Surprise! The new estate tax law (albeit temporary for only two years: 2011 and 2012) will make estate planning easier. Without added complexity. And, best of all, you can be certain of the positive results.

The two-year window of opportunity started on January 1, 2011 and sadly will end on December 31, 2012. Let’s work together – to take advantage of this opportunity for you and your family. Your economic health is at stake. Remember, every day that the sun sets the window closes a bit.

Exactly what is this new tax opportunity?… For our purposes, Congress made two significant changes: (1) combined the gift and estate tax into a single tax, and (2) made the amount that is tax-free huge: $5 million if you are single… $10 million if you are married. Certainly, not a big deal for estate tax purposes . (Know anyone planning to die before January 1, 2013?).

Ah, but for gifting, you (and your spouse if married) can each make gifts up to $5 million without incurring one cent in gift tax. In addition, you can still give $13,000 ($26,000 if married) to each donee (person receiving your gift) per year. Gifts greater than $5 million ($10 million if married) are taxed at a flat rate of 35%.

Unfortunately, starting in 2013 the old law is scheduled to come back to haunt us: a paltry $1 million ($2 million if married) and the top rate jumps to a monstrous 55%. Outrageous!

Regular readers of this column known that your author and his network of professionals have developed a System (used in practice with hundreds of real-life clients) that legally

eliminates the impact of the estate tax. Essentially, the System creates two plans. First, your planning starts with a lifetime plan. Second is the creation of your estate plan, really your death plan. The two plans dovetail, creating one comprehensive tax plan.

Gifts, by their very nature, are always a part of your lifetime plan. The liberal increase from $1 million to $5 million per person for gifts is a perfect fit into the System.

The  balance of this article shows you how the System takes advantage of the opportunities opened up by the two-year window created by the new law. Best of all, you’ll see how easy it is to integrate the new law into either your existing estate  plan or start from scratch with your  first estate plan. The System is the secret.

Let’s examine how a typical business-owner reader (Joe) of this column will (with our help) take advantage of the new law. Joe (age 67) is married to Mary (age 64), owns Success Co. and his son Sam  helps him manage Success Co.
Joe has five key goals and one “maybe” goal.

1. Maintain his and Mary’s lifestyle for as long as they live.
2. Transfer Success Co. (which grows in value almost every year) to Sam without getting killed by taxes.
3. Treat his two nonbusiness kids fairly.
4. Keep absolute control of his assets – particularly Success Co. – to the day he dies.
5. Eliminate the loss of taxes to the IRS after both Joe and Mary pass on.
6. The maybe goal: Leave $3 million to his alma mater, as long as the gift does not reduce the inheritance to his kids and grandkids.

Joe’s and Mary’s major assets are:

Stop for a  moment. Substitute your own numbers. Whether your numbers are smaller or larger, you’ll see that the System works for you, just as it does for Joe.

Joe and Mary currently have a traditional estate plan (A and B trusts or as they are often called, a “marital trust” and a “family trust”). Although both are healthy, Joe has only $1.2 million in insurance on his life (policy owned by Success Co.).

Yes, Joe’s and Mary’s situation is screaming for a lifetime plan that integrates the new law into the System. Following is the plan (in the process of being implemented) dictated by the System.

1. Transfer Success Co. to Sam

First we recapitalized (created 100 shares of voting stock and 10,000 shares of nonvoting stock to replace the existing common stock) Success Co. Joe is keeping the voting stock and thus absolute control of Success Co. The nonvoting stock is entitled to various discounts (totaling about 40%) under the tax law. So the nonvoting stock is worth (after discounts of $4.4 million) only $6.6 million for tax purposes.

Next, Joe created an intentionally defective trust (IDT). One-half of the nonvoting stock was gifted ($3.3 million) and one-half was sold (also $3.3 million) to the IDT. The one-half sold to the IDT trust will use the cash flow of Success Co. to pay the $3.3 million to Joe. Joe, because of long-existing tax law concerning IDTs, will receive all of the $3.3 million, plus

interest, tax-free. Sam is the beneficiary of the IDT and will receive all of the nonvoting stock. When Joe goes to the big business in the sky, the voting stock will go to Sam.

2. Remove two homes from estate.

We created a qualified personal residence trust (QPRT) for the two homes. The QPRT allows Joe and Mary to live in both homes as long as either is alive. Both homes – with a $2.8 million value – will be out of their estates for tax purpose. What’s the current tax cost?…. We use up another $850,000 of their $10 million. Neat!

3. Multiply the $1.6 million in the 401(k) (turns a double-tax problem into tax-free wealth).

The insane tax law double taxes (income tax and estate tax) all qualified plan funds (like 401(k), IRA, profit-sharing and similar plans). Your family gets about 30%, the tax collectors 70%: For example, $1 million is divided $700,000 to Federal and State taxes, only $300,000 to your family. Yes, insane! We used a strategy called a retirement plan rescue to buy $6 million of second-to-die life insurance on Joe  and Mary. Ready for a tax miracle… the entire $6 million goes to the family tax-free. No income tax. No gift tax. And no estate tax.

4. Leverage investment assets into tax-free wealth.

We enhanced two-old-friend strategies from the System with gifts.

A. An intentionally defective trust (IDT)

Joe gifted $4 million in cash to a second IDT (using more of the $10 million available to Joe and Mary). Then Joe substituted a note payable to the IDT, with interest of 6% per year, in exchange for the $4 million in cash (which Joe needed in his own name for various activities). So, Joe was now obligated and did pay $240,000  in interest per year to the IDT (which interest under crazy American tax law is tax-free to the trust). The trust used most of the interest funds to pay premiums on a new $8.5 million second-to-die life insurance policy on Joe and Mary.

When Joe and Mary die, $4 million of the insurance proceeds will pay off the note.

B. A family limited partnership (FLIP)

Joe transferred the balance of the investment assets ($4.2 million) to a FLIP. Because of discounts allowed by the tax law, the FLIP interests are only worth $2.8 million for tax purposes. Counting all the noses of the three kids, their spouses and the six grandchildren totals 12 donees to receive annual gifts of $312,000 (12 X $26,000). So, in about 9 years all of the FLIP will have been given to the family, but Joe will still control the assets in the FLIP as the only voting partner.

NOTE: The beneficiaries of the IDT, the gifts of the FLIP interests and the language in the original estate plan were set up to treat the nonbusiness kids fairly.

