Estate Tax | - Part 3

Archive for the ‘Estate Tax’ Category

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.estatetaxsecrets.com.

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 »

Did your lawyer (inadvertently) rip you off

Wednesday, April 29th, 2009

Joe (a 63-year old reader of this column who hails from Iowa, but winters in Florida) almost cried when talking to me on the phone. He said, “I still want to kick myself for thinking my estate plan was done. For years I was convinced that my plan was perfect.

“I never stopped reading and studying. You know, articles. Even books. All my professionals assured me my plan was the best it could be. I religiously attended seminars. I consulted regularly with my CPA and several lawyers. All confirmed that the estate plan drawn by my lawyer Mike was right for me and Mary (Joe’s wife).

“It never occurred to me that so many estate planning experts could be so dead wrong or that there’s a better way to transfer my business to the kids and deal with my other assets. Not until a friend brought me a small pile of your articles.

“I immediately read and reread the articles. The next day, I went to Mike’s office. Basically he gave three reasons why the dozens of concepts and ideas in your articles wouldn’t work for me: don’t apply to me, never heard of it or he’ll check it out and call me.”

The above summarizes about 20 minutes of Joe telling me about his years of planning with Mike (a friend and well-respected lawyer who specializes in estate planning).

Then, I asked Joe a series of blunt questions. His answers revealed Joe’s professionals had crafted a traditional estate plan.

My bet is that 90 percent of you married guys reading this article also have a traditional estate plan. What is it? Here’s the traditional plan Joe had (See if it sounds like your estate plan, as you read further).

Joe’s plan centers on two basic strategies: First, the plan takes advantage of the unified credit (actually $2 million is tax-free in 2006, 2007 and 2008; rising to $3.5 million in 2009. There is no tax in 2010. In 2011 the credit falls to $1 million). By using a two-trust arrangement (most often called Trust A and Trust B; marital trust and family trust or similar names), Joe and Mary each will escape tax on the amount of their unified credit, depending on their year of death. Second, the couple’s plan takes advantage of the marital deduction, which means zero estate tax when the first of Joe or Mary passes.

That’s it: the traditional estate plan that we see in all 50 states. That was Joe and Mary’s plan. Is your plan the same? Similar?

What’s the guaranteed result? The plan prevents the IRS from collecting a dime at the first death (of either Joe or Mary). Good! However, when the second spouse dies, the IRS gets its pound of flesh. In this couple’s case it’s a ton. If their wealth stayed the same, from today until the day both deceased, their estate tax would have been $4,655,000.

You’ll love the rest of the story.

Joe said, “Irv will you give me a second opinion?” I agreed. Joe sent me a standard package of information (tax returns and financial statements — both business and personal; family tree; and his estate plan documents). After two more telephone conversations, we pinned down Joe’s goals: for him and Mary, his successful business (wanted to leave it to his middle son) and his family (four kids and six grandchildren).

Three weeks later I called Joe and outlined the wealth transfer plan I had created (with the help of my network lawyer, Don). Joe’s family will receive every dime of his and Mary’s wealth, probably more (we actually created additional tax-free wealth because we took advantage of the tax-free environments, particularly strategies involving life insurance and charity — available in the tax law). Gone was the $4,655,000 estate tax obligation to the IRS.

A delighted Joe couldn’t help feeling ripped off by his lawyer’s traditional estate plan. Don and I explained that Mike’s plan was the norm.

After our comprehensive plan was reduced to writing (five new documents and some modifications to the trusts that Mike wrote), we submitted the new plan and documents to Mike. He was easy to work with. Don and I answered his stream of questions. Mike — after about three weeks of “review and research” (his words) — fully endorsed our plan.

For me this is a rewarding story, because it shows that the message we try to deliver — you can always win the estate tax game — is getting through to the readers of this column

If you are married and have a traditional estate plan (the same or similar to Joe’s), most likely your plan is not complete.

Think second opinion.

Tags: assets, bet, cpa, family trust, lawyer, lawyers, marital trust, seminars, trust arrangement
Posted in Estate Tax, Family Tax Issues, Tax Strategies | No Comments »

How to turn a tax tragedy into a wealth-building miracle

Wednesday, April 29th, 2009

Do you have a large amount of money in an IRA, profit-sharing plan, 401(k) plan or other qualified plan? Or know someone — family, friend or co-worker-who does? Then, this article will not only save you a ton of taxes, but will show you how to dramatically increase your after-tax wealth tax-free.

