Archive for the ‘Estate Tax’ Category

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Winning the tax game for a family business requires solving two sets of problems: money, and human

Wednesday, May 6th, 2009

Recently, I read an article titled, “What Makes For Success?” by Kemmons Wilson, the founder of Holiday Inn. He said, “It is great to attain wealth, but money is really just one way – and hardly the best way – to keep score.”
Interesting quote, huh? Most readers of this column call me with tax problems because they have attained wealth (no doubt they have and do keep score in money), and they don’t want to share that wealth with the IRS…Perfectly normal. Yet, it’s amazing… Once the reader realizes that we really do know how to pass their wealth – all of it and intact – to their family, the conversation turns to other ways that they might keep score. Sure, they are delighted to find there are legal ways to totally win the estate tax game. But they readily admit that they don’t know how to deal with the other problems (other ways to keep score).
The other problems fall into the category of little kids, little problems; big kids, big problems. Stuff like which of my kids should run the business?… How do I treat the kids fairly?… What about the non-business kids?… What happens if one (or more) of my kids gets divorced?… How do I take care of my wife (the second one who is 15 years – or more –younger than the caller)? The callers tell me about family problems, business problems and/or assorted personal problems. To me every word is important, even though I’ve listened to so many tales of woe before (but although similar, each problem has its own peculiar twists and turns).
Let’s face it. Stuff happens. After years of solving wealth transfer, business succession (usually the business is at center stage) and estate planning problems, experience has taught me that solving only the money problems can never yield a perfect plan.
The human stuff – your spouse and kids support your plan – must be solved too.
What about your son-in-law or daughter-in-law?… A hate or love relationship? I know, it sounds like cornball. But if you really want to win the game of life after you have won the money game (really the easy part), you must attempt to solve the human part…the emotional stuff.
Here’s my suggestion to start the process. Make two lists: the money-problem list/the human-problem list. Solve the money-problem list first (usually you are home free if you solve these three money problems: (1) maintain your lifestyle – and your spouse’s – for as long as you live: (2) transfer your business to the business kids… tax-free; and (3) kill the estate tax.
Then, it’s easier to tackle the human-problem list. Interesting, many times solving the money problems solves some (often all) of the human problems. Finally, you must work with experienced professionals who know how to solve both problems: the money problems and the emotional human stuff that comes with accumulating wealth and trying to pass it on.
One more thing: each piece of your plan must be part of a single comprehensive and integrated plan, all implemented at the same time. Piecemeal planning, based on my 50-plus years of experience, is a disaster that not only enriches the IRS, but fails to satisfy the normal human desires of a typical family.
Call Irv Blackman 847-674-5295 if you want to talk about your stuff: The money problems… The human problems… Or both.

Posted in Corporate Tax, Estate Tax, Featured, Uncategorized | Comments Off

The best way to handle a new business opportunity

Wednesday, May 6th, 2009

Every year, this must happen a million or more times. What? A successful family owned business is presented with or dreams up a new business opportunity with good (maybe even great) profit potential. Maybe a new product. Or a new service. An old customer wants you to make part X; you’ve been making part Y for years. A new store. A new geographic territory. The possibilities are endless.

What does the typical successful family business do with these opportunities? Want to guess? The sad answer: Add them to its present business.

What’s the obvious tax result? More income taxes, with profits of the new business opportunity being taxed at the highest rate. Worse yet, it balloons the family wealth for estate tax purposes. Not a smart tax strategy. You are enriching the IRS, instead of your family?

Whether your kids are babes in arms or experienced business adults active in the family business, this is what you should do with these types of opportunities: (1) Let your kids get all or the lion’s share of the income. (2) Keep all or most of the value of the new venture out of your estate.

There are two basic way s to get this job done right.

Situation 1: You want the kids to own and control everything.

Situation 2: You want the kids to own the venture (for tax purposes), while you control the management.

This is the classical way of handling the first situation. Loan the kids (or their new corporation, Kids, Inc.) the money needed to fund the new venture. Or you borrow the money from the bank and then loan it to Kids, Inc. Charge the going interest rate. The kids can deduct the interest. If you like, you can gift the principal of the loan to the kids at the rate of $12,000 per year ($24, 000 if you’re married) per child.

The second situation is solved in about the same way as the first, except Kids, Inc. issues voting stock (say 100 shares costs you $100 and you own all of it) and nonvoting stock (say 10,000 shares, which the kids own at $10,000). Make additional loans as required. You own less than one percent of the value (for tax purposes) of Kids, Inc., but you have absolute control. Cool!