And finally, Joe’s $1.2 million life insurance policy was taken out of Success Co. and put into an irrevocable life insurance trust (to keep the proceeds out of his estate). After Joe reviewed the entire plan (he particularly liked the tax-free gifts [total of $8.15 million] and the new no-tax life insurance [total of $14.5 million]), he authorized the creation of a charitable lead trust (CLT) that would get $3 million to his alma mater. The CLT did not reduce the inheritance to Joe’s family.

It should be pointed out that every detail and nuance of Joe’s and Mary’s plan is not set out in this article. In light of the fresh opportunities created by the new law, consider joining the tax saving fun… have your current plan reviewed. Or at least get a second opinion.

Want to learn more?…  Browse my website: www.taxsecretsofthewealthy.com. Or have a question, call me (Irv) at 847-674-5295.

-END OF ITEM-

On December 17, 2010, the President signed the 2010 Tax Relief Act (New Law), after cutting a deal with Congress.

In a nutshell, here’s what the New Law does: extends for two years (a) the Bush-era income tax cuts (highest rate for all of 35%); (b) retains the favorable tax rates (15%) for long-term capital gains and qualified dividends; (c) significant estate and gift tax changes and; (d) a ton of other provisions beyond the scope of this article.

We are going to zero in on the most significant changes in the estate and gift tax area.

The Good News

Bottom line: The New Law applies to lifetime gifts and transfers of death for only 2011 and 2012 offering an exemption (pay no tax) on the first $5 million of your wealth per person. That’s a delightful $10 million – tax-free – if you are married. Any excess, over the $5 million ($10 million, if married), will be taxed at a 35% flat rate.

NOTE: The gift tax and estate tax are unified into one tax. You can use part or all of the $5 million/$10 million during 2011 and 2012 as a gift; any unused gift amount is tax-free for estate tax purposes.

The Bad News Makes The Good News A Joke

The New Law has a sunset provision. After December 31, 2012, the old law will be reincarnated: a measly $1 million exemption ($2 million, if married) and a stratospheric tax rate of 55%.

Outrageous!

And dumb. The 2010 lame-duck Congress replaced the uncertainty we suffered with for 10 years under the old law, with a two-year period of uncertainty under the New Law. Want to be safe? … Better die in 2010 or 2011. Married?… To get the full $10 million benefits, you both must die during those two years. Crazy.

The new joke – if the kids come to visit, better lock the bedroom door.

But Wait There Is Some Really Good News… Not a Joke

Let’s talk about the pleasant surprise – the two-year window you have to make a $5 million ($10 million if married) gift. Sorry, the window will close on December 31, 2012. Too bad. But what about gifts that you (and your spouse, if married) make during 2011 and 2012?… The gifts are good FOREVER. The IRS can’t take ‘em back or tax you. Unquestionably, Congress made an unintended mistake.

You Own A Closely Held Business

Here’s an example. Joe and Mary (married and affluent) make $10 million in gifts of various assets to their kids during 2011 and 2012. That $10 million, plus future income earned by the $10 million of assets, plus any appreciation of the assets will never be taxed to Joe and Mary… for as long as they live or when they die.

NOTE: In addition, Joe and Mary each can make annual gifts (including 2011 and 2012) of $13,000 ($26,000 total) to every one of their kids… really a continuation of the old law.

So, the real question becomes how can we maximize the tax benefits of this two-year gift tax window? First, I should tell you the challenge my typical worried-about-the-estate tax client throws at me: “Irv, how do I get the most significant assets I own out of my estate, yet keep control of those assets?” Well, we (my network of advisors and me) have been meeting this challenge for years. But Hallelujah!… the New Law, concerning gifts you can make in 2011 and 2012, gives us an easy way to keep huge amounts of your wealth in the family, instead of losing it to the IRS.

My network (other experienced estate planning experts I work with regularly) called a meeting to discuss the New Law. We all recognized that completed gifts made in 2011 and 2012 are a made-in-heaven-tax opportunity. We spent a fun afternoon exchanging ideas and came up with 14 ways to take advantage of the gift provisions in the New Law. We have come up with more since.

Following are three examples (that occur often in practice and for many of the readers of this column) and will enrich your family, instead of losing tax dollars to the IRS.

Business Succession

Joe (married to Mary) owns 100% of Success Co., which is run by his son Sam. Success Co. is profitable, growing in sales, net profit and value (now worth about $12 million). Joe wants to transfer Success Co. to Sam.

Here’s the simple plan: Step #1. Recapitalize Success Co. so Joe now has nonvoting stock (say 10,000 shares) and voting stock (say 100 shares)… a tax-free transaction.

Step #2. Joe gifts the nonvoting shares to an “intentionally defective trust” (IDT) with Sam as the beneficiary.

NOTE: For tax purposes, Success Co., because of discounts (typically, about 40%) allowed by current law, is only worth about $7.2 million (the actual gift tax amount) for tax purposes.

A few significant bonuses for Joe: Not only is Success Co. out of Joe’s estate, but the future substantial income will not be added to his estate. Nor is the company’s future appreciated value a continuing problem. Also, the IDT acts as a perfect asset protection device: protecting Joe as well as Sam (including keeping the trust assets away from Sam’s wife should he get divorced). And maybe best of all, Joe still controls Success Co. (because he still owns all the voting stock).

Finally, because Joe intends to keep working for Success Co., he can continue to take a salary and his usual fringe benefits. Also, we would put in a wage continuation plan, so Joe can keep getting a salary to the day he dies (in case he stops working and still needs income).

You Own Investment-Type Assets

We are talking about real estate (whether income producing or not, but excluding any residence), stocks, bonds, CDs, cash and similar assets. For example, Jake owns many of the assets just listed. Here’s the strategy: Step #1. When real estate is involved, we start by putting the real estate in one or more limited liability companies (LLC) as an asset protection device.  Step #2. Then we transfer the real estate LLC interest and the other assets to a family limited partnership (FLIP). Jake (married to Sue) transfers $11 million of such assets to his FLIP. The discounts (about 30%) under current law make the assets transferred worth only about $7.7 million for tax purposes. Step #3. Jake and Sue  give the limited partnership units (cannot vote), which own 99% of the FLIP to their kids. Jake and Sue retain all the voting units (1%) of the FLIP and keep absolute control of the assets transferred.

What if Jake needs or wants the use of funds inside the FLIP?… Easy enough… the FLIP loans the funds to Jake. He may pay back the loan, or die owing it, which would reduce his taxable estate dollar for dollar.

NOTE: Instead of transferring the assets to a FLIP, an IDT or other irrevocable trust might be used, depending on the exact facts and circumstances.

