Archive for the ‘Family Tax Issues’ Category

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How You Can Enrich Your Family And Charity Too

Tuesday, April 14th, 2009

Patrick Henry once said, “I have but one lamp by which my feet are lighted, and that is the lamp of experience.” After years of working in the area of wealth transfer, business succession, estate planning and related areas my view of my client’s view of philosophy changed. Why? Experience!

You’ll like what you are about to read: How to actually make money while giving it away.

An important task for tax advisors (particularly those doing estate planning) is to make sure they have a clear understanding of each client’s goals. So, one of the questions yours truly (or my staff) would ask each client was (and still is), “Do you have charitable intent?” Most clients answered, “No” and that was that. For those that said, “Yes,” we had a large arsenal of tax-advantaged charitable strategies that would enrich not only charity, but substantially enrich our clients too. Every client always made an economic-after-tax-profit.

One day (about 10 years ago) we decided to dig a bit deeper when a client said, “No” to our charity question. Following are the two most important questions we asked, the answers and what (to our surprise) we learned.

First, a simple one word question: “Why?” (did you say “No”). About two out of every three clients responded with something like, “I don’t want to reduce the amount of my children’s and grandchildren’s inheritance.”

After learning this, it made good sense to follow with the next question. Actually two questions designed to get a ‘Yes.’ First, “Would you consider making a substantial gift to charity, if it would not reduce your heirs’ inheritance?” And if that didn’t do the trick, then second, “Would you make a large charitable gift if you could actually make an after-tax profit?” Then, almost all clients say “yes” or “show me how” or something similar.

The simple fact is that the tax law has two tax-free environments: charity and life insurance. Marry them and you are on the road to tax heaven. Let’s stay away from the technical stuff (like charitable remainder trusts and charitable lead trusts and their many ways to help you and charity) and look at two basic examples.

Suppose Joe and Mary (married and both age 65) buy a 15-year pay, $4 million second-to-die life insurance policy. The annual premium is $20,618 per $1 million payable for 15 years or a total of $1.237 million ($20,618 X 15 X 4). Joe and Mary set it up so their favorite charity is irrevocably the beneficiary of the policy.

Let’s take a look at the tax consequences of this charitable gesture by Joe and Mary. They are in a 40 percent income tax bracket (counting State and Federal combined), a 55 percent estate tax bracket (using 2011 rates).

First, let’s look at the estate tax picture: in a 55 percent estate tax bracket, the real story is that the IRS paid 55 percent of that $1.237 million. Since it’s gone, the IRS can’t tax it. So, the real out-of-pocket cost to Joe and Mary (after estate tax consideration) is only $557 thousand (45 percent of $1.237 million).

Second, let’s look at the income tax consequences of the transaction. In a 40 percent income tax bracket, Joe and Mary save $8,247 ($20,618 X 40%) each year as a charitable deduction.

Next, Joe and Mary buy $1.6 million of 15-year pay, second-to-die life insurance in an irrevocable life insurance trust (to keep the proceeds out of their estate). What’s the annual premium cost (only for 15 years)? You guessed it. Their annual $8,247 income tax savings.

Finally, let’s put it all together. Favorite charity will wind up with $4 million. Joe and Mary’s family will make over a cool $1 million ($1.6 insurance proceeds less the after tax cost-$557 thousand-of the premiums paid for the gift to charity).

Yes, it’s easy to “enrich your family (actually make a profit) and charity too.”

The above is only the tip of the iceberg. There are dozens of similar strategies to enrich your family while you enrich charity. This example (the one with the best leverage) is “premium financing” where $500,000 can be turned into $6.5 million for Joe and Mary and then shared with their favorite charity. Joe and Mary can divide the $6.5 million, $5 million to their family and $1.5 million to charity (or in any other ratio they desire). Now, $500,000 turned into $6.5 million. That’s tax and economic leverage!

Most of the time favorite charity is your own family foundation, that bears your name. By now you get the idea: if you (or your spouse or both) are lucky enough to be insurable, you can leverage small amounts of capital (a $500,000 investment or less, paid out in small amounts over many years) to mushroom into large tax-free amounts ($5 million or more). Divide your tax-free profits between your family and charity any way you desire.

Join the tax-free wealth-creating fun. For more information on how-to-do it for your family (and/or your favorite charity) send a copy of your personal financial statement to Irv Blackman, 3960 Deer Crossing Court, Unit #102, Naples, Florida 34114. Please include all phone numbers where you can be reached: work, home and cell.