This is one of those bad-news, good-news tax stories. First, the bad news. Some day the money in your plan must be distributed: to you or your beneficiaries. If you make the mistake of becoming rich, those beautiful dollars that took you decades to accumulate will be worth only in the 27 percent range to you and your family. You see, the IRS will get the rest in taxes. Yep, typically you will lose about 73 cents out of every dollar because you must pay two taxes on your plan distributions: income tax and estate tax. It’s even worse in some high-tax states like New York (check with your accountant).

How do I define rich? You are irrevocably in the highest income tax bracket (say 40 percent, state and federal) and highest estate tax bracket (55 percent, using 2011 rates.) Sorry, but the tax collector will take the lion’s share of your plan assets whether you get plan distributions during life, or the distributions go to your heirs after death.

Can anything be done to prevent this tax robbery? Yes! Here comes the good news. Regular readers of this column know I’m part of a national tax network (other professionals who work together and share tax knowledge). Well, some of the experts in the network have devised two tax concepts to enrich your family instead of the IRS. These concepts are designed to help individuals who have accumulated large amounts (from $200,000 to millions of dollars or more) in their plans.

Suppose you have $1 million (fill in your own exact number) in one plan or all of your plans combined. If you fail to take advantage of one or both of these concepts you will lose $730,000 (or more) in taxes to the IRS. Just take 73 percent of the amount in all your plans, and you can clearly see the full tax-disaster picture. Of course, your local tax collectors (state, as well as your local county or city) may grab an additional piece of the tax action. Now, let’s look at each concept separately.

The first concept — called the Single Premium Strategy (SPS) — to overcome the tax robbers combines three strategies:

• An immediate-pay annuity (typically a joint-life annuity if you are married);

• A life insurance policy (second-to-die if you are married) and;

• An irrevocable life insurance trust.

In one real-life case, an unmarried reader of this column turned $325,000 into $2,878,385 (all taxes paid). Another reader, who is married, turned $270,000 into $3,496,063 (all taxes paid). Single or married, it’s smart to get an exact quote of how much tax-free wealth an SPS would create for you and your family.

The second concept is named Retirement Plan Rescue (RPR) When using an RPR, your qualified plan uses the funds in the plan to buy the insurance: either for a single life or second-to-die for a husband and wife. A married reader (Joe) used an RPR to buy $10 million of second-to-die insurance, which will go to his kids tax-free. Joe actually turned $567,900 into $10 million. Joe’s wife Mary called the entire transaction a “tax miracle.”

You’ll also be surprised at how easy the above strategies are to do. So, if you are lucky enough to be rich, but unlucky enough to have a substantial part of your wealth in a qualified plan (IRA, profit-sharing, 401 k or similar plan), you owe it to your family to take a close look at the above two tax-miracle concepts and it’s easy to do.

I have arranged for readers of this column to get a free analysis of their plans for both of these concepts. Just fax your name and birthday (also your spouse if married), the total amount in all your plans combined; and all phone numbers (business/home/cell) where you can be reached to 847-674-5299. Please mark SPS and/or RPR as the top of the page. You are welcome to include other information, questions or problems concerning you, your business or your family.

Tags: accountant, amount of money, bad news good news, beneficiaries, co worker, exact number, family friend, heirs, income tax bracket, IRA, IRS, plan assets, plan distributions, profit sharing plan, robbery, tax knowledge, tax states, wealth tax
Posted in Estate Tax, General Tax Strategies, General Tax Talk | No Comments »

Don’t lose a lifetime of wealth to the IRS

Tuesday, April 28th, 2009

Many business owners spend a lifetime accumulating wealth for their families, yet lose it to the IRS why?

The tax law frustrates successful business owners at every turn. Never have I seen this frustration expressed better than in a letter from a reader (let’s call him Joe) of this column, a portion of which follows word-for-word (except the names have been changed).

“Mary and I spent the better part of a year creating a plan to leave our worldly goods [Joe and Mary are worth about 4.1 million] to our [two] single sons, one of whom is in our business.

“You can see from our wills, revocable trusts and the two green manuals from the Family Planning Group, [professional advisors specializing in business succession and estate planning], our tax attorney and our CPA, who sat in all of our meetings, that we are trying to do the right thing. Just what that means, I don’t know, but it seems that if Mary and I went to Vegas and lost every dime there would be no taxes, yet if we live a reasonably decent life and try to pass on our savings to our children and to charities, Uncle Sam steps in and decimates a lifetime of savings.”