You Want To Create Additional Wealth Without Risk

This strategy actually has a number of variations… all legally taking advantage of the tax law and the favorable economic possibilities if you (or your spouse or both) are insurable for life insurance.

For example, (the following facts apply to many Americans, from the little guy to the affluent) Jim and his wife Jane (both 70 years old) have a large portfolio of conservative cash-like assets (stocks, bonds, municipals, CDs and the like) that they will never need to maintain their lifestyle. The portfolio grows every year… nice! But Jim is furious when he knows the IRS will get 35% (or more) in estate taxes when he and Jane die.

Strategy #1. Jim and Jane gift $6 million to a FLIP; which purchases $21 million of second-to-die life insurance (on Jim and Jane). The FLIP limited partnership interests are gifted to their kids (value about $4.2 million for tax purposes). Result: The $6 million is out of their estate. When Jim and Jane go to heaven, the kids will get $21 million. Tax-free (no income tax, no estate tax)… and oh, yes, NO market risk.

Strategy #2. Same facts as above, except this time the $6 million gift goes to the family foundation created by Jim and Jane. The foundation purchases the $21 million in life insurance, which Jim and Jane want to go to their alma mater (where they met).

Jim and Jane will save about $2.1 million (Federal and State) in income taxes because of the $6 million contribution to their foundation. They will use the income from the $2.1 million (and principal, if necessary) to buy $8 million of life insurance in an irrevocable life insurance trust.

Result: Charity (the foundation) gets $21 million… tax-free. The family keeps $8 million (or more)… $6 million, tax-free. Thank you, Congress, for your New Law.

In Conclusion

All of the above gives you a great opportunity. But the clock is ticking… By the time you read this, you will have only 22 months or less to take advantage of the New Law.

One caution: No attempt is made to cover every strategy available using of the New Law… Nor is every exception and possible tax trap considered. It is essential that you only work with advisors who are knowledgeable with the old law as well as the New Law. Also, it is critical that you revisit your existing estate plan in light of the New Law.

And be smart… always get a second opinion. Got a question, problem or concern involving the New Law?.. .Call me (Irv) at 847-674-5295.

Do you own (all or part of) a closely held business? Sooner or later – like it or not – you must deal with what is commonly called the “succession planning problems.” Hands down, the reason most readers of this column call me is for help with their business succession plan.
Interesting, most callers do not have an estate plan or, if they do, the plan is out of date. Let me say it loud and clear: There is no way to do a succession plan right, unless it is part of a comprehensive (a tax-saving strategy for every significant asset you own) estate plan.
But most readers are not even aware of their most valuable asset (often called “lifetime equity growth” or LEG for short). LEG is your ability to (a) earn income (of all types for the rest of your life) and (b) the fact that the value of most of your assets (because of inflation and/or simple increase in intrinsic worth) will grow over time  Plain logic tells you that LEG is crying out for a lifetime tax plan. Remember, you ain’t dead yet.
Also, remember, the estate tax can do no damage until you (you and your spouse, if married) go to heaven. If you are a guy, life expectancy is in the age 75 to 77 range… add 3 or 4 years for the ladies. As you get older, the life expectancy tables move the age up: for example, a 70-year old male has 13 more years to live; an 80-year old, almost 8 more years.

Stop!… take a minute. Guesstimate your life expectancy. Write down how many years your LEG probably will be increasing your taxable wealth (and your potential estate tax liability). And that’s why you need a lifetime plan (to keep your LEG in the family, instead of losing it to the tax collector).
Following is an example of a typical reader (Joe) who called me asking about a succession plan problem, that ultimately blossomed into the three plans (succession/estate/lifetime) listed above. Here’s Joe’s story.
Joe (age 61) owns 100% of Success Co. (an S corporation). Joe and  his wife Mary (age 59) have three children. Only one of the children (Sam) works in the business. Joe called me with a simple question: “What’s the best way to get Success Co. to Sam without getting beat up with taxes?” After a short conversation Joe agreed to send me some written information (about him, his family, Success Co. and his other assets).
Received the information. Reviewed it. Called Joe. Asked him some questions. It soon became clear that Joe had three main goals: (1) Avoid tax on the transfer of Success Co. to Sam; (2) Treat the two non-business kids fairly; and (3) create an estate plan that would get his wealth to his family (children and grandchildren) without being reduced by the estate tax when Joe and Mary die. “Yes”, I told Joe, the above goals are doable, but only with the creation of a lifetime plan, in addition to the other plans to be created. Joe agreed. Following is a brief description of the four plans (of course, they all dovetailed) we created for Joe. (In the end, really only one comprehensive plan.)

#1. The Succession Plan

The easy-to-do strategy is called an intentionally defective trust (IDT) and will accomplish Joe’s goal – no tax to Joe when Success Co. is transferred to Sam. A professional business valuation expert valued Success Co. at $16 million, but because of discounts allowed by the tax law, Success Co. was sold  to the IDT for $9.6 million (for tax purposes). Joe was able to keep control of Success Co. by retaining the voting stock (100 shares) and selling the nonvoting stock (10,000 shares) to the IDT.  An IDT saves about $200,000 (in taxes for the buyer – here Sam – and the seller – here Joe – combined) for each $1 million of the price (here $1.92 million taxes saved… 9.6 times $200,000).
#2. Plan to Treat Non-Business Kids Fairly

Here’s Joe’s special problem: Joe does not want the two nonbusiness kids in the business (a typical family business owner’s desire), yet he wants to treat these two kids equally (to Sam). But here’s the killer that none of Joe’s professionals could solve: Success Co. is worth $16 million (before discounts), but all of his other assets (two homes, 401(k) plan, stock portfolio, the real estate Success Co. rents and some other minor assets) only total about $6 million… too much ($16 million) for Sam, but not enough other assets (only $6 million) for Sam’s siblings.

What to do?

The answer is simple: Make each of the three kids equal one-third beneficiaries of the IDT. The trustee is instructed to keep the stock until the last of Joe and Mary dies. Then, the properly drawn buy/sell agreement kicks in. The IDT distributes the stock to the two nonbusiness kids, and the stock is immediately redeemed (bought by Success Co.) using the life insurance proceeds that funded the buy/sell to pay for the stock.

Note: If Joe dies first, the voting stock immediately goes to Sam so he can continue to run Success Co.

#3. Estate plan

We updated the wills and trusts for Joe and Mary. Nothing fancy. Most important was to make sure that all aspects of these new documents are compatible with the three other plans.

