The Estate Planning Pyramid

Estate planning pyramid

Estate plans, like pyramids, must be built on a firm foundation. A pyramid built on its point would be very unstable, and probably dangerous. The same is true of estate plans that are built upside down: they are in danger of toppling and hurting someone. How does an estate plan get built incorrectly? By focusing on taxes instead of on people.

Have you ever visited an attorney, CPA, or financial advisor and found that the first thing he or she wants to know is the size of your estate? That seems to be a very common experience among our clients. Why does the professional need to know the size of your estate to counsel you? There are actually some very good reasons.

The question regarding estate size typically has to do with taxes. If the size of the estate isn’t easily computed, the advisor may ask you to at least estimate if you are "under $2 million or over $2 million" (in year 2006), because that is the amount excluded from federal estate taxes upon death.

Tax planning is important because most people enjoy paying less tax and keeping more wealth within family control. But taxes aren’t the only thing that matter to most families. Because of the way professional advisors are trained, they sometimes get the tax "cart" before the estate planning "horse."

In our practice, we know that it’s important to keep things in the proper perspective. Therefore we prefer to plan according to the Planning Pyramid.


First and foremost, planning must take care of me or my spouse and me. If you're married, you might feel better putting the word " US at the bottom of the pyramid. We don’t want to plan if it means giving up control. We don’t want to plan if it means impoverishing ourselves. We want to be sure we'll have enough money to take care of ourselves for the rest of our lives. Once that’s accomplished, our attention turns to the next level on the pyramid.


Our clients are typically very concerned that their loved ones are taken care of after they’re gone. For some, family means children or grandchildren. For others, family includes more distant relatives. It may also mean friends, charities, or even pets. However you define family, great thought must go into determining those who are important to you and how you want to provide for them.

Some of us are concerned with poor financial choices our loved ones have made in the past. Some of us have children from more than one marriage who need to be treated separately. Some of us have children or loved ones with disabilities. Each family is unique, so each estate plan should also be unique. Proper estate planning will take you and your family into account as financial decisions are made.

Wealth Preservation and Expansion

The next level of discussion in estate planning regards your wealth. Most of our clients would first like to keep what they have and not risk that. Once their current wealth is pre- served, they are often interested in expanding that wealth as well.

Save Taxes

What's the easiest piece to place in a jigsaw puzzle? The corner? An edge? No, it’s the last piece. If the proper foundation has been laid, it's very easy to place the "last piece" of estate tax savings.

If the planning starts with taxes, then there's often little or no flexibility to accommodate changes in the family’s goals or circumstances that come later. If the planning is built upon a solid understanding of you and your family, the tax planning will be more effective.

IRA's, Qualified Plans, and "Stretch Out"

As the Planning Pyramid reminds us, savings taxes is just the capstone of a process that will continue to be important whether death taxes are eventually abolished by the Federal government or not.

Another type of planning that I'm hearing more about is "Stretch Out" planning for qualified plan and IRA proceeds. The experts agree that first you should decide who your beneficiaries should be - typically your spouse, who can "roll over" the fund and start the distribution clock running again. The beneficiary should not be your estate or even a trust if its provisions would allow it to pay estate expenses - which most trusts do. We are working with others to complete a "Designated Beneficiary" module for trusts that will be named as beneficiaries of such funds.

The second step is to try to make the payment a joint one for greater stretchout. A single person typically has a life expectancy of 16 more years at age 70-1/2. Make the choice - joint with husband and wife and you have about 21 years, or, if you're single and you can name a child or niece or nephew, 23 years, because that person is deemed to be 10 years younger than the plan participant. After the participant's death, the younger person can withdraw the funds over his or her real life expectancy for maximum stretchout.