Posted in Corporate Tax, Estate Tax | No Comments »

How a second opinion enriched Joe and his family at the expense of the IRS

Wednesday, May 6th, 2009

This is a war story. Joe, a 60-year old reader of this column, owned 100-percent of Success Co. He called me and wanted to know which of two estate plans he should choose.

Here are the significant facts: Joe’s wife Mary is 53 years old. His only child Sam, 31 years old, has worked in the business since he was 12. Sam owns one share of Success Co. stock; Joe owns all the rest of the stock: 199 shares.

The business is worth $4 million and has enjoyed about a 10 percent growth in profits in each of the past five years. This growth should continue into the future. Joe’s total net worth is $10 million including a residence, various investments (mostly the real estate leased to Success Co. and a portfolio of stocks and tax-free bonds) and $950,000 in a profit-sharing plan.

The two estate plans Joe asked me to review (“Give me a second opinion” in his words) follow. At the core of both plans was a $4 million life insurance policy on Joe’s life.

Plan 1: The life insurance policy would be owned by Sam. Joe would gift Sam the annual premiums. At Joe’s death Sam would buy Success Co.’s 199 shares from Joe’s estate for $4 million.

Plan 2: Success Co. would own the $4 million in life insurance and at Joe’s death would redeem the 199 shares from Joe’s estate.

In the end, the final results would be exactly the same: Sam would own 100 percent of Success Co. and the estate would have $4 million in cash instead of $4 million in stock. First, the good news: (1) Joe’s estate would owe no income tax on the sale of the stock. Why? Because the estate would get a raised basis equal to the fair market value of the 199 shares on the date of Joe’s death. (2) No estate tax because the $4 million of insurance proceeds will wind up in Mary’s trust and receive the benefits of the 100 percent tax-free marital deduction.

Sounds pretty good. Joe loved it.

Yes, it is a good plan. Certainly better than no plan at all. As a matter of fact, either of the plans outlined above — or some variations — is the most popular way of transferring a business to the next generation. Now the bad news: two problems always cause us to turn thumbs down on any such plan: (1) Joe’s team of professional advisors forgot that Mary did not need the income that would be produced by the $4 million of insurance proceeds. The other $6 million of assets owned by Joe is more than enough to take care of her lifestyle needs. (2) When Mary passes on, the IRS is guaranteed a big payday; 55-percent of the $4 million. That’s right, the IRS will get $2.2 million and the family only $1.8 million. Plus, a huge undeserved bonus to the IRS of 55-percent of the after-income tax balance on the income in (1) above, which is explained in the following paragraph. An outrage!

Continuing with (2) above, watch this tax disaster unfold. Mary is a healthy 53-year old with a normal life expectancy to age 83. Her grandparents, on both sides, all lived to age 92 or older. Good genes.

Mary’s mom and dad are in their late 70s, healthy and lead an active lifestyle. Let’s say Mary lives to age 85. That’s 32 years of earnings on the $4 million in her trust. Let’s use a conservative after-tax earnings of four-percent. Have you any idea of how much that $4 million will grow to in those 32 years? Would you believe $16 million? Really that’s the number. And what do you think the IRS’s bite would be? An amazing $8.8 million. Lousy planning! Yet, that’s the way most business owners, on the advice of their professionals, do it.

What should you do when your facts are the same or similar to Joe’s facts? Here’s the four-step plan we put in place for Joe:

Step 1: Success Co. elected S corporation status. We recapitalized the company so Joe wound up with 99.5 percent of the voting stock-100 shares-(So Joe could keep control of Success Co. for as long as he lived.) Then, Joe sold the non-voting stock-19,900 shares-to an intentionally defective trust (IDT).

The non-voting stock, under the tax law, is allowed to take various discounts. So, the value of the Success Co. stock Joe sold to the IDT, for tax purposes, was only $2.4 million (actually almost all profit, because Joe started Success Co. 31 years ago with $12,000, most of it borrowed.) The IDT trust is a wonderful creature under the tax law that allows Joe to collect the entire $2.4 million (plus interest) tax-free. Also, the IDT takes Success Co. out of Joe’s estate, avoiding another big tax loss to the IRS. Now here’s the tax wow! Once the $2.4 has been paid to Joe, Sam will own all of the non-voting stock, as beneficiary of the IDT (free of all taxes-income, gift and estate taxes).

Step 2: We initiated a strategy called retirement plan rescue (RPR), using the $950,000 in the profit-sharing plan, to acquire a $4 million second-to-die life insurance policy on Joe and Mary. We created an irrevocable life insurance trust (ILIT) to own this policy. Because of the RPR and the ILIT, none of the $4 million in insurance proceeds will be subject to income tax or estate tax. Every penny will be tax-free.

