Back at the end of 2012, estate planners were busy as tax planning beavers. The expiration of the gifting credit—surprise, it didn’t disappear after all!—caused clients to put in place lifetime trusts before the then-$5.12 million gifting credit expired. That December was a time when planners could be selective as to projects and new clients. Interestingly, that time period provided good lessons on how we all could manage our practice, even in less busy times.
Darth Vader Calling
Really bad potential clients remind me of Fawn Liebowitz from Animal House.1 We’re one kiln accident away from being business-engaged to that client for a long time. Where’s the malfunctioning kiln when you need one?
One incident I remember quite vividly. A potential client (let’s call him “Ted”) with substantial net worth had requested I advise him on how most effectively to use the lifetime credit at year-end. I discussed partnerships and discounted gifting to maximize the use of the credit. As December approached, I emphasized to Ted the need to put a strategy in place (if he wanted to do so before year-end) as soon as possible so that we could get it done in time. He promised he would get right back to me as to whether to proceed or not.
On Dec. 23, my receptionist frantically tracked me down to indicate that Ted was on the phone and needed urgently to talk to me.
The conversation went something like this:
“Lou, this is Ted. I’m riding on a chairlift at Snow Valley right now and chatting about estate planning with the dude in the chair next to me. Just met him on the way up the mountain. He indicated that his estate planner recommended blah, blah, blah strategy for use of the credit. I want to know why we’re not doing that. You never suggested that. What were you thinking, or not thinking? Explain yourself!”
I had this vision of the chairlift crashing down. In addition to that pleasant thought, many verbal responses floated in and out of my mind, like detritus and flotsam washing onto a polluted beach. One response I was sure not to make: mollycoddle or vindicate Ted’s need to discuss the strategy. My response, instead, went something like this:
“Ted, at this point, we’re going to have to decline your representation. I enjoyed meeting with you [a prevarication, but probably allowed under the ‘politeness allows for mendacity’ rule], but I won’t be able to handle your matters. Have a nice ski trip. Bye.”
In hanging up the phone, my mood couldn’t have been better. We underrate the joy of saying “no” to Darth Vaders.
The 90/10 Rule
The 80/20 rule is well known by estate planners: 80 percent of our revenue comes from 20 percent of our clients. We’re not as focused on the 90/10 rule, primarily because I just made it up.
That rule indicates that 90 percent of aggravation in our practice life comes from 10 percent of our clients, that is, bad clients or bad projects. And, by “bad” I mean something a tad more painful than the pain that comes from jamming a sharp stick in your eye.
Because we control the variables, new projects and new clients, an understanding of the 90/10 rule can actually increase our happiness. But, this strategy means we have to be strong and not select those 10 percent clients or matters.
Let’s consider some examples of how properly to comply with the 90/10 rule.
Use Common Sense
Usually, listening carefully during the initial telephone call or sending out a questionnaire and reviewing the responses carefully will provide clues as to client matters for which a “no” should be immediate.
Examples are common place, such as being the prospective client’s third attorney in a representation: “I didn’t love them, but in five minutes, Lou, I know you’re my guy.” Hmmm. This was usually the kind of statement heard on a date that caused me to excuse myself to go to the bathroom, detour and exit through the kitchen and begin changing my phone number.
Other clues are a bit more subtle, but if we pay attention to them, we can do well to avoid certain representations. At the initial meeting, listen carefully to the buzz words and concepts that will make you want to dismiss a potential client. These include:
1. The prospect has had too many lawyers before you and may even refuse to name them. Or, worse, he wants to consult with you about how and why he shouldn’t pay his prior attorney.
2. The prospect thinks all previous lawyers are “idiots” or makes otherwise derogatory statements about lawyers in general.
3. The prospect can’t demonstrate he can pay for the cost of your services, balks at paying a retainer and/or asks for a special reduced rate or payment terms up front.
4. THE PROSPECT WANTS TO BE NOT JUST A PRIORITY, WHICH ALL CLIENTS ARE, BUT THE SOLE AND PRIMARY PRIORITY. WITH THESE CAPS, DOES IT SOUND LIKE I AM SCREAMING AT YOU? SORT OF LIKE HOW THIS CLIENT MAY SOUND.