#4. Lifetime plan

The heart of any estate plan is always the lifetime plan. Why? The typical estate planning documents (really death documents) in #3 above are essential, but they do nothing until you die. Sorry, but then it’s too late to save estate taxes.
Sure, life insurance only pays after death, but buying life insurance is clearly a lifetime decision (typically when you and/or your spouse are young enough and healthy enough to make the premium cost acceptable).
The lifetime plan includes a wage continuation plan for Joe when he can no longer work, as part of the plan to maintain Joe’s (and Mary’s) lifestyle (for the time frame covered by life expectancy as discussed earlier in this article… and maybe, we hope, for longer). We used other tax-saving strategies: (a) a family limited partnership for the income real estate and stock portfolio; (b) a qualified personal residence trust for the two residences; (c) the 401(k) plan to help pay some of the required insurance premiums; (d) created a new management company to give special fringe benefits to Joe and Sam allowed by the tax law; (e) and a lifetime gifting program to the kids and grandkids to reduce the potential estate tax liability.
When all the plans were done, Joe was amazed at how quick and easy it was to accomplish every one of his goals. Joe quipped, “I’m a LEG up now.” One warning: all of the details of the above plans – and possible tax traps if done wrong – are not given. Only work with competent and experienced professionals.
Want to learn more about this fascinating subject?…Browse my website… www.taxsecretsofthewealthy.com There’s a ton of tax-saving information. In a hurry or have a question, call me (Irv) at 847-674-5295.

#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:

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.

Investors are suffering. Interest rates are at historic lows. The stock market, plagued with roller coaster-like volatility, is like a Las Vegas casino. Many readers of this column complain that it feels like they have been fleeced by Wall Street. Most have either totally or partially (usually a large portion of their portfolio) abandoned the equity market.

Where have these ex-equity players put their money?… in low-yield, fixed rate stuff like CDs, savings accounts and U.S. Treasury bonds.

Even though the readers know I am a tax guy, they seek my investment advice. Sorry, just don’t have those skills. But according to almost every reader I talk to, neither do their professional advisors have the skill to win in a down market or get them out without suffering a big loss.

What to do?

Would you believe that a hated enemy – the Internal Revenue Code (Code) – has the answers. There’s an old saying that goes, “You must know your enemy before you can defeat him.” We are about to apply some rules found in the enemy’s Code that will delight those who are conservative investors by nature or who have become conservative because of current conditions.

But first, let me tell you what my survey with clients and column readers who call me has taught me about the typical goals of a conservative investor:

1. Want to increase income

2. Want to minimize risk

3. Want to lower taxes

4. Want to maximize inheritance (to their family)

Okay, let’s go to work. For tax purposes there are two types of funds you can invest: (1) qualified funds (in an IRA, profit-sharing, 401(k) or similar plan) or non-qualified funds (usually in your personal bank account or funds you control in a business, trust, partnership or other entity).

There are an endless variety of tax-advantaged strategies to accomplish the four goals listed above. Following are examples of the three strategies we most often use in our real-life tax practice.

Hidden Equity Strategy (HES)

Lenny is the little guy (in a 25% income tax bracket/not enough wealth to worry about estate taxes); Sam is the supervisor (a bit higher income tax bracket/no estate tax problem); and Joe is the business owner (35% income tax bracket/55% estate tax-bracket, using 2011 rates). All are 70 years old, retired (except Joe) and in good health.

HES is a simple two-step strategy:

Step #1 – Purchase a lifetime income contract that pays a fixed annual amount every year for as long as you live. Divide the annual income into two parts: one part for income, the second part to pay premiums on a life insurance policy to replace the cost of the income contract.

The schedule below is an example that shows the results for Lenny (invested $250,000) and Joe (invested $2.5 million). Both were earning 2% on their funds before starting their HES.

The numbers speak for themselves: more “Spendable Income,” more “To Family.” Thank you Internal Revenue Code. (The numbers for Sam the supervisor would be similar.)

Qualified Plan Rescue (QPR)

For this example the cast of characters are identical and everything is the same except the funds are in a qualified plan (IRA, 401(k) profit-sharing, etc.)… in this case a rollover IRA, which was earning 2%.

This time the IRA funds are used to buy the income contract, a tax-free transaction at its inception (again, thank you Code). However, each annual income (when received by Lenny and Joe) is subject to the full income tax rate, the same as if a distribution had been made by the qualified plan.

You’ll love the results that follow:

Lenny locked in $250,000 (at his death) for his family while he will enjoy a $10,150 income per year for life (4.06% after tax on the $250,000). Joe, on the other hand, does not need the income and chose to use all of his “after-tax income” to purchase life insurance for the extraordinary amount of $4,642,800… 100% tax-free (from the estate tax).

How much would Joe’s family have received if he got hit by the proverbial bus?… only about $750,000 because of the double tax – income and estate – on qualified plan money. So the QPR strategy turned $750,000 of after-tax money into $4,642,800 (tax-free) for Joe’s family. Wow!

Obviously the QPR strategy is very flexible and can be designed to do tax miracles for your specific goals. The numbers for the likes of Joe usually look even better when Joe is married and the insurance involved is second-to-die.

Conservative investors life insurance (CILI)

Want to increase your income, legally avoid the income tax on that income, and have your capital (plus all earnings) go to your family tax-free? No, it’s not a fantasy. It’s CILI. It’s perfect for a guy like Joe, who is married to Mary (also age 70).

Joe and Mary buy a $3 million second-to-die CILI policy (it could be any amount) with an annual premium of $70,548. The policy currently earns 3%.

The payoff on their investment comes after the second death and is determined as follows. (This example assumes that after 10 years – age 80 – both Joe and Mary get hit by the same bus.) Their heirs (kids and grandkids) would receive:

1. Death benefit $3,000,000

2. Premiums paid

($70,548 times 10 years) 705,480

3. Interest earned on premiums

paid (at 3%, but would be higher,

If interest rates rise, or lower, if

Interest rates fall) 111,999

Total amount (tax-free) to heirs $3,817,479

Of course, the longer that either Joe or Mary lives, the larger the amount to their heirs.

The easy way to summarize a CILI investment is as follows: You get (1) your investment (premiums paid) back, dollar-for-dollar; (2) plus earnings (3% here) on premiums paid; (3) plus a guaranteed bonus, the death benefit (here $3 million); and (4) it’s all tax free (no income tax, no estate tax).

Neat! The Internal Revenue Code comes through again.

Important note: The exact numbers for any specific person in each of the above examples are influenced primarily by your age, your health and interest rates. Also, the skill of your advisor impacts the final results. So, don’t mess with an amateur.