Step 3: Joe decided to invest a portion of the funds in the profit-sharing plan in senior settlements (SS) to help pay the life insurance premiums in Step 2. SS earn an average of 15.82-percent per year without market risk (created by a public company that sells on the NASDAQ).

Step 4: We created a family limited partnership (FLIP) to hold Joe’s investments and started an annual gift-giving program to give interests in the FLIP to Joe’s and Mary’s other two children (neither are in the business).

The four-step plan we substituted for the original proposed plans will increase the amount of wealth Joe and Mary will leave to their family by over $5.5 million (increasing every year Mary lives and growing to over $14 million if Mary lives to age 85, as explained above) more than the original plans.

Joe was right: He sure needed a second opinion.

Posted in Corporate Tax, Estate Tax, Family Tax Issues | No Comments »

A report on the 2006 wealth transfer plan test

Wednesday, May 6th, 2009

Back in early 1995 I wrote a long article for this column titled, “A New Plan to Beat the Estate Tax.” The article said in part: “If you use the right tax tools and techniques together with the right professionals (lawyer, insurance consultant and CPA), you can and will develop a plan to beat the IRS. Every time. And legally.

“Remember, the goal of the typical estate planner is to reduce estate taxes. My goal is to eliminate the estate tax … every time.

“Now, gather ‘round y’all, there are three types of readers that call me for help: the reader who (1) has an estate plan but needs a second opinion, (2) has no plan or (3) has been working on a plan for years and just can’t seem to get it done. Which type are you? We (my staff and me) would like every reader who wants a second opinion or needs help completing their estate tax to join the tax-planning test.

“We will do a transfer/estate plan (and any necessary valuation) for each reader. We will report back to you (through this column) how many readers responded, how many we could and could not help, and a summary of the tax tools and techniques used to help the readers who respond.”

Since 1995, we have done the test almost every year. Well, the results are in for 2006. In all, 12 readers (more than we expected) responded; nine were in either category (1) or category (2) and, of course, were easy to help using the tax tools and techniques described in this column over the years.

One of the respondents — a 65-year-old from Oregon (Joe) — fell into the second opinion category. Joe’s letter said in part: “I enclosed all you asked for. I feel that I have a complete package, but it doesn’t hurt to get another opinion.”

Joe is a perfect example of a successful business owner of his generation. He started from scratch; built a successful business (Success Co.); wants to transfer Success Co. to Sam, his son. Joe is divorced and remarried. He works hard and plays hard. Joe is rich, but doesn’t feel rich. But in general, a happy camper.

But his “complete package” (estate/wealth transfer plan) is a disaster.

What’s amazing is that Joe’s assets (type and mix) and his objectives represent an almost perfect cross section of all 12 respondents. Read on. No doubt, you’ll see yourself.

Joe basically had five types of assets: (1) a residence worth $500,000 (all values rounded); (2) Success Co. ($4.5 million); (3) profit-sharing plan ($800,000); (4) other assets, real estate and other investments ($2.5 million); and (5) life insurance on Joe (death benefit of $500,000).

For estate tax purposes, if Joe got hit by the proverbial truck and his wife, Mary, predeceased him, his estate would be worth $8.8 million. (Note: Joe is no longer insurable. Mary is.) Taxes at Joe’s death, using his present wealth transfer plan and 2011 tax rates would be about $3.5 million.

What are Joe’s objectives? (1) “Want me and Mary to maintain our lifestyle for as long as we live”; (2) “control my assets, including my business, for as long as I live”; and (3) “pay as little estate tax as possible.” And then Joe, with an I-know-it-can’t-be-done laugh, asked: “Irv, maybe you can get all of my assets to my family, no reduction for taxes?”

The first step was to reduce the value of Joe’s assets for estate tax purposes, yet keep him in control. Without covering every detail and nuance of the plan, this is what we did on an asset-by-asset basis: (1) transferred his residence to a qualified personal residence trust; (2) sold Success Co. to an intentionally defective trust — only the nonvoting stock (which we created), while Joe kept all the voting stock; (3) profit-sharing plan (our magic bullet, which is discussed later); (4) transferred all other assets to a family limited partnership; and (5) transferred the life insurance to an irrevocable life insurance trust (ILIT). These five strategies lowered the total value of the five assets for estate tax purposed to about $3.5 million. We used up almost all of Joe’s and Mary’s unified credits ($1 million tax-free for each) in the process, leaving a potential tax liability (when Joe and Mary both die) of about $2 million.