The letter was accompanied by a stack of documents and financial data, (actually the same information made available to Joe’s threesome of advisors). What’s so interesting about Joe and Mary is that they are a poster couple for the six most common maintaining your lifestyle and estate tax problems — that follow — facing millions of family business owners:

• How to transfer your family business when you have one child (or more) in the business and one child (or more) not in the business;

• How to maintain your lifestyle (and your spouse’s) for as long as you live;

• How to invest your excess funds;

• How to treat your children fairly;

• How to get your wealth to your children (or other family members) without being “decimated” by the IRS;

• How to control your business for as long as you live.

It should be noted that all of Joe’s advisors were smart and experienced practitioners in their respective areas. Then, why was Joe still searching for better results than this group could deliver? Simply put, Joe saw blue every time he thought of the $1 million-plus tax bill he was told he must pay to the IRS. Since Joe and Mary are like so many other family business owners (the amount of wealth is almost immaterial, it could be $3 million, $30 million or more), following is the basic plan (as your read, think how the same or a similar plan would solve your problems: for the rest of your life and when you get hit buy the final bus) we implemented for them. It’s also the six-step core plan (the planning strategies are italicized) we create for most business owners, who want to (1) maintain their lifestyle for as long as they live and (2) to finesse the estate tax and get 100 percent of their wealth to their family. All taxes, if any, paid in full:

1. The business is transferred to the business child (or children) using an intentionally defective trust.

2. A subtrust or retirement plan rescue (using qualified plan funds, typically a profit-sharing plan, 401(k) or rollover IRA) is used to purchase second-to-die life insurance on Joe and Mary (proceeds to the children tax-free).

3. A family limited partnership (FLIP) is created to hold all of Joe’s and Mary’s assets (usually investments, like real estate, stocks and bonds).

4. Invest a portion of available funds (in your qualified plans, business or personal) in senior settlements (SS). Maintaining your lifestyle is easier with SSs, which earn over 15 percent — without market risk-per year. These SSs are made available by a public company (trades on the NASDAQ) that has been enjoying a 15.82 percent rate of return on average for 15 years.

5. An annual gifting program is started immediately to transfer the FLIP interests to the children (typically, the non-business children).

6. The death documents (will and trust) are designed to clean up all of their goals and asset distributions that were not accomplished during their life by the first five steps of the plan. Notice that the first five steps are done while Joe and Mary are alive — a must if you want to maintain your lifestyle and win the estate tax game. A will and trust (really a death plan — as opposed to a lifetime plan) just can’t get the job done.

Joe and Mary will control all their assets — including the business — for as long as they live. Again, we want to pound this point home: The plan is essentially a lifetime tax plan (the first five steps). The real secret is to do lifetime planning, not only death or estate planning (the sixth step), like Joe’s advisors did.

After our six-step plan was put in place, the wealth that will ultimately go to the children of Joe and Mary will be in excess of $5 million. We actually created additional tax-free wealth, instead of losing over $1 million to the IRS. Most importantly, Joe and Mary will be able to maintain their lifestyle — allowing for an inflation rate of up to five percent — for as long as they live.

As regular readers of this column know, we do a reader test from time to time (Joe was part of the last-reader test).

So, if you want to maintain your lifestyle for life, have an estate tax problem or own an interest in a closely held business (particularly if you want to transfer the business to one or more of your kids), you are invited to join the test.

In order to participate, please send the following information (send copies, do not send original documents):

1. For your business — Your last year-end financial statement.

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

3. A family tree — Your name and birthday. Same for your spouse, kids and grandchildren.

4. Estate documents. It’s not necessary to send copies of your wills and trusts to start.

Send to Irv Blackman, Estate Plan Test, 3960 Deer Crossing Court, Unit 102, Naples, FL 34114. (If you have a question call, 239-417-9732).

Just one more point: If you want to learn more about SSs (whether or not you join the Estate Plan Test), please fax your name, address, phone numbers (business/home/cell) and estimated amount to invest (the minimum is $50,000 for accredited investors) to 847-674-5299.

Okay, that’s our plan to help your do your plan. Let’s hear from you.

Tags: accumulating wealth, business succession, charities, cpa, decent life, do the right thing, family business owners, family members, family planning, frustration, IRS, planning group, professional advisors, stack, successful business, tax attorney, threesome, uncle sam, wills, worldly goods
Posted in Estate Tax, Family Tax Issues, General Tax Strategies, Investment Strategies, Planning | No Comments »

Want To Get Real estate Out Of Your Corporation — Tax Free?

