table, we were still struggling to come up with an answer, though we got a good start.
However, of one thing I am certain: Not one of us was likely to come up with the optimal solution by ourselves. We all needed the intellectual juice that having a team of knowledgeable professionals who knew and trusted each other brought.
What’s my point? Many people whom I deal with on a regular basis begin by believing they can do it all themselves. You may believe you know the best way to handle a potential long-term care need, or can figure out the best time to begin taking Social Security, or the best election you can make on your pension, or the best way to grow, or even more perilous, to spend their money in retirement.
Every one of these decisions often presents only one chance to get it right, with potentially decades of having to live with the consequences of the decision.
I get the desire to save money by reading and studying up and making one’s own plan. The problem is, who do you believe? And the vast majority of what you read, including this column, simply cannot provide the answers you will need to make the best decisions for your particular set of circumstances.
It takes a coach. And often, it takes a team of coaches to provide the correct answers to your needs. Often the answers seem obvious but are filled with numerous landmines that can severely damage your retirement. Sometimes you won’t even get to the correct questions, let alone the correct answers.
Here’s an example from my aforementioned estate-planning meeting. One of the things that is not clear is whether these laws would be made retroactive or begin sometime in the future. One bet is they will be written to take effect as soon as they are passed. We just don’t know.
As the debate over this and how it could affect the decisions we made became more and more energetic, I drew from a lesson I learned a long time ago when I was in college. In those days, I was a bridge fanatic. I would routinely skip class to stay at the table in an intense game. It turns out bridge is full of life lessons if one will be open to them — at least that’s what I told myself when I made the decision to skip a class.
In bridge, there is a move called a finesse. It’s basically a way to turn a potential losing card into a winner. Assume you won the contract, have a queen, jack, ace and a couple small cards of a suit on the board and several smalls in your hand. The problem is, the king is out there somewhere, and you want to capture it, rather than letting your opponents have the trick. That’s where the finesse comes in. If you assume the player to your left is holding the king, all you have to do is lead from your hand, and then if the king doesn’t fall, play the jack or the queen from the board. If the player to your right has the king, they will take the trick. But if the player to your left has it, it’s trapped. All you need to do is get back into your hand and run the finesse again.
But if the player to the right has it, you lose. The point is, if that player has the king, you always lose it unless it’s a singleton and you lead the ace (a very low-percentage play). But if the player to the left has it, you win. So the proper play is to assume the player to your left has it, play the hand as if they have it, and 50% of the time you win.
How does this pertain to estate planning? Bottom line, if these laws are made retroactive, we lose. There is nothing we can do. But if it isn’t, there is a lot we still can do under current law, so we must assume it will work out that way and plan as if it will.
And that’s the key to financial planning: Come up with all the things that can happen, and make whatever adjustments you can. If they don’t, more often than not no harm done, or there was nothing you could do anyway. But if they do, you can significantly increase the chances of a more desirable outcome.
But you need someone who understands the issues to make it work. You need a coach.
