Is Your Career About to Be Repealed? - Part I

Is Your Career About to Be Repealed? - Part I

Estate Tax Reform
Article posted in Legislative on 14 May 2001| comments
audience: National Publication | last updated: 18 May 2011
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Summary

As Congress is placing the final touches on a $1.35 trillion tax-cut package, that in its current form includes a phase-out of the federal estate tax, values-based estate planning pioneer Scott Fithian addresses the question, "Is Your Career About to Be Repealed?"

by Scott C. Fithian

Introduction

To tax or not to tax, that is the question. Congress is debating this question at this very moment. Should the federal transfer tax system be repealed, revised or left alone?

As we wait for the outcome of this debate to materialize, the anticipation of what the future might hold provides an interesting context for professional advisors to reevaluate the role of TAX in the planning process. In light of this debate, every professional working in the estate, charitable and wealth transfer planning fields should consider the following question: Is the tax tail wagging the dog? Are you a financial planner or a financial tax planner? Are you an investment advisor or an investment tax advisor? Are you an estate planner or estate tax planner? Are you a charitable gift planner or charitable tax planner?

Few would argue that over the past several decades planning has focused on "tax effective" wealth transfer. As a result, considerable time and intellectual capacity has been directed at avoiding the transfer tax. The "tax-centric" planning focus that has evolved over the last several years has left many estate, charitable and wealth planning professionals at the mercy of a largely external force -- the political process. In short, if the transfer tax is the focus of what you do, your career may eventually be repealed!

According to Darwin's Theory of Evolution, those species that adapt to external change will evolve and prosper. Those that do not adapt will perish and become extinct. At this very moment our industry faces one of the most significant external changes in recent history. Regardless of whether the transfer tax system is actually repealed, the mere possibility offers a tremendous opportunity to reevaluate our priorities and evolve as an industry. Are you ready to evolve?

This article explores the following questions:

  1. What is the purpose of estate planning?

  2. With respect to potential tax reform, what are the biggest

    1. Dangers to be eliminated

    2. Opportunities to be focused and captured, and

    3. Strengths to be reinforced and maximized?1


What is Estate Planning?

In order to discuss the role the transfer tax system plays in estate planning, we must answer a question. What is estate planning? Consider the dictionary definition of the words estate and plan.

Estate: Everything one owns.

Plan: A program thought out ahead of time for the accomplishment of a goal.

Although this provides some insight into estate planning, it only tells a portion of the story. First and foremost, the reference to everything one owns appears to refer exclusively to financial assets. Yet, if we are to meaningfully serve wealth-holders, we need to know about both their financial and non-financial assets and how their unique journey has shaped their values, attitudes and preferences. We must understand and incorporate their life story and the lessons they have learned. In order to incorporate the concept of non-financial assets into our definition of estate planning, I suggest we add the word values to our definition.

Value: A principle, standard or quality considered worthwhile or desirable.

In order to complete our definition, we must define the underlying goal of estate planning. Estate planning is often referred to as the process of transferring wealth between generations. However, most experienced advisors would expand this basic goal to include both wealth accumulation and management.

By incorporating family values and expanding the goal of estate planning to include wealth accumulation and management, the following definition emerges.

Estate Plan: A clearly thought out program, based upon principles, standards and qualities considered worthwhile, designed for the accumulation, management and transfer of everything one owns.

In reviewing this definition, you may notice an omission - the word tax. Does the word tax have an appropriate role in the definition of an estate plan? Is tax avoidance an end in itself, or is it merely one of many obstacles to effective wealth transfer? Is the goal tax-effective wealth transfer or effective wealth transfer? In my experience, tax avoidance is NOT a goal, but rather a means of fulfilling a goal. This is due to the fact that a goal must be associated with a desired result. Consider the following examples:

  1. Reduce or avoid tax in order to increase my net annual income.

  2. Reduce or avoid tax in order to increase my heirs' financial legacy.

  3. Reduce or avoid tax in order to transfer the family business to my heirs.

  4. Reduce or avoid tax in order to increase net sale proceeds.

  5. Reduce or avoid tax in order to increase the resources I can contribute to charity.


The goal is not to avoid taxes. The goal is to have more income, to leave a larger financial legacy, to transfer the business to heirs, to net more when selling an asset or increase charitable contributions. Tax avoidance is but one factor in the equation. In my entire professional career I have never met a client who was seeking tax avoidance for the sake of tax avoidance alone. It is not about the burden of tax, it is about the many burdens of wealth. In reality, wealth produces a corresponding burden of responsibility. Estate planning is about managing this responsibility effectively. Regardless of the tax environment in which planning occurs, our clients will benefit from an approach that focuses on positive meaningful issues and acknowledges that tax is but one factor.