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Retiring? How To Keep Getting Income From Your Business

Monday, April 13th, 2009

Joe, a reader of this column, founded a family business, Success, Inc., that he headed for 24 years. His son, Bill, has been running the business for about six years.

He’s doing a good job too. Joe, age 64, has cut back his work time to three to four hours a day for nine months of the year. The other three months are spent in a warm climate (mostly Florida) or traveling.

As Success grew over the years, Joe took only enough salary to maintain his family’s lifestyle. Simple put, profits were not taken out of Success, but reinvested. The business is still profitable, and it’s Joe’s only source of income. Success is a C corporation (tax paying).

In the past, Joe had taken a rather modest salary during the year, but he took a big bonus (when profits were available) to fund large family cash requirements (college, vacations, condo, etc.). His professionals had advised him to continue this compensation practice — the same salary and bonus arrangement — even though Joe was putting in about one-third of the time of prior years. Joe called me to get a second opinion.

The IRS would probably attack Joe’s current compensation arrangement on two fronts: First, the bonus would be regarded as a dividend, because it’s not taken until after the end of the year when the amount of the profit could be determined; and second, the salary would be regarded as unreasonable (too high) compensation.

Would the IRS win? On the first attack, Joe and the business wouldn’t stand a chance. The IRS would win hands down with the result being a nondeductible dividend for Success, and a taxable dividend for Joe. Second, the IRS could probably knock out about half of Joe’s current salary as being too high for services actually rendered. Unfortunately the (unreasonable) salary issue is tough to pin down (when challenged by the IRS) with any certainty.

What should Joe do? He needs the current income to live. The answer is to kill the C corporation and elect S corporation status. This would automatically remove the unreasonable compensation problem. What about the bonus? As an S corporation, Joe could take a tax-free dividend from Success (up to the amount of S corporation profits). This means that Success’ profits would only be taxed once when taken as an S corporation dividend, instead of twice, when taken from a C corporation as a dividend. A big tax saving! Better yet, the same trick will continue to work when Joe completely retires (take those delightful tax-free dividends).

One more thing: S corporation dividends (the economic equivalent of a bonus to Joe) are not subject to Social Security tax or other payroll taxes … another big tax saving. And here’s an extra bonus: Joe can collect Social Security benefits even if he continues to work for Success.

If you’re not tuned into the many advantages of electing S corporation status, you owe it to yourself to get the true tax facts. So, to be or not to be an S corporation? That is the question.

In practice, many factors can impact your decision. Still have doubts? Call Irv (417-9732) and I’ll walk you through to the right C or S decision.

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Selling Your Business To Your Kids Is A Tax No-No

Monday, April 13th, 2009

About once a month I get a call from a reader (call him Joe) of this column who wants to sell his business (call it Success Co.) to his kids.

A short conversation with the caller explains why such a sale is a terrible idea — for Joe, and for the kids.

Let’s start with the kids, in this case Joe’s son, Steve, who wants to buy Success Co. for $1 million.

Follow these strangling tax numbers: Steve must earn about $1.66 to have $1 left to pay to Joe (40 percent in income tax on $1.66 is 66 cents in tax). Steve pays the full $1 to Joe. Steve cannot deduct any portion of this $1 because the purchase of stock (Success Co. or any other stock) is simply a nondeductible capital expenditure.

If Success Co. is a C corporation, any interest paid by Steve (in addition to the principal stock purchase amount) is generally not deductible. Steve could deduct this interest against portfolio income (interest and dividends on other investments).

Rarely do the kids have such investments. But Steve can make all the interest deductible simply by electing S corporation status.

What about Joe? Steve pays Joe that $1 (plus interest). Joe must pay a capital gains tax (typically 15 percent) on the dollar and pay his top tax bracket (typically 40 percent, including State and Federal income taxes) on the interest income.

OK, Joe has 85 cents left after paying the capital gains tax on the $1. If Joe doesn’t spend that 85 cents (he usually has it at death), the tax collector gets up to 55 percent (using 2011 rates) for estate taxes. That’s another 47 cents, leaving Joe’s heirs with only 38 cents out of the $1.

Let’s review. Steve had to make $1.66 for Joe to leave his family 38 cents.

