Blackman’s Primer on what they (the people who take your money) don’t want you to know about estate tax planning

If this article was a college course, it would be called “Estate Taxonomics 101.” If you have, or could have an estate tax problem, this is must reading. We expose some sacred cows. But every word is true, based on my 40-plus years of experience in the estate tax battlefield.

#1. The IRS and the estate tax.

The IRS doesn’t want you to know that the estate tax – if your plan is properly done – is a voluntary tax. Sadly, if you have only a traditional estate plan (typically, a revocable trust for him and the same for her) you have no chance to avoid the estate tax. Yet, by adding a simple lifetime plan, it’s easy to legally avoid the estate tax. Just use the correct specific strategy for each significant asset that you own.

For example, for each of the following assets: Use the strategies as listed below:

Asset

 Strategy
  1. Residence
 Qualified personal residence trust or 50/50 title
  1. Your business
 Intentionally defective trust (IDT)
  1. Funds in a qualified plan (like a 401(k), profit-sharing or IRA)
 Retirement plan rescue or Subtrust
  1. Investments (cash, CDs, stocks, bonds, real estate, etc.)
 Family limited partnership or IDT

The IRS never gives any public acknowledgment to the thousands of plans that legally beat the estate tax, and, it only attacks those plans that have a tax mistake. Why?… Simply put, they don’t want to acknowledge the right roadmap so others can follow. Unfortunately, their function is not to help you – the taxpayer, but to collect more taxes.

What to do?… Find the professional advisor who knows how to do your estate planning right in the first place… an advisor who can explain to you how each of the above strategies wins the estate tax game for each asset class above.

#2. Succession planning… transferring your business.

The biggest transaction of your life will probably be the transfer (or sale) of your business to your kid(s). (or could be your employee(s) or an outside buyer). The IRS wants you to think that a taxable installment sale is the way to go. Unfortunately, so do most professional advisors.

What should you do?… Tell ‘em to take a look at an IDT. The proof is always in the numbers. Simply ask your professional to run the number for the tax consequences of an installment sale versus an IDT. Remember, you want to see the tax impact for both the buyer and the seller.

Hint: I have never seen an installment sale (or cash sale) beat the after-tax numbers of an intentionally defective trust.

#3. The double taxation of qualified plan funds.

Okay, you folks with a large amount of money in a 401(k), rollover IRA or other qualified plan, listen up. Everyone – you, the IRS and your advisor – knows that those funds will be double taxed (hit hard by both income taxes and estate taxes)… with as much as 73% going to the tax collector. (That’s $73,000 out of every $100,000 you have in plan funds.)

What’s the unfortunate truth?… Again, the IRS doesn’t want you to know that there are multiple ways to avoid the double tax and even turn the tables on the IRS by multiplying the funds in your plan… risk free. Worse yet, most professional advisors don’t have a clue of what to do.

My files are bulging with clients that used one of the many strategies available to turn double-tax traps into tax-free victories. For example, a single (not married) client turned $1.2 million in IRA funds (worth $325,000 after-tax to his kids) into $2.25 million of tax-free dollars for his kids.

A married couple turned $800,000 (worth $240,000 after-tax to their family) into $4.1 million of tax-free dollars for their family.

Would you be open to results like that for your qualified plan funds? Hint: If you are under 59 ½ years old, use a subtrust… if over 59 ½ years old, use a retirement plan rescue. Always use a stretch-IRA for any funds still in the plan when you go to heaven. Talk to your professional advisor.

#4. How important is life insurance in your estate plan?

Let’s look at the IRS, your professional advisor and the insurance company. Like it or not, life insurance proceeds are taxable for estate tax purposes. The IRS loves life insurance, there’s always the insurance company’s money to pay your tax bill. Fortunately, there are many strategies to convert a potential taxable life insurance death benefit, into a tax-free pool of money. It’s your professional’s job to walk you through the many possibilities (for avoiding the estate tax) when you buy the policy.

What, you already bought the policy, and it won’t be tax-free. Consult a new advisor immediately. There are many ways to correct this mistake. But hurry, there’s usually a three-year waiting period to get off the taxable boat and onto the tax-free one.

Now for the insurance company. The life insurance industry is highly regulated. Each of the 50 states has an insurance commissioner, and generally they do a great job protecting the public.

But hey, insurance companies are in business to make a profit. Here are some important things they don’t want you to know.

Do you have a policy on your life (or second-to-die) that has built up enough cash surrender value (CSV) so you no longer need to pay more premiums to keep the policy in force? So, you think you are getting a free ride? If you are still healthy (could pass a physical to get more insurance), almost 100% of the time you can dump the old policy and get a new one with a larger death benefit (and never pay another premium). But the insurance company won’t tell you.

Nor will the insurance company tell you that your CSV dies when you die. Yes, you and your family lose it… every penny. The insurance company keeps all of it. What to do?… While you are alive and healthy, check out your options (there are many) to use that CSV toward a new policy. Why?… Medical advances have increased life expectancy and premiums have gone down over the years. Take a look at the opportunities available using your CSV for positive leverage.

Here’s a few more things you should know about life insurance. If you don’t need it, don’t buy it. Only buy life insurance if you intend to keep the policy in force till the day you die, so your family collects the death benefit. Otherwise don’t buy it.

Here’s the big WHY… Something else the insurance companies won’t tell you. What follows is hard to believe: 98% of term policies sold never pay a death benefit; 91.5% of CSV policies sold lapse for various reasons and don’t pay a death benefit. Great business… collect money (called “premiums”) and legally do not have to deliver the product (a death benefit).

One final point about life insurance: It is not for everyone. If you think that down the road you may have to choose between maintaining your lifestyle and paying a life insurance premium, rethink buying the policy in the first place. On the other hand if you are fortunate enough to have excess funds (not needed for lifestyle), do not think of premium payments as a cost. The economic fact is, in such a case, the premium is simply a transfer of capital from a cash-like asset category to an insurance asset category. Again, run the numbers from today, until your life expectancy (and at least seven years beyond). You’ll clearly discover, life insurance is always a profitable tax-advantaged investment (you, really your family, always win).

Finally, make sure that when your estate plan is done, you will be able to legally avoid the impact of the estate tax. If not, you owe it to yourself and your family to get a second opinion.

So, join the estate tax saving club. Learn more. Take a look at my website: www.taxsecretsofthewealthy.com. In a hurry, call me (Irv) at 847-674-5295.

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