How I Learned to Stop Worrying and Love the Death Tax

By: Nadine Heintz

Roger Peugeot jokes that a fitting way for him to die would be while hugging the toilet in his basement during a tornado -- preferably in 2010. Peugeot, better known in Overland Park, Kansas, as "Roger the Plumber," owns the company that his father, Arley, founded in 1950. At age 7, Peugeot was his father's apprentice, eventually joining him full-time after graduating from high school. Ten years later, Arley died during a house call, but luckily, he had hashed out a succession plan a year and a half earlier: He gave his truck and tools to his son and helped him train two new employees. As soon as he died, Roger would inherit the business.

Things are a lot more complicated for Peugeot today. His father's once-humble plumbing concern now boasts 25 employees, 15 trucks, and more than $5 million in annual sales. Peugeot, 60, says estate taxes have become a big worry. While there is scant statistical evidence that many small businesses are affected by the levy, the so-called "death tax" is nonetheless considered by opponents to be a kind of bogeyman preying on entrepreneurs and family farms. Politics hasn't helped matters, either. In 2001, Congress enacted an eventual phaseout of the levy; in 2010, it will be repealed altogether. The problem is, the tax is set to return in 2011 unless Congress votes to make the repeal permanent -- something unlikely to happen in an election year and even less likely should Republicans lose the White House or Congress. In other words, there's no telling what will happen. "We don't know what the prospect for repeal is," notes Steve Aikers, managing director of wealth-management firm Bessemer Trust's Dallas office. As a result, he adds, the onus is on business owners to "do enough planning so they won't have a problem."

Peugeot, for one, has done precisely that. Rather than driving himself crazy with what-ifs (or praying for a timely demise in 2010), he's taken matters into his own hands. This election season, as politicians and pundits debate the issue, the master plumber will rest a little easier thanks to smart, and legal, estate-planning strategies.
Make the Most of Your Marital Status

There's at least one nice thing to say about the estate tax: You're entitled to an exemption. In 2004 and 2005, the exemption is $1.5 million. (The amount jumps to $2 million between 2006 and 2008 and hits $3.5 million in 2009 before the tax is repealed for one year in 2010.) Any amount exceeding $1.5 million is subject to a federal estate tax as high as 48%. Fortunately for married couples, the tax only kicks in upon the death of the spouse. With some planning, couples can qualify for two $1.5 million exemptions instead of just one.
To that end, in 1997, Peugeot and his wife, Diane, 55, each set up living trusts funded by personal assets like the plumbing business, bank accounts, and real estate. (There's no limit to how much they can contribute to the trusts.) Things get a little macabre here, so bear with us. Let's say Roger were to pass away this year. In that case, his trust is designed to split into two subtrusts: a bypass trust and a marital trust. Diane would be the primary beneficiary of the bypass trust, which she could use for health, education, maintenance, and support needs. She'd also be the sole beneficiary of the marital trust.

Now, let's say Diane's revocable trust is worth $1 million and Roger's $2 million. Upon Roger's death, $1.5 million of his trust would go to his bypass trust (and remain free from estate taxes), while the remaining $500,000 would go to his marital trust. Upon Diane's death, the $500,000 in the marital trust would become part of her estate value, bringing it to the $1.5 million exemption. Meanwhile, Roger's $1.5 million bypass trust would go to the couple's four children, free of federal estate taxes. It's a somewhat complicated way to get to a simple end: The Peugeot estate will have fully utilized the $3 million combined exemption available, and the children may not have to pay any

estate tax.

Create an Irrevocable Life Insurance Trust

With the help of his estate-planning attorney, Kyle Krull, Peugeot created another safety net just in case his estate exceeds the estate-tax exemption. He established an irrevocable trust that's separate from his estate and exempt from estate tax. (As with the bypass trust, this irrevocable trust cannot be altered once it's established.) The trust is funded by a survivorship life insurance policy that will deliver to the beneficiaries -- Peugeot's children -- upon the death of both Peugeot and his wife, providing their four children with liquid funds to help pay off any potential estate tax owed. Because the children are the trust's beneficiaries, Roger and Diane can each put $11,000 a year per child into the insurance policy tax-free, thanks to the gift-tax exemption. That translates into a maximum of $88,000 total per year. Since 1997, Peugeot has stashed away some $200,000 into the life insurance trust. He figures his kids can't lose: Even if his estate winds up being exempt, he says, they'll just be a lot richer.