Or would you believe that would turn into $1,660,000 for Steve to make while Joe’s family only gets $380,000.

That’s lousy tax planning!

Joe and Steve can avoid these tragic tax results. So can you. How?

Apply the above $1 example to the price you want to get for your business if you sell to one or more of your kids. You’ll immediately notice that the IRS gets more out of the sale of your business than you or your family combined. The lesson is simple. Don’t sell your business to your kids.

Watch this column for the right way for you to get a lifetime flow of income for you (and your spouse if you are married) and transfer your business to your kids without the IRS getting into your pocket.

You’ll want to take a look at the following strategies: Electing S corporation status; use of an intentionally defective trust to transfer your business to your kids — tax-free (yet stay in control for as long as you live).

One more thing: Do not transfer your business (by sale or otherwise) to the kids without putting three other plans in place: (1) a lifetime tax plan, (2) a retirement plan and (3) an estate plan.

Want to learn more about how to shield yourself and your family from the IRS when you transfer your business? Browse my Web site at www.taxsecretsofthewealthy.com.

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Old-Time Tax Religion Yields To New-Time Tax Religion

Monday, April 13th, 2009

If you are a tax sinner, please step forward. Today’s sermon at The First Anti-Tax Church is entitled, “How You Can Enrich the IRS When Transferring Your Business.” Strange title? Not really. It’s the conventional wisdom or what our preacher calls “The Old-Time Tax Religion.”

Following is a true story of good against evil taken straight from the pages of the ever-growing-tax-business bible. If you’re a business owner with two or more children-listen up.

A business owner (age 68) (we’ll call him Joe) from Alabama told me how three employees (ages 38, 45, and 52) had helped build his business (Success Co.) over the years. Profits were plowed back into the business. Today its worth $10 million, with 80 percent owned by Joe and 20 percent owned by the employees. Joe and his wife, Mary, have three children, none active (and not likely to be) in the business.

Joe’s goals are simple: After he passes on, the business should go to the three employees; his three children should get the value ($8 million) of Joe’s share of the business. What’s the conventional wisdom? Have Success Co. own life insurance. The actual amount of insurance is now $11 million. The extra $3 million allows for growth.

The insurance funds a buy-sell agreement. After Joe dies, Success Co. will buy Joe’s stock. Then the employees will own 100 percent of the business. (Good! That’s what Joe wants.) The kids will get the $8 million or more, which is also what Joe wants. Perfect? Joe’s lawyer, accountant, and insurance consultant assured him that this is — by conventional wisdom — the “best” way to go.

What’s wrong with the picture? Each dollar of those insurance proceeds used to buy Joe’s stock will be divided two ways: 55 cents to the IRS; 45 cents to the kids. Unwittingly, the IRS, not Joe’s family will benefit the most from Joe’s business, which took him a lifetime to build.

What to do? The solution may vary with your particular situation (for example, how many kids you have in the business, how many are nonbusiness children, your age, your wife’s age, the value of your business and the value of the rest of your assets). But here’s a plan to beat the pants off of the conventional wisdom and the IRS, legally. And it’s easy to do.

Step one: Get the insurance out of the corporation into Joe’s name and then into an irrevocable life insurance trust. No, the insurance proceeds will be free of the estate tax.

Step two: Recapitalize Success Co. (which will create voting and non-voting stock) so Joe can keep voting control (a tax-free transaction) for as long as he lives. Say there is 100 shares of voting stock and 10,000 shares of non-voting stock. Joe will keep the 100 shares of voting stock (and absolute control) for as long as he lives.

Step three: Create an annual stock-bonus/stock-gift program. Success Co. will give stock bonuses of non-voting stock to the employees. (In a more typical example, the employees would be Joe’s children.) Joe would make annual gifts of Success Co. stock to his children and grandchildren.

This sermon does not attempt to cover all the details of the plan outlined above. Find a professional who knows how to use this structure to craft that transfers most (in many cases all) your wealth free of the estate tax. More importantly, your estate tax liability (whatever the amount) will be transferred, in effect to the insurance carrier.

When all the smoke clears, either your estate tax will be zero or paid 100 percent by tax-free insurance proceeds. It’s time for you and your professionals to get that new-time tax religion.

Want a head start on how to win the transfer/succession/estate tax game? Visit my Web site or call to discuss your specific concerns.

