Archive for May, 2009

Newer Entries »

How to turn your hidden assets into cash

Wednesday, May 6th, 2009

Does $120,000, $200,000 or more paid to you — in cash — sound interesting? Without any investment, risk or work? We call it the “Hidden Asset Strategy” (HAS).

What is your hidden asset? Simply, it’s your unused insurance capacity. For example, Joe (age 73) has total assets of $5 million (counting the assets of his wife Mary). Joe’s insurance capacity is normally 80-percent of his marital assets or $4 million. Joe can use HAS to sell his insurance capacity for about three-percent, netting him $120,000 (three-percent of $4 million). The $120,000 is taxed as ordinary income.

Who owns the policy on Joe’s life? Investors. They will pay all premiums and receive 100-percent of the death benefits.

Joe is typical of millions of seniors: He owns an asset that he didn’t even know he has and does not need or want life insurance. Or if Joe has $1 million in life insurance, he still has insurance capacity of $3 million, allowing him to use a HAS to receive about $90,000.

There is an endless number of HAS variations. If you are 65 years or older, have insurance capacity, and are insurable (or if not, your spouse is insurable) you can get into the fun of playing one of the many profitable HAS games.

Now back to Joe’s specific example: In order to qualify for Joe’s HAS variation, you must be between the ages of 72 and 86, have assets (including your spouse) of at least $2.5 million and be insurable.

A side (but important) note: Many senior readers of this column don’t need or want life insurance. Sometimes these readers want life insurance, but, in spite of their wealth, can’t afford life insurance because they don’t have the necessary spendable cash flow. Finally, HAS is a way to help these senior readers.

So if you’re a senior (65 years or older), you owe it to yourself and your family to check how a HAS would work for you. If you are still a lucky young whippersnapper (not yet 65), give this article to a senior (typically, your dad or grandfather).

The real question for each and every senior reader is, “How will a HAS work for me?” (Either Joe’s HAS example in this article or the many HAS variations that might be just right for you.)

I have arranged for senior readers (65 years or older and insurable) of this column to submit the information to create a HAS just for you. Here’s the information you should fax (847-674-5299) to me (Irv Blackman): Your name, address, phone numbers (business/home/cell), your birthday (same for your spouse); your net worth (including your spouse). Write “HAS” at the top of the page.

Or if you are 65 (or older) and have any tax question (about insurance or otherwise, call me at 847-674-5295.)

¤

Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection.

Posted in Corporate Tax, Estate Tax, Investment Strategies | No Comments »

The client called it tax magic

Wednesday, May 6th, 2009

Do you have a large amount of retained earnings and excess cash in your corporation, but the double taxing power of the law has your cash locked in? Most business owners think they are stuck, but there’s an easy way out.

Here’s a true story of one way to get the job done. You’ll like it. Joe called me with this problem. He and his brother Jeff each owned 30 percent of Success Co., which they managed. Their mom (age 66) owed 20 percent in her own name, and a trust (created when their dad died) owned the other 20 percent.

Mary’s professional advisors recommended that she obtain $2 million of life insurance using an irrevocable life insurance trust (ILIT) to pay the estate tax liability that would be due at her death (because of the value of the assets she owned directly in her own name and indirectly as a beneficiary of her deceased husband’s trust). The advisors were right. Mary needed the insurance, but she did not have a ghost of a chance of coming up with the annual premium requirements of $32,000 per year for as long as she lived.

I asked Joe lots of questions, conferred with the advisors and requested a large pile of information — stuff like tax returns, financial statements, etc. After discovering that Success Co. had $2.5 million in excess cash, this is what I recommended.

Mary gifts $1.2 million of her Success Co. stock (the total value of Success Co. was appraised at over $8 million) to a charitable remainder trust (CRT). The CRT agrees to pay Mary $72,000 per year for as long as she lives. At Mary’s death, the balance (called the “remainder”) in the CRT will go to charity. Each year Mary must pay $25,000 in income tax (on the $72,000 of income from the CRT) and $32,000 in premiums (for the $2 million policy, which is owned by an irrevocable life insurance trust, ILIT for short), or a total of $57,000. This leaves Mary an extra $15,000 per year to buy presents for her grandchildren.