With respect to tax reform, what are the greatest dangers to be eliminated?

Regardless of final elements crafted in this round of tax reform negotiations, it is essential to understand the dangers associated with the change.

The previous discussion notwithstanding, below is a partial list of dangers that professional advisors face in light of tax reform:

Market perception will change.

In the wake created by a repeal of the transfer tax, a flurry of media analysis and speculation will emerge. The pundits will have a feeding frenzy on the carcass of a dying industry. As readers are exposed to this barrage of misguided information, many wealth-holders will unwittingly come to believe there is little value in planning. It could take years to overcome this general perception.

Eliminate the Danger: Turn a negative into a positive. Don't let the market define you as an estate planner without a job. Remember, tax is only one of many obstacles associated with effective planning and the transfer tax is only one of many taxes.

Adverse selection will occur.

According to Darwin, the strong shall survive and the weak shall perish. Our industry is on the verge of transforming itself. Unfortunately, many advisors are not prepared for the journey. As the saying goes, there are three types of people in the world--those who make things happen, those who watch things happen, and those who don't know what is happening. Advisors who are in the second two categories are at risk of extinction.

Eliminate the Danger: Do not wait on the sidelines for the answer to become obvious. Remember the definition of insanity -- doing something the same way and expecting different results. You must think outside the box and act in areas beyond your comfort level.

Advisor revenue will decline.

Without question, the present estate planning industry is preoccupied with tax and tax related strategies. Although there are many elements to the development of a true estate plan, most fall into three general categories:

  1. Strategies, tactics and tools designed to reduce the tax paid on the transfer of wealth between generations. Ranging from the simplistic to the exotic, these strategies are designed to exploit opportunities within the current tax system effectively or beat the system altogether.

  2. Strategies, tactics and tools designed to pay the resulting tax more efficiently. The majority of these strategies are insurance related and are designed to pay the tax or replenish the estate once the tax is paid.

  3. Strategies, tactics and tools designed to accumulate, manage, protect, transfer and distribute family wealth. The majority of these strategies are entirely tax-neutral.


As you can easily surmise, the first two are entirely tax based. If there is no transfer tax to eliminate, there is little value in transfer tax strategies. Likewise, if there is no transfer tax, there is little use for tools that help pay the tax more efficiently. These two elements of estate planning are entirely tax based and therefore subject to repeal. As a result, advisors who utilize either or both of these approaches are at risk of having a significant portion of their revenue disappear.

Eliminate the Danger: Without limiting yourself by what you believe is possible, make a list of the services you can add to replace revenue lost in the first two categories regardless of what happens with tax reform, implement the top three ideas.

The fear of tax will be lost as a motivational force.

For obvious reasons, the way in which we motivate wealth-holders affects the resulting planning process. In other words, if fear of tax is the primary motivation to plan, it follows that avoiding the tax will be the focus of planning. As a result, for the past several decades, planning has been focused almost entirely on minimizing, avoiding or paying the transfer tax. This fear-based approach has left the estate-planning field at the mercy of lawmakers.

If the current transfer tax is repealed, advisors who rely on tax as the primary motivational force will find themselves firing blanks at an indifferent target.

Eliminate the Danger: Make a list of your best ten motivational phrases. Draw a line through all those that are related to the transfer tax. How compelling is the remaining argument? If the transfer tax is eliminated this is how you will sound to prospects in the initial meeting. What can you add to improve the impact? Remember, don't limit your thinking by what you believe is possible. The greatest enlightenment comes from trying to accomplish the impossible. Dare to be wrong.

Wealth-holders will not require professional advice in developing an estate plan.

One of the major arguments for tax reform is simplification. This argument is supported by the belief that dollars spent on avoiding the tax system are unproductive. In other words, if they were not spent on avoiding the tax, they would show up somewhere else in our economy.

Whether or not you buy into the concept of unproductive capital, it is hard to argue with simplification. It is also hard to ignore the consequence. As the tax system becomes less complicated, more and more individuals may fall prey to a do-it-yourself mentality. As a result, wealth-holders may see a reduced need for professional advice in developing their plans.