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Don’t Get Stuck In These IRS Tax Traps

Wednesday, April 8th, 2009

If you own a business and your estate plan uses or intends to use any of the four commonly used techniques (actually tax traps) discussed in this article, you will unnecessarily enrich the IRS.

Guaranteed!

Let’s set-up the typical family-business situation we see at least 100 times every year. Joe, who is married to Mary, owns Success Co. Sam, their son, runs the business and someday will replace Joe. They have other children who are not active in the business.

The traps are listed here in order of the most serious and most frequent blunder.

The marital deduction. After Joe’s death, Mary will own Success Co. or a large portion of it in her own name or in some kind of marital trust. That’s great, when Joe dies. No estate tax. But when Mary goes, the IRS gets its pound of flesh. Remember, the marital deduction only defers tax; it’s not intended to be a tax saver.

A Section 303 redemption. Success Co. can redeem as much of Joe’s stock as necessary, free of any income or capital- gains tax to pay Joe’s (or Mary’s) death taxes and other estate costs. Sounds good. But the fact is, the money that comes out of Success Co. goes straight to the IRS.

Section 6166. Because Success Co. is a major asset in Joe’s (or Mary’s) estate, the estate tax can be paid in installments for up to 15 years with interest at a very low rate. Not only does the IRS get the estate tax, it now gets (even though a low percentage) interest to boot.

Normally this column tells you what to do to win the tax game, as opposed to telling you what not to do. OK, then. Here’s what you must do to check your estate plan and know it’s right for you and your family:

• The strategies you use must be initiated during your life (such as gifts, a grantor retained annuity trust or a family limited partnership), not at death (the three traps described in this article).

• When the entire plan is in place, your advisor should show you clearly that your total wealth will go to your family without being reduced in value by even one dime of estate taxes.

• Your advisor must get you into some kind of tax-free environment, such as an irrevocable life-insurance trust or some kind of charitable trust, immediately.

• You control your assets for as long as you live (or at least as long as you want) with the use of voting/nonvoting stock, a family limited partnership or various trusts.

• Finally, your assets are protected from creditors and lawsuits.

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An Easy Way For The Kids To Buy Their Parents’ Stock — Tax-Free

Tuesday, April 7th, 2009

Do you want to transfer your business to your kids? Read this:

Mom or Dad wants to transfer the family business to one or more of the children. But the money to fund the buyout at the death of the parent/stockholder —insurance on the parent’s life — is in the wrong place.

Here’s a foolproof way of getting the job done, according to an IRS letter ruling:

The father, Joe, worked with his son, Sam, in a business founded by Joe. The stock of the corporation was owned 25 percent by Joe, 4 percent by Sam and the balance by five other children not active in the business.

Joe had two main objectives: First, to have his stock go to Sam after his death and, second, to make sure that his wife, Mary, would be financially secure for the rest of her life.

Joe and his son developed a plan to accomplish these objectives. They entered into a buy-sell agreement requiring Sam to buy his father’s shares from his estate after his death at fair market value. To fund the purchase, Sam would use the proceeds of a life insurance policy on his dad’s life.

The corporation owned the insurance policy and paid the premiums. Joe intended to buy the policy from the corporation for its cash-surrender value and gift the policy to his son. From then on, Sam would pay all premiums. Great news!

The IRS ruled that, under these conditions, Sam could collect the insurance proceeds income tax-free (IRS Letter Ruling 8906034).

There are two more tax goodies that flow as a result of this ruling.

One, when Sam buys Joe’s stock from his estate, the sale of the stock by the estate is income tax-free.

Why? Under the tax law, the estate gets a new tax basis equal to the stock’s fair market value at the date of Joe’s death.

Two, since Mary is the beneficiary of Joe’s estate, there is no estate tax. Why? An estate is entitled to a 100 percent marital deduction for all property passing to a spouse, Mary in this case.

What could be better? No income tax. No estate tax.

Sam owns 100 percent of Joe’s stock.

Mary is financially secure.

Perfect!

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A Review of Gift-Tax Rules to Enchance Your Family’s Wealth

Tuesday, April 7th, 2009

Applause! Applause!

Congress in 1998 buried an old and onerous gift-tax killer rule. Yet few people are aware of the tax-saving advantages of the new law.

First, some background. Gifts to your spouse are sheltered by an unlimited marital deduction, no matter how much the gift — during life or at death — there is no gift tax or estate tax. For lifetime gifts to all other individuals, the first $12,000 ($24,000 if married) is also exempt from tax.