Sure, sure, you want to know how an HES, QPR or CILI might work for you, your Mom/Dad or your grandparents.

So, I have made arrangements for readers of this column to get (from an experienced professional) all the information you need. Just fax your name and birthday (same for your spouse if you’re married), address and phone numbers (work, home and cell) to Irv Blackman at 847-674-5299. Mark “CODE article” at the top of the page. Have a question and can’t wait?… Call Irv (847-674-5295).

First, a bit of history. When the income tax rates were cut by Congress at the turn of the century (known as the “Bush tax cuts”), the amount of income tax revenue actually went up in the years that followed. The same result – tax revenues went up – followed significant tax cuts during the Reagan administration and Kennedy’s short term in office.

WHOA!!! There’s a clear pattern here: proven three times by the facts, as opposed to political posturing. Hey, Congress, do you get the message? Lower income tax rates produce larger tax revenues. Simple!

Yet here’s the current Congressional position: A majority of Democrat and Republican lawmakers want to keep the Bush tax cuts for families that earn $250,000 or less. A good start.

But look out!… Most Democrats would end the tax cuts for families earning more than $250,000. What group of taxpayers do you think earns over $250,000?… Successful owners of closely held businesses. Sorry, but as of now the answer to the question in the first paragraph of this article is ‘Yes’ for families earning $250,000 or less and a sad political ‘No’ for families earning over $250,000.
Bad news for successful closely held businesses – typically earn over $250,000 – that we know provide over 50% of the jobs in our country.
Maybe economic logic can sway enough Congressional votes to keep all of the Bush tax cuts in place. Here’s how. Let’s take a look at some of the problems that would be helped by
keeping income taxes down for all Americans:

1. improve the economy;
2. increase tax revenues;
3. help closely held businesses grow;
4. more jobs
5. with a little amendment to keeping the tax cuts, help alleviate the tragedy of banks not making enough loans to businesses.

One of the advantages of writing a tax column is that I get to talk to business owners all over the country… answering tax questions, solving tax problems, but mostly doing estate planning. No question about it, 2010 for almost every business owner I talk to is having a better year than 2008 and 2009.  Many are enjoying record sales and profits. But often taxes – even at the Bush tax cut rates – stunt the growth of the business. Growing businesses provide jobs (new employees put almost all of their earnings back into the economy), buy more inventory, equipment and make other necessary business expenditures. The ripple effect is positive for other businesses, their employees and, of course, the economy.

But growth requires capital to fund increased inventory, receivables and equipment. Bank loans – the traditional way of funding business growth – is usually not available in these crazy economic times.

What to do?… An amendment to the Bush tax cuts. Here’s the idea (it’s easier to explain by example). Suppose Success Company (Success), a closely held business, has a total of $1 million in inventory, receivables and fixed assets (basically equipment, computers and vehicles used in the business) on December 31, 2010. Suppose at the end of the 2011 the same group of assets total $1.3 million, an increase of $300,000. Success would get a deferred tax credit (DTC) of say 90% of the $300,000, or $270,000 (the DTC). Now assume that Success’ income tax bill is $370,000. The DTC would reduce the amount due to the IRS to $100,000 ($370,000-$270,000).

Each year the computations of the DTC would be done again, resulting in an increase of the DTC or payment of the prior year(s) tax because of a DTC decrease. Now don’t be a

nitpicker. Of course, there would be rules to help qualified small businesses grow, yet prevent cheats from cutting their taxes by misuse of the DTC rules.

Now, take a moment and go back to read the five positive impacts that lowering taxes will have. Do you agree? If so, join me in the fight to keep the income tax law and in addition, help closely held businesses grow. Pass this article on to your friends.

How can you help?… In two ways:

• Send a copy of this article to your representative in the House and to your two Senators;
• vote for those members of Congress who support tax cuts.

Let me end on a positive note. Can’t tell you exactly when (maybe before the November elections, but certainly shortly after the 112th Congress begins business after the election), but the estate tax will be changed to ease your potential estate tax liability. How?… Between $3.5 million (the House version) and $ 5 million (the Senate version) of your wealth will be estate tax free. That’s between $7 million and $10 million for you married folks. Nice!

Finally, no matter how the final estate tax law comes out of Congress (whether your net worth is $8 million or $80 million), we have figured out how to – legally – eliminate the estate tax. To learn how it’s done, browse my website: www.taxsecretsofthewealthy.com.

Questions or comments… Call me (Irv) at 847-674-5295.

The typical reader of this column hates paying taxes. Beating up the IRS – legally – is often their favorite indoor sport.

What tax do they fear the most?… Hands down, it’s the estate tax monster. To calm your fear, let’s start with a bit of good news: Your author, with the help of other experts, has learned – over 40 years of practice – how to win the estate tax game. What does this mean?… We have developed a System – used hundreds of times over the years – that can, does and will beat the estate tax monster… every time, no matter how large your estate.

Would you be interested in that?

But face it, even a perfect estate plan, at best, is in reality a death plan… because nothing happens until you die. Then, and only then, will your assets go to your heirs (or into a trust, partnership or other entity for their benefit).

All very good. But wait, you ain’t dead yet. In the meantime are your assets protected?… today?… tomorrow?… for the rest of your life? Let’s take a closer look at your situation together: Write your age here ____________ (and if married, your spouse’s age here ____________). If you are a guy and you wrote 41, you life expectancy is 77; at 52 it’s 78; at 63 it’s 81; at 74 it’s 84. Hey, even at age 86 you have 5 more years to enjoy life. Oh, you’re a gal, add 3 to 4 years.

What’s my point?… Well, your death plan should protect your assets from the IRS when you go to heaven. But what about protecting your assets from today (the day you sign your estate planning documents) until the day you go to that better place?

Sorry, but here comes the bad news: To be brutally honest, the reason almost all estate planning advisors don’t do asset protection is because they don’t know how. What about those advisors that rely on a software package?… They are helpless, asset protection is not part of the package. Just imagine going to the bank with a large amount of cash. Only a fool would not take the necessary precautions. In a like manner, it only makes good sense to protect your assets… starting today and until you go to the big business in the sky.

How and when should your asset protection plan be done? The when is easy: When you do your estate plan, do a lifetime plan at the same time. Your lifetime plan must include your asset protection plan.

IMPORTANT NOTE: Your lifetime plan includes such considerations as (1) how to maintain your lifestyle (and your spouse’s, if married) for the rest of your life; (2) how to deal with inflation; (3) succession planning for your business; (4) what if one of your kids gets divorced and (5) a host of other issues unique to every family and business owner.