5. You don’t agree with the prospect’s legal position.
6. You don’t believe the prospect is being truthful.
7. The prospect is VAV (vindictive, angry and vengeful).
8. The prospect is a family member.
9. The prospect indicates he knows the law and what he wants to do and just wants the attorney to do the front end work for him.
Don’t Open Pandora’s Project Box
Oh to be the oracle and identify the one characteristic that allows planners to say “no” to those projects that create the wrong ratio of risk to reward. (See “Risk vs. Reward,” p. 12.) One important variable that we don’t pay enough attention to is risk. But, that’s just one variable.
However, ignoring the other variables is like Congress saying, “If we repeal the estate tax in 2017, that will completely throw the budget out of whack.”
You also need to consider the fee charged, temperament of the client, tax environment in which the planning is done, conjecture as to future tax environments, steps necessary to effectively implement the strategy, required monitoring and anticipated client behavior or ability to follow through.
Less Favored Project List
On an objective plane, with all those variables in mind, we can identify the Year 2017 “less favored” project list.
1. Payment of gift tax. With the repeal of the estate tax, avoid a project that requires the actual payment of gift tax this year, until we’re clear where the estate tax system is going. I discussed that concept in a recent column.2
2. Discount partnerships. A second strategy that’s fallen in disfavor in 2017 is discount partnerships. This disfavor isn’t because of proposed regulations under Internal Revenue Code Section 2704. Instead, we can go back to the genesis of discount partnerships for a clue as to why they may not be an appropriate strategy for many clients who think they would like to use them.
Back in the ‘90s, occasionally a client would call asking me only to set up a discount partnership for him. He would be confused when I asked him the question, “Are your other estate-planning documents, such as your will and trust, in place?” I believed then, and now, that prospective clients who didn’t have their estate planning in place weren’t likely to follow the road map for the proper implementation and administration of a family partnership. Since then, we’ve learned that proper administration of the family partnership, as well as proper construction, is essential for sustaining its credibility.
The other item that’s occurred in this area is the increase in income tax rates, accompanied by the decrease in estate tax rates. The differential between federal estate tax rates (40 percent) and all-in income tax rates (with the additional health care tax and loss of basis costs, say 30 percent) is only 10 percent. This differential translates into a potential tax savings of the discount times 10 percent; for example, a 40 percent discount times 10 percent, or 4 percent total tax savings.
In many ways, the discount partnership may not be worth the effort and the audit exposure.
3. Self-canceling installment notes (SCINs). Practitioners have to now be alert to possible Internal Revenue Service scrutiny when a SCIN is used. At least one recent case indicates the heightened level of scrutiny and IRS antipathy towards this strategy.
4. Drafting. We also need to revisit drafting in this age of uncertainty. We may want to simplify drafting as we wait to see where the estate tax system ends up. That simplified drafting could be through a single fund qualified terminable interest property (QTIP) trust, which essentially has been further validated for portability and estate tax planning through the recent IRS pronouncement, Revenue Procedure 2016-49, allowing a QTIP election even if not necessary to avoid a federal estate tax.
5. Status quo bias. This planning strategy isn’t a strategy at all. It’s avoiding what behavioral economists often refer to as the “status quo bias,” in which a client feels comfortable doing nothing in the face of tax law uncertainty. Tax laws may have an uncertain future but, ironically, one item that’s certain is eventual mortality. Therefore, planners should be cautious not to delay completion of drafting projects beyond a few months as we decipher the tax planning that will rule the day.
The Right Emoji
Life is short and should be accompanied by smiles, not frowns. We’re in control of this emotion, and adherence to the 90/10 rule will have a strong influence on getting us to the happy face.
1. For those unfamiliar with the reference in the movie Animal House, Ms. Liebowitz, who actually didn’t exist, died in a kiln explosion, while purportedly crafting a bowl for her fiancé. Very complicated stuff.
2. Louis S. Harrison, “Speak Now or Forever Hold Your Peace of Mind on Taxable Gifts,” Trusts & Estates (April 2017), at p. 12.