A gift-tax return is generally not required for gifts qualifying for the marital deduction. On the other hand, a gift-tax return must be filed for all gifts in excess of $12,000 per donee (the person receiving the gift) per year.

Just like your income-tax return, your gift-tax return is due on April 15. For example, taxable gifts made in 2005 should have been reported on a gift-tax return filed by April 15, 2006. The IRS has three years from the date a gift-tax return is filed to make a gift-tax assessment. So, if the IRS decides four years down the road that a gift was worth more than the value shown on your timely filed gift-tax return, it’s out of luck. The IRS cannot assess any additional tax on the gift.

In the past, there was a catch.

Again, some background. The estate and gift taxes are unified so that a single graduated rate schedule applies to cumulative lifetime and death transfers. As a result, the final tax on your estate depends on the amount of taxable gifts made during your life.

The more lifetime taxable gifts, the higher your estate tax.

Sad but true, the courts allowed the IRS to revalue gifts — even after death — in order to determine the decedent’s estate tax. While it was too late to assess additional gift taxes on the gift (because the three-year time period had run out), the revalued gift could bump the estate into a higher tax bracket and cost — often huge — additional estate-tax dollars.

If the IRS claimed that a lifetime gift — very often the stock of a family business — was seriously undervalued, the tax on the estate would skyrocket. The estate had a tough time proving that a business valuation made years earlier (5, 10, 15 years or more) was and is still correct.

OK, let’s hear the drumroll for the new law:

For gifts made after Aug. 5, 1997, the IRS can no longer revalue lifetime gifts for estate-tax purposes. You must only jump through one hoop: report the gift on a gift-tax return. The value of the gift must be shown on the return or disclosed on the return or an attachment in a manner adequate to disclose to the IRS the nature of the gift.

After three years, the IRS (and you) are bound by the values shown on the return.

The door is, however, still open for the IRS to revalue some gifts:

• Any gift made prior to Aug. 6, 1997;

• A gift-tax return is filed, but the gifts are not properly disclosed or reported;

• Gifts not shown on a return;

• No gift tax return was filed because you thought the gift was worth $12,000 or less.

Here’s what to do for absolute protection:

Except for cash gifts under $12,000, report all gifts — particularly gifts involving the stock or an interest in any kind of family business or partnership — on a timely filed gift-tax return.

The more you are worth, the more your estate plan should include a well-thought-out lifetime plan, which includes a gifting program to the next generation.

Generally, cash gifts are a no-no. Leveraged gifts (usually involving a family limited partnership (FLIP), intentionally defective trust (IDT) or one or more of the dozens of life insurance strategies, are smart. They beat up the IRS legally and keep you in control of the gifted assets for as long as you live.

Gifting (using an FLIP, IDT or life insurance) is only one of 22 strategies used to legally avoid the estate tax. Learn how and when to use all the strategies —whether you are worth $2 million or $20 million.

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Please write a check to the IRS for $3,167,000

Sunday, April 5th, 2009

Through the years, our office has listened to an endless stream of taxpayers complain about the income tax.

But if you ever want to see anger, frustration and bitterness, meet with the beneficiaries (usually the kids) of an estate when they are told to write a seven- or eight-figure check to the IRS — for estate taxes.

Taxes that could have been avoided with proper planning.

Tragic!

A recent post-death estate planning consultation got us thinking about what you are now reading. Yes, the estate tax was exactly $3,167,000 after Mom died; Dad had died six years earlier. The really sad part of this story is that Dad’s and Mom’s entire estate tax liability could have been legally avoided with a rather simple estate plan.

Mom and Dad were survived by three kids and eight grandchildren. The business that Dad started back in the mid-50s was worth $4.5 million and owned 100 percent by Mom when she died.

According to Dad’s estate tax return, the business, which he left to Mom, was worth $2.9 million when he died. No estate tax (because of the marital deduction) was paid when Dad died.

Dad and Mom had a typical estate plan: a will and a trust. The trust created two trusts: one trust to take advantage of passing $1 million tax-free (the amount that was tax-free when Dad died) and a second trust to capture the marital deduction.

The tax-free amount is $2 million in 2006, rising to $3.5 million in 2009 and back to $1 million in 2011.

There is no estate tax if you die in 2010. I’m betting Congress will change these amounts before 2010 (or sooner).