The ILIT will give Mary’s children $2 million (in insurance proceeds) when she dies. The entire $2 million will be tax free — no income tax, no estate tax.

But where does the CRT get the income to pay Mary? The CRT sells the gifted stock back to Success Co. for $1.2 million. Let’s summarize Mary’s tax picture: Mary avoids all capital gains tax on the sale of the Success Co. stock. The balance in the CRT (estimated at $1.1 million) at Mary’s death goes to Mary’s favorite charity and is free of income tax and estate tax.

In addition, Mary gets an immediate income tax deduction of about $200,000 for her charitable contribution to the CRT. Simply put, even though Mary avoids both the capital gains tax and the estate tax, the IRS writes her a check. For what, you ask? For the present value of the remainder (of the $1.2 million) gifted to the CRT. This $200,000 (immediate deduction) results in about $70,000 in cash income tax savings for Mary. Lots more expensive presents for the grandchildren. (Note: If Mary had sold the $1.2 million of Success Co. stock directly to the company, it would have been taxed as a dividend, resulting in a whooping tax of $180,000.)

A side note before concluding: There are many other ways to get cash (or other types of property out of your C corporation) in a tax-effective manner. If you have such a problem, as a service to readers of this column, call me with your problem (239-417-9732).

The use of a CRT in tandem with an ILIT is a time-test method for making a tax-advantaged investment for your family. You actually create wealth (make a real economic profit) by gifting to charity.

Posted in Estate Tax | No Comments »

The best retirment plan I’ve ever seen

Saturday, May 2nd, 2009

Mention retirement to any group — no matter how young or old — and the knee-jerk reaction is almost always the same: stuff as much as you can into a qualified retirement plan (for example, IRA, 401(k), profit-sharing plan and the like). Actually good advice.

Why?

Well, the money going into the plan is 100 percent tax-deductible and your earnings are tax-deferred until the day you take money out. Good! Very good!

But wait, what happens when you take the money out?

Not so good. You are hit with taxable income (plus a 10 percent penalty if you are not older than age 59½). Worse yet, if you die with funds in your plan, your heirs are robbed by a double tax, both income and estate tax as high as 73 percent, with your heirs only getting 27 percent.

Think about it: $1 million in your plan(s) is demolished down to $270,000. Bad. Real bad. Apply this sad tax tragedy to your own plan(s) numbers.

What’s better? A Roth IRA!

Sorry, you can’t deduct your contributions to a Roth. But what happens when you take those dollars out? Drum roll, please. Tax-free! Yes, every penny comes out free of the income tax. Great!

Any problems with a Roth? Unfortunately, yes. There are two significant restrictions: without giving all the gory details:

(1) If your income exceeds $114,000 and you are single, you cannot make any contribution to a Roth; if married, the prohibition number is $166,000 of income.

(2) The maximum annual contribution for 2007 is $4,000, rising to $5,000 in 2008.

Is there really something better than a Roth IRA? Of course there is. And the strategy has been around since the 60s. Yet few people know the strategy –called a “Private Retirement Plan” (PRP) — even exists.

Taxwise, a PRP is exactly like a Roth: no deduction when funds go into the PRP, no tax when the funds — contributions, plus tax-free earnings — come out. Now here’s what makes a PRP superior to any other plan:

(1) There are no restrictions as to how high (or low) your income can be.

(2) There is no limit on the amount of your annual contribution.

Truly, a PRP — whether or not you are a resident of Florida — is the best tax-advantaged retirement plan I have ever seen.

A PRP is simply a special kind of high cash surrender value life insurance policy. We have been using PRPs to fund for retirement for clients, their children and even grandchildren since the early¥’50s. Although a PRP is easy to do, each one (whether for a 1-year old or a 60-year old) must be individually designed. So if you are a reader of this column and would like to see real-life numbers of how a PRP might work for you (or other family members), fax your name and birthday (same for other family members) along with all phone numbers (business/home/cell) where you can be reached.