Eliminate the Danger: A repeal of the transfer tax will make it easier for individuals and families to accomplish their wealth transfer goals; however, it will not make it easy. Make a list of the greatest dangers that wealth-holders face with respect to the accumulation, management, protection and distribution of their wealth. Focus your attention on those that are most complicated, yet place the least emphasis on tax.

Technical knowledge will depreciate in value.

Professional advisors spend numerous dollars, time and energy becoming and staying proficient. Many have advanced professional degrees and maintain rigorous requirements for continuing education. All this is true, yet with the stroke of a pen the value of years of education and experience may depreciate considerably. Ironically, those who know the most stand to lose the most, and those who know the least stand to lose the least.

Eliminate the Danger: Technical competency is only one four areas of competency. Relationship, management and discovery are also required for effective planning. Make a list of your key competencies relating to each of these four areas. Consider how you can increase your competence in the non-technical categories.

Learn new skills, acquire new knowledge, and gain new experiences.

In order to survive in a climate of change one must adapt and evolve. If the transfer tax is repealed, advisors will be required to retool their arsenal of strategies, tactics and tools, as well as their approach for motivating clients. This will be a time consuming, expensive and for some, a humiliating task.

Eliminate the Danger: Use the fear of tax reform as motivation to evolve. Rather than complain about the negative impact of tax reform, consider this an opportunity and focus your attention on non-tax related issues. You may actually find it exciting and rewarding.

With respect to tax reform, what are the greatest opportunities on which to focus and capture?

One definition of success is that point where opportunity meets preparedness. Taking this into consideration, below is a partial list of opportunities presented in the midst of this evolution:

Survival of the fittest

As stated previously, according to Darwin, the strong shall survive and the weak shall perish. To put it simply, one of the most important reasons to evolve is that many of your competitors will not. As a result, there will be fewer and fewer competent advisors to serve an ever-increasing base of affluent wealth-holders.

Capture the Opportunity: It is easier to be different than to have to be better. In order to maximize the value of this evolutionary change, you must find a way to separate yourself from the pack. Identify at least ten beliefs that distinguish your approach from your competitors.

Evolution is not an option.

People naturally resist change. In fact, most people opt to stay in dysfunctional situations rather then venture into a new one. Therefore, one of the greatest opportunities presented in light of tax reform is the requirement to evolve.

Capture the Opportunity: The choice is simple. Evolve or perish. To maximize the value of change, you must first accept the inevitability of change. Make a list of every positive outcome that would emerge from a complete repeal. What business opportunities can you see?

Shift from "tax-effective" wealth transfer to "effective wealth transfer."

Money is similar to a drug. Used appropriately, it can save a life. Used inappropriately, it can destroy a life. It is a sad commentary, yet our industry's tax-centered approach to planning has historically resulted in a number of financial overdoses. We have focused so much time and energy on strategies for avoiding the transfer tax; we haven't stopped to consider if we should. Most advisors have seen first hand the adverse impact that money can have on succeeding generations. In reality money is one of the few things that can change the course of an individual's life. For better or worse!

Could you imagine the results that would be achieved if our industry focused its attention on effective wealth transfer, rather than "tax" effective wealth transfer?

Capture the Opportunity: Assume the transfer tax has been eliminated completely. What strategies, tactics and tools can you see that will remain attractive? What new strategies, tactics and tools will emerge?

Family businesses will focus on non-tax transition issues.

We are all familiar with the horrible statistics regarding the successful transfer of family businesses between generations. The reason for this is simple; families are forced to spend so much time managing transfer tax-related issues that they entirely forget, or never find the time to deal with the non-tax issues. I am sure the actual tax payment is a major challenge in transferring a family business; however, I believe that taxes are only indirectly responsible for most business failures. This is because that tax-focus prevented families from addressing more important non-tax related issues. In the event the transfer tax is repealed families will finally be able to focus on non-tax transition issues.

Capture the Opportunity: Focus your attention on non-tax business transition issues such as cash flow, management, family governance, mediation and long-term financial success.

Focus will change from avoiding tax on transfers between generations to managing family wealth across multiple generations.

For the past several decades, the estate planning process has been devoted to the effective transfer of wealth between generations. This approach has been driven by the inevitability of death and taxes. The removal of the transfer tax from this planning equation provides families with the freedom to shift their attention from tax to the appropriate allocation of resources in light of death.