The real answer (to why many people procrastinate and don’t complete a comprehensive estate plan during their life) is the deceased person whose estate caused the tax did not have to personally write that big check to the IRS.

Whenever we are about to plan an estate, we estimate the amount of estate tax that ultimately will be due.

Then we ask the client to write a check to the IRS for that amount. The client always gets the point. Then, we plan the estate so the client’s wealth goes to their family, instead of the IRS.

The plan must be a lifetime plan, that implements the proper strategies, as necessary, during your life. A plan contained in the typical will and trust-like Mom’s and Dad’s above-only enriches the IRS.

The person (your executor) who must write the check to pay your estate tax is helpless when it comes to minimizing or eliminating the estate tax. Only you, while you are alive, can eliminate the estate tax… by creating the proper comprehensive estate plan.

Here are the three things you can do to drive the estate-tax devil away:

(1) Learn all you can (this column is a good start);

(2) No matter what your age, put a complete estate plan into place now (then monitor it every two to four years);

(3) Only work with experienced professionals who can show you how to pass all your wealth — intact —to your family (if you are not sure, get a second opinion).

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Tax Secrets of the Wealthy: These M7 Strategies Are Simply Magnificent

Wednesday, April 1st, 2009

More than 90 percent of contacts with readers of this column are specific questions or concerns involving the “Magnificent Seven” (M7). What are the M7?

Actually, they are seven separate strategies designed to answer the questions and at the same time to save huge amounts of estate tax or create huge amounts of wealth (usually tax-free).

Using just one M7 is fun. Two or more is party time.

So let’s visit with each M7 partygoer — first the specific questions, then the answer and the strategy (to eliminate any concerns). Remember: Each M7 you are about to meet represents a most popular strategy according to readers of my column in the past two years.

• M7 No. 1 — “How can I get my family business (Success Co.) out of my estate, transfer it to my kids yet keep control for life?”

Create voting and non-voting stock, then transfer the non-voting stock to your business kids. Also use these strategies: a recapitalization to create the non-voting stock and an intentionally defective trust to transfer the stock. The voting stock, which you keep, maintains your control. All the strategies are tax-free — to you, your kids and Success Co.

• M7 No. 2 — How can I earn large returns every year without risk?”

Invest in senior settlements/transferable insurance policies (TIPs). The average TIP rate of return per year is in the 12- to 14-percent range, available from a 14-year-old company that is public (on the NASDAQ). Minimum investment is $50,000 for qualified investors.

• M7 No. 3 — “How can I avoid the double tax (income and estate) that hits all qualified plans (like an IRA, 401(k) profit-sharing)?”

Use a subtrust. It’s true: The tax collector can get up to 73 percent of your plan funds (that’s $730,000 per $1 million). Your family gets only $270,000. A subtrust allows you to use plan funds to buy life insurance (usually second-to-die). One reader turned $240,000 into $4.5 million of tax-free life insurance.

• M7 No. 4 — “How do I know if my completed (or proposed) estate plan is done and done right?”

Easy. You must be able to answer “Yes” to both of these questions: (1) Do you have and will you continue to have absolute control of your business and other assets? And (2) Will all of your wealth pass intact — every penny of it — to your family when you die. “All” means if you, for example are worth $6 million, the entire $6 million (fill in your own net worth number) to your family. If you can’t answer ‘Yes’ to these two questions, get a second opinion from an independent professional.

• M7 No. 5 — “I have significant excess cash or cash-like assets (municipal bonds, certificates of deposits, and the like). I’m conservative. Hate risk. Are there any tax-advantaged investments for me?”

Yes, conservative investment life insurance (CILI) that is really a conservation investment. The insurance company agrees to guarantee you that upon your death your heirs will receive the sum of the following: (1) All premiums you paid (say you paid $20,000 per year for 20 years. Your heirs will get back the entire $400,000), plus (2) a guaranteed rate of return on all premiums paid (usually around 3%), plus (3) the death benefit as a bonus (say $1 million, but could be more or less depending on your age and health). Get a personal quote. You’ll be delighted. And oh, yes, all earnings and the death benefit (all three items) are tax-free.

• M7 No. 6. “Is there a way to reduce the value of my business for tax purposes?”