Next, the how of asset protection: For most law-abiding Americans, asset protection is a three category subject: (1) protect you and your spouse; (2) protect your kids and grandkids; and (3) protect your business.

Before detailing the categories it is important to understand the goal of asset protection: to protect assets from possible lawsuits (even if you lose and are held liable), creditors, divorce claims and frivolous claims.

Following is a list of the basic dos, don’ts and strategies to make sure your assets (wealth) are protected.

Protecting you and your spouse

1. Your residence(s): Transfer to a “qualified personal residences trust” or hold title 50% in your revocable (estate planning) trust and 50% in your spouse’s trust.

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1. Other real estate you own (whether vacant or improved): Each property should be in a separate LLC. Exception, properties that are not too valuable can be grouped in one LLC.
2. Investments (cash/stocks/bonds/CDs, and the like, as well as your interests in the LLCs in 2 above): Transfer to a family limited partnership (FLIP).
3. Always carry umbrella liability insurance.
4. Never serve on the board of directors (profit or not-for-profit) without adequate error and omissions insurance.
5. Do not co-sign or guarantee loans for friends or family. (Your kids or grandkids could be an exception.)
6. Cars can be an expensive asset destroyer:
7. Don’t own the car of an adult child.
8. Don’t own vehicles jointly with your spouse.
9. Don’t let other people drive your car unless your insurance has proper coverage.
10. Getting married?… A prenuptial agreement is a must.
11. You and your spouse must execute property powers of attorney.

Protecting your kids and grandkids

1. Never leave property – including life insurance proceeds or retirement plan funds – directly to a minor… always in trust, to a FLIP or some other protection device.
2. Beware of the divorce devil.
   1. Never have your kids own life insurance policies on your life (or second-to-die).
   2. If your kids or other family members own stock in your closely held business, make sure you have a unit buy/sell agreement to be certain the business stays in the family.

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1. 1. Investments (See 3 in the first category): Give the kids limited (nonvoting) units in the FLIP, which is a perfect asset protection device, locking out an ex-spouse.
   2. If you live in a community property state (like Texas, California or Louisiana), remember that gifts and inherited property are not in the community (spouse has no ownership). In all other states, gifts and inherited property (and property owned prior to marriage) are non-marital property (spouse has no claim). Never comingle non-community property with community property or non-marital property with marital property.

3.        Sometimes kids must be protected from themselves. If a minor (or maybe even an adult) is a spendthrift, on drugs, has special needs, or other problems, set up an appropriate trust.

Protecting your business

1. Don’t operate your business as a sole proprietorship or as a general partnership… incorporate your business.
2. Keep your corporation thin… means only have the corporation have (own) those assets that are absolutely necessary to operate: cash (distribute excess cash if an S corporation), inventory and accounts receivable. Here’s the drumbeat:
   1. The following should be owned by separate LLCs and leased to the corporation:
      1. Land that the business uses to operate. It’s okay to leave the building in the company as a leasehold improvement.
      2. Expensive equipment, furnishings and signage.
      3. Vehicles (most lawsuits against businesses are the result of vehicle accidents).
      4. The company should not use its cash to make investments, own artwork or own any other non-business asset.

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NOTE: A thin corporation is not a good target for a lawyer going after big bucks.

1. 1. If you are a C corporation, become an S corporation so you can make distributions (dividends) without being double taxed.
   2. Your corporation should never own life insurance on any of the stockholders… proceeds open to creditor claims.
   3. Opening a new location or diversifying with a new product or service?… Start a new corporation.

WARNING: The above list does not cover all of the situations that require asset protection. Nor does the list include every do, don’t or strategy that a competent advisor might use.

Let’s sum up: Your death plan should be designed to protect your wealth from the IRS. Your estate plan – no matter how perfect – is not done unless it includes a lifetime plan (from today to the day the grim reaper gets you). Asset protection is an essential part of your lifetime plan… designed to protect your wealth from any third party or court that tries to take away any part of your wealth.

When you work with an experienced advisor, asset protection (as a part of your estate plan) is easy, quick and best of all, inexpensive.

Theodore Roosevelt, the 26th president of the United States, said it:

“In any moment of decision, the best thing you can do is the right thing. The next best thing is the wrong thing. And the worst thing you can do is nothing.”

This is the story of two brothers: Joe and Moe. Joe (now age 68) did the right thing by creating his estate plan at an early age… Monitoring it… And updating it, as necessary.

Moe (now age 72) on the other hand, was a champion procrastinator. As you will see, he did very little estate planning and what he did was out of date. However, when it came to business, according to Joe, Moe was on the ball: had a knack for spotting problems, solving them quickly and multi-tasking with timely efficiency his many areas of responsibility… the perfect business partner.

Let’s look back to the late 60s when the brothers started a business (Little Co.) in a two- car rented garage. They struggled in the beginning. Yet, slowly but surely the business grew in sales and profitability. Market share and profits increased almost every year. By any standards Joe and Moe were a success… and rich.

From the very beginning Joe insisted on a buy/sell agreement for Little Co., funded by life insurance. At Joe’s insistence the stock was valued every year and additional insurance acquired to fund the increased value of Little Co. Way to go, Joe! His buy/sell agreement insistence ultimately saves the day. You’ll love the story, which follows. First, a few more facts, mostly about Moe to set the scene for his train-wreck-tax disaster for his failure to put a comprehensive estate plan in place.

Moe had five kids, two of them (Sid and Sam) worked for Little Co. Sid and Sam were chips off the old block… good at business. Joe and Moe often talked about how the two boys would ultimately own and run Little Co. Joe has three kids, but none of them ever worked for Little Co. or showed any interest in doing so.

Although Joe and Moe took exactly the same salary and enjoyed equal distributions from the large profits of Little Co. (an S corporation), their individual net worth was significantly different. Aside from the value of Little Co., Joe was worth $23 million… He watched and managed his personal wealth, often seeking professional help. Moe on the other hand was worth only $15 million, plus his interest in Little Co., Moe simply did not pay attention to the millions of dollars he drew out of Little Co. over the years.

The only semblance of an estate plan for Moe was his 22-year-old will leaving everything he owned to his wife Molly. From time to time Moe would talk about doing a comprehensive estate plan (like Joe’s), including transferring his share of Little Co. to Sid and Sam. Too bad, but Moe died, suddenly, two weeks before his 79th birthday. Procrastination and the IRS were the clear victors. Of course, the buy/sell agreement kicked in. According to the agreement Little Co. had a value of $23 million… $11.5 million for Moe’s 50% share. The insurance on Moe’s life was $11 million. A few days after Little Co. received the $11 million in insurance proceeds (which was tax-free), Little Co. redeemed (bought) Moe’s stock for $11.5 million… for cash.