The elimination of the transfer tax has another profound implication. It increases the likelihood that family assets will exist for multiple generations. As a result, the focus of planning is likely to shift from wealth transfer to multi-generational management. In the context of this shifting focus, it may turn out that the burden of managing perpetual wealth is greater than the burden of avoiding our current transfer tax.

Capture the Opportunity: Focus your attention on multi-generational planning techniques. In particular, focus on strategies, tactics and tools that increase the probability that transferred wealth will have a positive effect on succeeding generations.

Family unity will be enhanced by the need to discuss wealth related issues throughout the family and between generations.

As I mentioned above, the elimination of the transfer tax will certainly increase the probability that family assets will exist for multiple generations. This change will cause families to divert their attention from tax avoidance to family preparation. The certainty of leaving a legacy will create a forum for dialogue surrounding family wealth that has never before existed. As a result, family members will be more prepared and family wealth more likely to grow over time and positively affect succeeding generations.

Capture the Opportunity: Focus your attention on multiple strategies, tactics and tools that contribute to family interaction and dialogue surrounding wealth. In particular, focus on preparing succeeding generations for their future inheritance.

Family wealth will experience significant growth across multiple generations.

There is a simple mathematical consequence associated with eliminating the transfer tax. Family wealth is likely to increase significantly across multiple generations. As a result, the complexity associated with managing family wealth is likely to increase. This produces a correspondingly greater opportunity for professional advisors. We will have more clients, with more money, with ever increasing complexity surrounding their financial lives.

Capture the Opportunity: Focus your attention on strategies, tactics and tools that reduce complexity and contribute to family governance and management. Also, focus on multi-family, multi-generation investment management strategies.

Irrevocable decisions will be exchanged for revocable decisions.

Under the present tax system, effective estate planning is a process that often requires the irrevocable separation of your client and their money as soon as possible and forever. To put is simply, it requires irrevocable decisions. These decisions will be either irrevocably good, or irrevocably bad. Because most wealth-holders would prefer to avoid irrevocable bad decisions, they tend to do nothing. Think about it, which would you rather have -- a revocable insurance trust or an irrevocable insurance trust.

One of the most positive elements of tax reform is the potential for exchanging irrevocable decisions for revocable decisions. This will have a positive effect on the ability of our wealth-holders to make effective decisions and move forward with confidence.

Capture the Opportunity: Focus on strategies, tactics and tools that will benefit from revocability.

The dilemma between financial independence and family legacy will be eliminated.

Under our present tax system, our client goals for financial independence are at odds with their goals for providing a family legacy. Which is more important; feeling financially secure or preserving a family legacy for heirs? Most wealth-holders would say that both are important. Nevertheless, our current system forces them to chose. Eliminating the transfer tax would go a long way to eliminating this planning dilemma.

Capture the Opportunity: Focus on strategies, tactics and tools that align a client's financial independence, family legacy, and social capital legacy needs.

With respect to tax reform, what are the greatest strengths to be reinforced and maximized?

Over the past seventeen years, I have worked with hundreds of estate and wealth planning clients, given more than 1,000 seminar presentations, written numerous articles, built a training company and written a book titled Values-Based Estate Planning . Given this background, many professionals and clients have asked me to comment on the potential elimination of the transfer tax, as well as the impact on my practice and our industry.

Like most advisors, my initial response to this question was based on fear. After some time and reflection, my response grew into indifference. Finally, having clearly and confidently thought about the issue, my response has evolved into excitement. This excitement comes from three fundamental beliefs:

  1. As a professional adviser, I serve the needs of my clients first. The elimination of the estate tax will contribute positively to my clients' abilities to fulfill their wealth management and transfer objectives.

  2. Estate planning it is not about the burden of tax; it is about the many burdens of wealth.

  3. Regardless of the tax environment in which planning occurs, clients will benefit from an approach focused on positive meaningful issues and acknowledgement that tax is but one factor and transfer tax but one of many taxes.


I realize that this is not a popular view among my peers in the industry, but before you put this article down, let me explain the source of my conviction and confidence.

* * * * *

Part II of this article, to be published next week, will outline the concepts, principles and beliefs that have enabled me to look in the face of tax reform and smile. Rest assured, regardless of the outcome from the current debate, these tax-neutral values-based strategies will allow you to repeal proof your career!

Click here to go to Part II.

Footnotes



  1. DOS is one of many proprietary concepts created by The Strategic Coach Inc. All rights reserved. Used with permission. For more information contact the Strategic Coach at 416.531.7399.back

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