Since we already have $500,000 of potential insurance proceeds parked in the ILIT, we only need about $2 million more of tax-free wealth to get all of Joe’s assets to his family-intact and after all taxes. What to do? Joe was not insurable.

We decided to buy a $2 million second-to-die life insurance policy (on Joe and Mary), using a subtrust as part of the profit-sharing plan. When all the smoke clears (and both Joe and Mary have passed on), the $2 million will go to Joe’s family-free of the estate tax-to pay any estate tax liability that may be due. Final result: Every one of Joe’s objectives will be accomplished and his entire lifetime wealth (about $9 million) will go to his family intact and all taxes paid in full.

It’s time for the next test.

So, if you want to participate in the 2007 test, please send the following information (send copies, do not send original documents):

For your business: Your last year-end financial statement (if 2006 is not done, send 2005).

Personal: A current personal financial statement for you and your spouse.

A family tree: Name and birthday for you, your spouse, kids and grandkids.

Estate documents: Do not send until we discuss the above.

Send to Irv Blackman, Wealth Transfer Plan Test, Blackman Kallick Bartelstein, LLP, 10 South Riverside Plaza, 9th Floor, Chicago, IL 60606.

What’s our job? To create the right plan for you, your family and your business (that will totally eliminate the impact of the estate tax) and to coordinate and work with your professionals.

Okay, that’s the plan. Let’s hear from you. Or, if you have a question concerning estate planning, business succession or related areas of concern call Irv at 847-674-5295.

Posted in Estate Tax | No Comments »

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 »

Do you have discretionary capital?

Wednesday, April 29th, 2009

Learn how to multiply it, tax free.

No question about it: Everyone would like to have “discretionary capital.” What is it? It’s spendable stuff (like cash or investments-for example, CDs, stocks and bonds-easily turned into cash). And you don’t need it now. Or ever. You could spend it, give it to charity or burn it without really missing it.

Yes, discretionary capital is nice to have. The IRS likes discretionary capital too; it will wind up with about 55 percent of it when you get hit by the final bus.

Just a little sidebar before we go on: The tax strategies and concepts you are about to read are not known by many tax experts or estate planners. Why? Because there are not many people with discretionary capital. So, it does not usually pay for professionals to go after such a small market. If you have any it, you’ll love what you are about to read. If you don’t, pass this article on to those who do. Then, they will love you.

The easiest way to grasp how a simple tax strategy turns discretionary capital from an “ho-hum” investment into an “exciting and wealth-building” investment is by looking at a real-life example.

Here’s the story: Joe (a reader of this column) is 77, has some serious health issues and is married to Mary (age 74 and in good health). Joe has lots of discretionary capital. Here’s the three-step strategy we structured for Joe and Mary:

• Step 1: Buy a $1 million second-to-die life insurance policy (on Joe and Mary). Pay for the policy with a single premium (just one payment; never pay another premium) of $347,103.

• Step 2: Gift the policy to you favorite charity.

• Step 3: Buy a second $1 million second-to-die policy. Pay annual premiums of $27,281. The policy will be owned by an (ILIT) irrevocable life insurance trust (to keep the $1 million death benefit out of the estates of Joe and Mary).

Final results of the strategy: After considering all the costs and benefits (i.e. premiums, time value of money, estate tax savings, income tax savings for the charitable gift and other factors) Joe’s net out-of-pocket investment is only $609,000. And look at the guaranteed return on his investment — $2 million: $1 million to charity and $1 million (tax-free) to his kids and grandkids via the ILIT.

Hey, not a bad deal. Joe can turn $609,000 into $2 million tax-free; or $1,218,000 into $4 million or any other number Joe and Mary feel best fits their charitable and financial goals. As a practical matter this discretionary capital strategy is really a tax-advantaged investment. For example, every $609,000 (using Joe’s numbers) you invest will get you back $2 million. Tax-free. Guaranteed.

And one more point: There are hundreds of variations of the above strategy. The exact strategy (and amount of your investment return) depends on your age, health, amount of discretionary capital and your goals. For example, some people use the concept to keep all the money (the $2 million, $4 million, whatever) in the family, or give it all to charity. Most people split it up (like Joe and Mary), but not necessarily 50/50.

If you are lucky enough to have discretionary capital, there are an endless number of tax-saving and tax-free-wealth-building opportunities. The concept works best if you are between the ages of 55 and 89, married or not.

Posted in Estate Tax, Investment Strategies | No Comments »

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by Irv Blackman

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