Moe’s widow, Molly (age 76), was now worth $26.5 million. No estate tax due now because of the marital deduction, but when Molly goes to the big business in the sky, the IRS will get its many pounds of flesh (the exact amount depends on the estate tax rates when Molly dies).

Another sad footnote: Molly – somewhat of a health nut – became uninsurable about a year before Moe died. The most basic estate planning strategy would have been a large second-to-die life insurance policy on Moe and Molly (both of whom were healthy – and very insurable – until near the end of this drama). The policy in an irrevocable life insurance trust (like Joe and his wife did) would have yielded millions of dollars of estate tax-free insurance for Moe.

Joe now owned 100% of Little Co. Sid and Sam were ready to take over running the company, but they owned no stock. Uncle Joe, as always, wanted to do the right thing. So, after consulting with me, he sold half (50%) of his Little Co. stock to an intentionally defective trust (IDT) for $11.5 million and made the beneficiaries of the trust his nephews: Sam and Sid.

Under the tax law rules; the $11.5 million, plus interest; to be collected by Uncle Joe from the IDT will be tax-free: no income tax, no capital gains tax. How will Sam and Sid pay for the stock, which they will receive from the IDT after Uncle Joe is paid in full?… The IDT is a sort of tax miracle worker. Sid and Sam will not pay one penny. The cash flow of Little Co. will be used to pay Uncle Joe.
When the IDT is finally done (Uncle Joe paid and the stock distributed to Sam and Sid) Moe’s sons will own 50% of Little Co. (25% each) and Uncle Joe will own the other 50%… just the way Moe wanted it.

The buy/sell agreement was updated, with appropriate language, to accommodate all possibilities – basically disability; death or any type of transfer – for Sam, Sid and Uncle Joe. Life insurance was acquired for Sam and Sid.

Of course, the intent of the new buy/sell agreement is that someday when Joe joins Moe in heaven,  Little Co. will redeem Uncle Joe’s stock and his two nephews would then own 100% of Little Co. Since Joe is still insurable, additional life insurance was acquired to cover the then fair market value of Little Co.

It should be pointed out that every detail of the plans for Joe, Sam and Sid (before and after Moe’s death) are not included in this article. The two most important points to take away from this article: (1) Do a comprehensive estate plan like brother Joe – and the IRS will not
become a partner sharing in your family’s wealth. And (2) failure to keep your estate plan updated, as required, guarantees the IRS a big pay day when you die.

Want to learn more about how to do your estate plan right?… Browse my website: www.taxsecretsofthewealthy.com. There’s a mountain of free information. In a hurry, call me (Irv) at 847-674-5295.

Hey, with a $7 million “freebie” to start if you are married and are worth about $14 million (or less), legally beating the estate tax will be an easy to attain goal.

The fact is we always have been able to beat the estate tax – whether you were worth $5 million or $50 million. Now, it’s just going to be easier. But let’s face it, an estate plan (really a death plan) does absolutely nothing until you enter the pearly gates. Logic tells you that a proper estate plan MUST include a lifetime plan (the period from today until you get hit by the final bus).

With the new unified credit (at least $3.5 million, $7 million if married) the estate tax monster won’t be scaring as many people. The goal of this article is to change the way you think about estate planning.

So for the moment, please pretend you are a client, sitting in my office, and we are going to talk about your estate plan.

Here’s the first question I typically would ask you, “Assuming, (#1 clients) you do not have enough wealth to worry about being hit by the estate tax… or (#2 clients) you know you will be hit hard by the estate tax but for the moment, forget the awful tax even exists and tell me, WHAT IS YOUR SINGLE BIGGEST CONCERN?”

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Let’s talk about the major difference between #1 clients and #2 clients separately. (You can only be one of them.) Hands down, the answer (most important concern) of a #1 client is, “To maintain my lifestyle (and my spouse’s) for as long as we live.” Sure the client has other concerns: for example, stay healthy, transfer the family business to the business kids, treat the non-business kids fairly… but LIFESTYLE is always stage center.

So professionally, we quickly take care of the #1 client death planning: wills, trusts, life insurance. Always, the real emphasis is on lifetime planning: transfer the business to the business kids… tax-free, yet have dad keep control of the business (via voting stock) for life. Make sure mom and dad have the best health insurance at minimum cost. Create a wage continuation plan for dad (from the family business) if someday he can no longer work. Protect personal assets.

What’s usually the biggest single lifetime planning task?… Make sure – with the help of others – that #1 clients get the highest rate of return on their investments, while minimizing risk.

Now let’s talk about the #2 clients. They are affluent. (Yes, they have an estate tax problem. Big time.) But they have enough wealth to no longer even think about any lifestyle concerns. Can you guess what is their biggest concern (aside from the estate tax, which we known how to legally conquer) that requires lifetime planning?… If the client still owns a business, transferring it (typically to the kids or key employees) in a tax-effective way is their biggest concern. Waiting until death only enriches the IRS… instead we use an intentionally defective trust to transfer the business (to the kids or key employees) – tax-free. Yet dad keeps control of his business for as long as he lives, but for estate tax purposes, it’s gone.

But what if the #2 client has sold the business and is now sitting on a pile of cash or over the years has accumulated a sizeable amount of cash and a significant stock and bond portfolio? Typically, those #2 clients also have a large amount (often in excess of $1 million) in

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their qualified plan (401(k), profit-sharing plan or IRA). Almost all either were or have turned conservative… their goal is to maximize their rate of return on these investable assets, while minimizing risk. One of the fun parts of the planning system we use for these clients is to help them accomplish this goal.

One final fact about #2 clients: Their wealth (in normal times) tends to double every six to nine years, exacerbating the estate tax problems. So, of course, we design a lifetime plan (unique for each client) to maximize the growth of the client’s wealth, but dovetail the lifetime plan with the estate plan to eliminate the impact of the estate tax.

It’s not as complicated as you think. Take this article to your professional advisor and discuss how the following strategies (in italics), which we use for most #2 clients, might apply to you:

(1) For your business: (a) a captive insurance company to significantly lower your property and casualty insurance costs and (b) an intentionally defective trust to transfer your business to your kids or employees (really the best succession plan) tax-free; (2) for your residence (a) a qualified personal residence trust or (b) a 50/50 revocable trust ownership; (3) for your qualified plan funds (i.e. 401(k) IRA) (a) a retirement plan rescue or (b) subtrust (both avoid double taxation of your funds) and turn them into 3 to 5 times more tax-free wealth; and (4) for your investment-type assets (like real estate, cash-like assets, stocks and bonds) a family limited partnership.