Are you one of the many readers who has accumulated large amounts (say $300,000 or more) in your IRAs, 401(k)s or other plans? If so, you have a huge tax problem and can lose up to 73 percent of your hard-earned plan wealth to the IRS.

Are you forever stuck in this horrible double tax trap? Probably not. There are a number of easy-to-do plan rescue strategies to get you out of the trap. Like the PRP, each strategy must be individually designed.

So, if you want to learn now to escape your qualified plan tax trap, fax me (Irv Blackman at 847-674-5299) the information requested above for a PRP, plus the total amount in all your qualified plans. Write “Plan Rescue” at the top of the page.

Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection.

Posted in Estate Tax, Planning, Retirement Tax Advice | No Comments »

Exploring the various needs in estate planning

Saturday, May 2nd, 2009

Most of the concepts and strategies you read in this tax column are really answers to questions asked (or concerns, problems or fears told to us) by readers who called our office.

Also tossed into the column is a large helping of our many years of experience consulting with our readers.

About three out of every four readers who call ask a variation of this troublesome question, “What will estate planning do for me, my family and my business?”

The simple answer: The “right plan” will accomplish all your goals. Actually the right estate plan is a group of small plans that all dovetail together.

There are basically two types of plans: a lifetime plan that should start now (in the next two or three months), and a death plan (really your will and trust documents) that can sit in a drawer until you get hit by the final bus.

By far, the lifetime plan is the most important of the two. Let me say it loud and clear: Never, under any circumstances can your will and trust — no matter how fancy or how long — accomplish your lifetime goals. Even worse, standing alone, rarely can your will and trust accomplish your estate planning (death) goals.

Remember, your death documents do absolutely nothing until after you have drawn your last breath.

OK, so lifetime planning is the way to go. The typical business owner (let’s call him Joe) will have three plans: (1) a retirement plan, (2) a business succession plan (who will run the company when Joe slows down, because in practice Joe rarely totally leaves the business until he goes to business heaven) and (3) a business transfer plan (usually leaving the business to Joe’s business child or children) or a sales plan (to key employees or an outside buyer if there are no kids or employees to take over the business).

Can you imagine any of these three lifetime plans being effectively handled in death documents?

The various plans that we, as consultants, create are in response to the goals that you, the client, list. To help you get started on the first task of creating the “right plans,” the balance of this article focuses on the 10 most common goals we hear from clients in the real world. Every one of these goals can be accomplished with ease by employing the appropriate strategy or strategies. You’ll easily recognize which are part of a lifetime plan and which a death plan. As you read, circle the goals that match your goals.

• Maintain our lifestyle (Joe’s and his wife Mary) for as long a we live — intentionally defective trust, S corporation, family limited partnership, retirement plan, TIPs, which stands for transferable insurance policies.

• Control my (Joe’s) wealth — including my business —for as long as I live (voting/nonvoting stock for business, family limited partnership).

• Maintain Mary’s lifestyle for as long as she lives (marital deduction, irrevocable life insurance trust, plus all strategies as shown in 1 above).

• Pass all of my wealth — every dime of it — to my family, instead of losing it to the IRS (strategies as shown in the other eleven items in this list).

• Transfer my business to our business children tax-free (intentionally defective trust; never a sale).

• Treat children (really non-business children) fairly (family limited partnership, irrevocable life insurance trust, subtrust, retirement plan rescue).

• Avoid the huge — up to 80 percent — double tax on my qualified retirement plan, like a profit-sharing plan, 401(k) or IRA-money (subtrust, retirement plan rescue).

• Educate my children/grandchildren (Private retirement plan).

Eliminate the capital gains tax (charitable remainder trust).

• Attract key employees and keep my key employees (nonqualified deferred compensation plan).

An investment without risk that earns 8 percent (could be more or less depending on person who calls). TIPs, an investment that has averaged 15.82% annual return for the past 15 years. Offered by a public company that trades on the NASDAQ. Must be a qualified investor, minimum investment $50,000.

• Establish a family foundation and make gifts to charity without reducing the value of our wealth to be inherited by our family (charitable lead trust and charitable remainder trust).

