Validating the Planning Process

Why Non-estate Planning Professionals Should Learn More About Tax Planning

“When you come to the end of your rope, tie a knot and hang on.”

—FranklinD.Roosevelt

Perseverance  Sometimes that’s what makes estate and gift planning work.  Logically, clients understand that they need to plan, and occasionally they are even prompted by external events to start the planning process, but they lose focus, priorities shift and estate planning drops off the radar screen.  How to counter this on and off approach?  Many professional planners distribute articles and case studies as examples of successful outcomes as a way to help focus on possible solutions.  Although clients see the plan and may recognize its potential, unless it’s immediately relevant, they mentally file it away and are not motivated to act, no matter how logical the plan might be.  And of course, logic doesn’t drive the estate planning process, emotion does.  But circumstances can change, and suddenly what was once an obscure solution to a complex planning problem suddenly becomes the answer needed today.  That’s why it’s so important to keep preaching the need to plan and to continue showing options.

Professor James Watson, an electrical engineering department head at the university, maintains close contacts with many of his students, who view him as an objective advisor to their ventures in the world of technology.  A graduate of the EE program mentioned that his closely held company was in play, with two large communications conglomerates seeking to buy his corporation for its expertise and patents.  The entrepreneur, V. J. Patel, started his business working out of his home by employing his cousin and concentrating his technical skills on building software and hardware solutions to a nagging telecommunications network bottleneck.  Admitting that sometimes it’s better to be lucky than smart, the Patels now find themselves selling founder’s stock in their corporation and are faced with a significant capital gains liability.  Professor Watson suggested that while he didn’t know all the technical details, he did remember a faculty workshop on estate and gift planning that mentioned income and estate tax benefits for business owners selling their companies.  Dr. Watson also knew that the benefits of these charitable trusts offered his graduates an opportunity to give something back to the university, and his department specifically, to encourage and develop future entrepreneurs.  So he set up a joint meeting between his old students and a gift and estate planning team to explore their options.  Taking into account their age, a desire to keep busy developing new projects and their family orientation, it was impractical for the Patels to contribute all of their stock to a CRT, but after considering their needs for income security, tax relief, financial independence and charitable interests, a plan evolved.

What the professional advisors suggested was a part sale/part gift strategy.  By combining a CRT and its income tax deductions to “wash the sale”, the Patels will be able to sell some of their stock in a taxable sale to keep some tax-free “seed money” to reinvest and start a series of new projects without compromising their financial security.

What lessons can be learned from this?  Sometimes it more important to learn to recognize the planning opportunities and suggest broad stroke planning solutions and let the technical experts fill in the gaps for the clients.  A referral to an expert and a recommendation from trusted advisors to consider alternative planning scenarios is a great way to validate options, even if all the details aren’t fully explained in the first meeting, the fact that it’s suggested by more than one person gives clients comfort that the technique may be a viable solution.  A charitable financial or estate plan often fits into many clients’ way of thinking, so it’s up to their advisors to elicit those priorities through a values based approach to arranging their affairs.