When the above strategies are done right (and all are easy to do), it is not difficult to escape the clutches of the estate tax monster.

And finally, if you have charitable intent, look into charitable lead trusts, charitable remainder trusts and those wonderful family foundations. You can leave millions of dollars to charity without reducing the amount your heir’s inheritance.

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Have a question: Take a look at my websites: www.taxsecretsofthewealthy.com and www.estatetaxsecrets.com. In a hurry, call Irv at 847-674-5295.

This article is a continuation of my series of articles dealing with “How to make it, how to keep it.”

New estate tax law is coming

Let’s start with some new tax laws Congress is likely to pass before 2009 ends. You must divide these new-tax-law candidates into two distinct groups: the good guys and the bad guys.

First the good guys (clearly great news for the how-to-keep-it fans).  The current law (for 2009 only) exempts your first $3.5 million of net worth from the estate tax ($7 million for married folks) with the top rate at 45% … the rate for 2010 is zero (no tax, even if you are worth a zillion dollars)… and then starting in 2011 a puny $1 million exemption ($2 million if married) and a top rate of 55%. Crazy law!

Two happy new versions are pending in Congress to replace the current estate tax law: (1) The budget outline passed by the House, which keeps the 2009 exemption ($3.5 million) and top rate (45%). I like it. (2) Even better is the Senate’s budget outline that raises the exemption to a delightful $5 million ($10 million for married couples) and – a drum roll please – lowers the top rate to 35%. Applause!

Place your bets. I’ll bet the farm that we wind up with a least the House version. A House/Senate compromise (more than $3.5 million) could happen.

More good stuff: The gift tax exemption (currently at $1 million) will probably soar to $3.5 million. Yeah!

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You won’t like the bad-guy possibilities: (1) Goodbye to a good old friend: LIFO (if terminated by new law, you’ll probably have 5 to 6 year to pay the income tax due). (2) The Washington heads are seriously talking about eliminating the long-standing discount rules (typically in the 35% to 40% range) when valuing a closely held business for tax purposes. A terrible and extremely costly tax change!

My advice: If you intend to transfer your business to your kids, DON’T WAIT. Take action now. TODAY! Make your transfer/sale to your kids (when you know how, it can be done tax-free) before the stupid new discount rules become law.

Now let’s take a look at two “How to make it” ideas. Each idea sounds too good to be true, yet each is a rock-solid concept. You’ll relish both of them.

Captive insurance companies (Captive)

As a business owner you must carry property and casualty insurance (P&C). Every year you pay your premium dollars (say $400,000) for your usual coverage: workman’s compensation, fire, theft, liability, vehicles and other risks. (Note: Healthcare costs are a separate expense.)

Suppose your claims for the year are only $100,000. Sorry, but your insurance carrier keeps the $300,000 excess. Worse yet, it (the premiums you paid significantly exceed your claims) probably happens year after year. But hey, can’t complain. That’s the way the P&C game is played. Only in a rare year, when your claims – usually one big one – exceed premiums paid, does your insurance carrier become a welcome friend.

So here’s the real question: Is there some way to keep those excess premiums (premiums you paid less claims paid by your carrier), yet be covered if a catastrophe strikes?

Enter Captives. The Internal Revenue Code [Section 831(b)] allows you to form a Captive. You, or more likely a younger member(s) of your family, owns the Captive. Say Your Co. pays Captive that $400,000 in premiums, which Your Co. deducts. Here’s the beauty of the

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tax law: Captive not only receives the $400,000 tax-free but invests it for earnings. Premiums plus earnings (called “unused reserves”) are available to pay your claims. A concept called “reinsurance” covers Your Co. should your unused reserve not be large enough to pay claims.

Wait, there’s more. A Captive can insure risks that your regular P&C carrier will not insurance (for example, loss of a key customer, supplier or employee, product warranties and an endless stream of other similar risks)… same too-good-to-be-true-tax deal: You deduct the premiums, Captive receives them tax-free.

Is a Captive for you?… the Answer is ‘Yes’ if your annual before-tax profit is in the $1 million range. Check out Captives. You’ll be glad you did.

Premium financing for life insurance is back

Life insurance is required for many purposes: pay estate taxes, provide for your family, pay debts and, if you know how to do it, life insurance is the best tax-advantaged investment I know. It’s an investment that never loses (death is guaranteed) and your profit (policy proceeds less premiums paid) is tax-free (no income tax, no estate tax).

One problem with life insurance: The blasted stuff costs money… for premiums. Is there some way to have your cake (a large amount of life insurance coverage) and eat it too (no or minimal out-of-pocket costs for premiums)? Because of the current credit crunch, premium financing (for life insurance) has been on a long vacation. But it’s back. Lenders – if you know where to find them – are back in the premium financing game.

How does premium financing work? Instead of you or your trust paying premiums, the lender pays your premiums (creating a loan). Loan interest can be paid or capitalized (added to the loan). Of course, when you go to heaven, the loan is paid back out of the insurance proceeds… while your heirs get the balance of the insurance coverage tax-free (typically $5 million, or more).

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Results: Your family is enriched (tax-free) at your death, while your premium cost during life is zero or miniscule.

If you need a large amount of life insurance (or just want an investment that creates tax-free wealth) premium financing is at the head of the class for “How to make it.”

And what about the future?

The nature of my work (primarily lifetime tax planning that dovetails with your estate plan and related areas) requires me to always keep an eye on what the future – world and American – economy might look like down the road.

I’m not smart enough to be both a tax guy and an economist. But I read a lot. My favorite and most accurate economic forecaster is Adrian Van Eck (been reading his newsletter, “Hotline on Money and the Economy” for about 25 years). He never has missed calling a trend – good or bad – in all those years.

Here’s a recent quote that says it all, ”Instead of a new Great Depression, we may now be looking at boom years ahead such as we have not enjoyed for a long time” (5/1/09 newsletter).

Don’t have room to give you all the reasons, but I’m bullish on the economy turning around. Are you? If so, plan for success. Aggressively seek new business. Tighten your business belt as necessary but don’t downsize.

Most of all, get your lifetime tax plan and your estate plan done. Enjoy strategies that make you wealthy (or wealthier).

Want to learn more about how to make it and how to keep it?… Browse my website, www.taxsecretsofthewealthy.com or if you have a question call (Irv) – 847-674-5295.