Monday, April 20th, 2009

Do you have real estate in your corporation? If so, raise your hand and keep reading. About once a month, we get a call at the office asking a question something like this: “How can I get real estate out of my corporation without being taxed to death?”

Actually, we could write a small book about the various facts and circumstances that impact on how-to-remove-real estate from your corporation. The book would answer many questions. Stuff like: Are you a C corporation or an S corporation? Are there retained earnings? And how much? How much has the real estate appreciated? And on and on.

Each additional fact might change the tax strategy needed to answer the question — to cover all the possibilities is beyond the scope of this column. Instead, let’s set up the facts and circumstances that represent over 95 percent of the calls and the recommended solution to get-the-real-estate-out-of-the-corporation problem.

Typical facts and circumstances

Joe owns Success Co., a C corporation with a large amount of retained earnings and one or more pieces of real estate that has significantly appreciated in value. Most of the time the real estate has a building on it, but it could be vacant. (If Success Co. is an S corporation, it has a large amount of old C corporation earnings frozen in place, and the same real estate facts).

The solution

As you read what follows, keep in mind that you don’t have to know how to build a car in order to drive one. Put it another way: Don’t sweat the technical details; simply concentrate on the unbelievable favorable tax results.

Here’s the process:

• Joe forms a family limited partnership (FLIP) outside of Success Co. Then, Success Co. contributes vacant land (if the land is improved, Success keeps the improvements as leasehold improvements) to the FLIP. The land is worth $1 million (of course, it could be any amount). In exchange, Success Co. receives (ownership of 99 percent of the FLIP) limited partnership interests. Joe contributes $10,000 in cash to the FLIP for a one percent general partnership interest. As the general partner Joe has all the voting rights and makes all the decisions.

• Success Co. leases the real estate from the FLIP for $100,000 per year.

• An independent appraiser values the FLIP interest (after applying a 40 percent discount for general lack of marketability) at $600,000. Yes, the $1 million land is only worth $600,000, because it’s in the FLIP-for tax purposes.

• Success Co. contributes 99 percent of its limited FLIP interests to a charitable lead trust (CLT) with the following terms: The FLIP will pay $99,000 per year to the CLT for eight years. (NOTE: Typically the CLT then makes contributions to Joe’s Family Foundation). Let’s pause to follow the money. Success pays $100,000 rent to the FLIP; the FLIP pays $99,000 to the CLT, which makes contributions to Joe’s foundation.

• First some information: According to IRS tables, the value of the annuity (the $99,000 to be received for eight years by the CLT) is $569,000. So, the value of the one percent remainder interest (the part of the FLIP still owned by Success Co. immediately after the gift of the FLIP to the CRT) is only $31,000 (the $600,000 discounted value of the land, minus the $569,000 value of the eight-year annuity gifted to the CLT, leaves $31,000 as the value of the remainder interest). Simply put, Success Co. owns an asset that according to the IRS is worth only $31,000. Joe’s children buy the one percent remainder interest from Success Co. for $31,000.

• After eight years the CLT ends. Joe’s children, who are the beneficiaries of the CLT receive and now own 99 percent of the limited FLIP interests. Remember, they bought (and own) the other one percent from Success Co. eight years ago. The CLT and Success Co. are out of the picture. Better yet, the real estate is out of the corporation, owned 100 percent by Joe’s children. And there is a bonus: The real estate is also out of Joe’s estate. The entire transaction is tax-free to the FLIP, the CLT, Joe, the kids and Success Co. (might owe tax on the $31,000 sale).

Now one warning: The above is an easy way to get your real estate-tax-free-out of your corporation. But you must use experienced advisors who know how to dot the ‘i’s and cross the ‘t’s.

Typical facts and circumstances

The solution

Here’s the process:

• Success Co. leases the real estate from the FLIP for $100,000 per year.

Now one warning: The above is an easy way to get your real estate-tax-free-out of your corporation. But you must use experienced advisors who know how to dot the ‘i’s and cross the ‘t’s.

Tags: annuity, beneficiaries, c corporation, circumstances, corporation earnings, decisions, family limited partnership, favorable tax, IRS, leasehold improvements, partnership interest, possibilities, real estate, s corporation, strategy, tax free, tax purposes, tax strategy
Posted in Corporate Tax, Estate Tax, Planning | No Comments »

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