Estate Planning

Spoiler alert: you're gonna die. It happens to all of us. So who gets what, when you're doing the backstroke six feet under? For most of the world, the planning of the disposition of their estate is almost purely an emotional thing. Who gets the watch? Who gets the fur hat? Who gets the whips and chains from the BDSM dungeon?

But for the wealthy, estate planning matters a lot, from a purely financial perspective.

In the U.S., estate transfer is "capped" at about $12 million. That is, with almost no taxes, one generation can transfer $12 million to the next. In Des Moines, Iowa and to school teachers, this seems like an enormous amount of money. But to a plumber living in Manhattan or Silicon Valley or another expensive-to-live-in place, it's not a lot, when you consider the fact that a 4-bedroom home on a half acre lot sells for $8 million. (That same home in Des Moines is $500k.) Just the cost of transferring the home then to the next generation eats up almost all of the estate tax waiver.

Subsequent taxes above $12 million are massive, in many cases. Well over half the money then goes back to the government, and if the goal is to generation-skip, i.e. where a grandparent gifts to a grandchild, then the estate is taxed twice, turning a dollar into about 22 cents quickly (in a blue state). So estate planning generally optimizes the annual transfer of a small amount (like, $20,000-ish is allowed tax free to be transferred annually), and if done year after year after year, it can help mitigate some of the onerous taxes at the end. The cost of not being disciplined in estate planning is that all of those years of hard work will have ended up being given back to the government, rather than to the people the entrepreneur who made that money...loved.