Absolutely! Take advantage of the three discounts allowed by the tax law: (1) lack of marketability, (2) minority interest and (3) non-voting stock is worth less than voting stock. Result, a $2 million business after discounts, is worth, (for tax purposes) in the $1.1 million to $1.2 million range.

• M7 No. 7 — “Is there any way to finance the cost of life insurance to significantly reduce the out-of-pocket cost of the insurance?”

Yes, it’s called premium financing. The strategy is easiest to explain by example. A 60-year-old reader got $5 million of insurance with a total cost (to be paid over his life) of $368,000. A 56-year-old husband with a 56-year-old wife bought $5 million with a total projected outlay of only $79,000. You must be worth a minimum of $5 million (more is better) and be 65 years young or younger.

Of course, you want to get to know one or more of the M7 people better. More info. Maybe you have a question. Will the strategy work for you, your family and your business?

Here’s what to do: Contact me with the following: (1) identify the M7 strategy you want to learn about; (2) your name, address and all phone numbers where you can be reached; (3) your birthday and same for other family members if insurance is involved; (4) a short statement of your specific facts; (5) fax to 847-674-5299 or e-mail me at wealthy@blackmankallick.com with “M-7 query” in the subject line.

I’ll summarize the best responses (all identities to be withheld) in future columns.

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Tax Secrets of the Wealthy: Helping Family is More Important Than Beating Up the IRS

Wednesday, April 1st, 2009

One question I ask every client is: “Tell me about your family.” Most of the time, I get an earful — sometimes more than I bargained for — but it’s all good stuff that helps us work together to create exactly the right tax plan.

Almost always, the original reason a client calls is to ask me to create an estate plan that would kill the estate tax.

Everyone loves to beat up the IRS. Ah, such delight when they find out that avoiding the impact of the estate tax is the easy part.

So what’s the hard part?

Satisfying everyone in your family is by far the greatest challenge. Usually, the more kids, the tougher. Remember, those little kids grow up, get married and each “I do” brings a new son-in-law or daughter-in- law. Often, the growing family brings different opinions.

Life goes on.

Well, you get the idea.

Oh, and before we forget: Soon those cute — and almost always wonderful— grandchildren come along. And if you and your spouse live long enough, those little grandbabies repeat the cycle (grow up, marry, have babies of their own). The family grows bigger. That’s good. Yet now there are more family members to satisfy.

Let’s take a closer look at this trying-to-satisfy-every-member- of-the-family problem. What’s interesting is that a bit more than half of the time there is no real problem. Sure, there are differences from time to time, but the typical family knows how to deal with issues as they pop up. Then my job is easy. All efforts can be directed toward creating a plan that solves the lifetime goals of the family.

Beating up the IRS always is one of the goals.

But what happens when one or more of the family members just can’t be satisfied?

Unfortunately, my sad experience is most people do nothing. Since they can’t solve the problem — either as they see it or as some other family member sees it — the problem persists and festers.

Ultimately, Mom and Dad die. It’s tax disaster and the IRS wins.

Can such a result be avoided?

Almost always, the answer is a loud ‘Yes.’

But first, let’s divide the differences into two clear and separate categories: financial (money) and emotional (the full range of human feelings, more often than not without any logical explanation).

Money differences are the most common and are the easiest to overcome to everyone’s satisfaction. How?

Get everyone involved (usually only direct family members and no in-laws, subject to rare exceptions) in the same room at the same time. A moderator posts everyone’s likes, dislikes, wants, goals or whatever else is involved for all to see. Only one person speaks at a time. No discussions. No negotiation.

Each person gets as many turns as needed.

Amazing! Almost every time the posted-on-the-blackboard goals and wants show agreement rather than disagreement. We isolate the differences — almost always about money. Putting in the right tax-saving (income, gift and estate taxes) plan usually solves the money issues.

What happens if there still are differences — serious stuff — not from my viewpoint, but by one or more members of the family?

Remember, doing nothing while waiting for total peace (which rarely comes) among quarreling family members favors the IRS. So we build a tax plan around the agreements and continue to work on the disagreements. The head of the family (usually Mom and Dad working as a team) must make the final call.

A well-structured plan makes tough decisions much easier.

Indeed, perfection should be sought in every tax plan. But the sad fact is that an imperfect plan is way better than no plan for a family that can’t seem to get everyone on the same page.

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Posted in Corporate Tax, Estate Tax, Family Tax Issues, Irv Talk, Planning, Tax Strategies | No Comments »

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