The goals listed above (followed by the tax strategies that easily accomplish your goals) are actually a good roadmap to help you get started on your own tax plans.

Want to learn more? Discover all the tax strategies and an organized system that shows you how to quickly accomplish all of your goals as you create your own lifetime plan and estate plan. Browse my Web site: www.taxsecretsofthewealthy.com/blog.

Posted in Estate Tax, Family Tax Issues, General Tax Strategies | No Comments »

The retirement plan rescue

Saturday, May 2nd, 2009

Raise your hand if you have a substantial amount in a qualified retirement plan — typically an IRA, 401(k), profit-sharing plan or the like. For our purposes, a substantial amount means $300,000 or more.

The larger the amount, the bigger the problem or the better the opportunity (to apply the “Retirement Plan Rescue” and create tax-free wealth).

This is a bad-news/good-news article. Most people want to weep at the bad news, yet high-five at the good news.

First, the bad news, in the form of an example: Joe (winters in Florida, but is not a Florida resident) has $1 million (substitute your own real number) in his 401(k). Two taxes destroy Joe’s $1 million plan wealth. When Joe takes out just $1, the income tax on average (state and federal) grabs 40-percent (40 cents), leaving 60 cents. At Joe’s death (using 2011 rates) the estate tax steals 55-percent (33 cents) of the 60 cents. What’s the results? The family gets only 27 cents out of every $1; the tax collector gets 73 cents. If Joe dies with funds still in his 401(k), the tax collector still double taxes the balance (as described above).

So, dead or alive, the tax collector will get $730,000 of Joe’s $1 million in his 401(k); the family only $270,000. Outrageous!

Note: If you are a Florida resident, you escape the state income tax and are only subject to the 35-percent federal income tax rate.

To make matters worse the IRS has, without warning, refused to favorably rule (as it did in the past) on a strategy called the subtrust. The use of this strategy allowed us — depending on the client’s marital status, age and health — to turn that $270,000 (as in Joe’s example) into a range between $2 million and $6 million in cash wealth, all taxes paid in full.

The subtrust only had one trick: allowed you to use qualified plan funds to buy life insurance and the death benefit was free of the income tax and the estate tax. We’ll miss the subtrust.

So, it was back to the drawing board for me and my network of experts. Our goal was to come up with a strategy that would give us the tax-saving, wealth-building results of a subtrust but was free of even a remote possibility of an IRS naysayer.

Now the good news: We have come up with a new strategy (really a variation of various strategies we have been using for decades) that gives the same tax-saving, wealth-building results as a subtrust. We named the strategy the Retirement Plan Rescue (RPR for short).

The core concept behind an RPR is to shift from a highly taxed environment (a qualified plan) into a tax-free environment (life insurance). Sorry, but if you are uninsurable or highly rated (have serious health issues), an RPR won’t work for you. Have a healthy spouse? She/he will probably save the day and put an RPR in your planning picture.

The benefits of RPR are easy to summarize — save a large amount of taxes and multiply the before — tax value of your qualified retirement plan (tax-free). However, the implementation of an RPR requires a great deal of expertise. In addition, each RPR (because of the many variables) is different and must be looked at on a case by case basis.

Finally, the big questions for readers are, “How will an RPR work for me and my family? What will my tax-savings be? How much tax-free wealth can I create?”

So, if you have $300,000 or more in your qualified plans (have more than one plan? … just combine them), you can turn a potential tax travesty into a tax-free, wealth-building cash pool for your family.

I have arranged for readers of this column to submit the information necessary to create an RPR. Here’s the information you should fax (847-674-5299) to me (Irv Blackman): (a) your name, address, phone numbers (business/home/cell); (b) total amount in all qualified plans combined (if married, same for your spouse) and (c) your birthday (also your spouse.) Write “RPR” at the top of the page.

Posted in Estate Tax, Retirement Tax Advice | No Comments »

Newer Entries »

Estate Tax Blog

by Irv Blackman

First and foremost, Irv Blackman is both a CPA and a lawyer. Irv is a tax guy. Stay tuned to the site by signing up for the RSS feed.