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A proven solution to make your company’s 401(k) plan healthy

Tuesday, May 10th, 2011

Do you own a closely held business?… A business with a 401(k) plan?… More specifically a 401(k) plan that is often called “self-directed” (where each employee/participant selects how to invest his/her plan funds, usually from a family of mutual funds offered by the plan sponsor?)
If you answered ‘Yes’, keep reading. You’ll learn how not to lose your retirement funds to Wall Street… Even better, how to improve the economic health of your company’s 401(k) for you – the business owner – and your employee participates.

Your author is on the warpath: to change a system that has long-been broken, not delivered its promises and skimmed billions of dollars in unearned fees from your 401(k)s.

Let’s start by dealing with the “buy and hold” myth touted by many self-proclaimed Wall Street gurus to all investors (including 401(k) participants). Following is a quote from an article titled, “A 10-Year Scam Called the Stock Market” by Michael Lombardi.

“What a decade it’s been.

“We witnessed a terrorist attack on American soil (September 2001) … a decade of interest rates at record lows.

“But, through it all… stocks have gone nowhere in value.

“This morning, [April 11, 2011] the S&P 500 opens the trading day at 1,328 – the same level it traded at in March of 2001. The stock market is at the same level today that it was 10 years ago despite interest rates falling “like a rock” since 2001.

“The majority of Americans who buy mutual funds in their retirement funds with the hope of seeing that money grow through the years have followed the worst possible strategy. “Buy and hold” for the long term, I’m not sure who made up that motto, but it was terrible advice to follow over the past 10 years”.

Worse yet, when you factor in inflation, instead of your retirement funds standing still, the intrinsic value (the price your must pay for goods and services) of those funds has gone down… way down.

Now, let’s dig a bit further into mutual funds. An article titled, “The Market Data Against Fundamentals” (written by Douglas Davenport) says, “An annualized return from 2000 through 2008 for large cap U.S. stocks show a Market Return of a negative .27%.” But, get this: “The average mutual fund return for the same period was a negative 3.25%.” Why?… Over 2/3s of this economic tragedy (2.04% to be exact) is directly attributable to “Loss due to [Mutual] Fund Expenses.” The article adds, “$21 billion in fees have been paid to mutual funds for no performance over the last 10 years.”

Interesting, during the first decade of this century, the professionals who manage (make the investment decision) mutual funds could not increase the value of their funds. However, let me take a moment to defend the beleaguered mutual fund managers.

Each individual mutual fund has predetermined and fixed limitations that put it at a significant investment disadvantage: (1) Strictly limited in their investment choices (for example, can invest only in large cap stocks, emerging companies, gold stocks or small cap stocks); (2) must be fully or almost fully invested (even as their market area heads south); and (3) can not go short (even if the manager thinks his market area is about to enter or is in a bear market).

Nevertheless, facts are facts: Mutual funds are an expensive investment choice. Except in a long-term bull market, even the fund managers do not make money. Yet the current crazy 401(k) system dictates that each 401(k) participant makes the investment decisions for his/her own account. Makes you wonder… how many – including the business owner – have investment training and/or experience?

Maybe a better question is, how did the current 401(k) system get started? Well, Section 401(k) was added to the Internal Revenue Code in 1974. Then, starting in the early 1980s, all

the way to the end of the century – with a few nasty hiccups in between – the market was in a delightful bull market mode. Mutual funds became the new investment darlings. Combining 401(k)s and mutual funds was a great opportunity for Wall Street and plan sponsors. Self-directed 401(k)s were born, and with the rising market prospered.

The plan sponsors had a great sales pitch to encourage employers to join the self-directed 401(k) club: Since the employees made their own investment decisions, there was no way the employer could be held liable for investment failures. Sorry, but in 2008 this liability bubble was burst by the Supreme Court (decided LaRue v. DeWolf, see 128 S. CT. 1020). The court clearly holds that a 401(k) participant can sue his employer stating, “When a participant sustains losses to his account as a result of a fiduciary breach… [the law] permits that participant to recover such losses…” Simply put, the boss (you or your company) now can be sued by participates in the company 401(k) plan.

A detailed analysis of how the typical self-directed 401(k) plan impacts the plan participants is nothing short of a national scandal. Each participant’s account gets charged two management fees: one by the plan sponsor and a second by the various mutual funds selected by participants.

A rising market hides the sins of the fees. But a bear market or go-nowhere market (like the past 10 years) causes the continuing fees to only exasperate the pain of investment losses suffered by plan participants. Sad!

It’s time for a change.

Okay, now we know why a change is needed, but this question still remains: How?

Maybe it’s easier to examine the “How” as goals: (1) Want to still avoid employer liability and (2) increase to an acceptable rate of return, while minimizing risk.

Avoiding Liability. Actually, it’s easy to do and the strategy is as old as the existence of qualified plans (including 401(k) plans). The owner(s) or trusted employee(s) become trustee(s)

of the 401(k) plan. Then, the trustees hire a professional money manager – to invest the plan funds and monitor the investment results.

Increase Rate of Return. I must confess that I am on a constant quest to seek, find and take advantage of new opportunities afforded by the “best” (uses a strategy that consistently accomplishes an acceptable rate of return, yet limits risk) money managers.

Yes, I have discovered an investment manager with a proprietary strategy – known as “Trend Following” – that does the job. This strategy does not attempt to predict market or stock movements. Instead, the strategy capitalizes on natural market’s movements (really the volatile ups and downs) whenever or where they occur. A trend following manager takes advantage of what is actually happening in the market, rather than trying to guess what may happen in the future.

Trend following turns volatility from a foe into a friend. A trend is a strong, sustained move that can last from several days to a number of years. A trend may be rising or falling and is applicable to any specific security or index (like the S&P)… or a commodity (like oil, gold or the Euro).

Why trend following works is not a secret. The basic concepts behind the strategy is simple. For example, when the investment is gold and gold is trending up, the manager is long gold. If it is trending down, the manager is short gold. What if gold is flat (no trend)?… The manager stays in cash temporarily. The real beauty of trend following is that you can make money not only when the market goes up, but when it goes down.

The rate of return numbers for the manager who we work with and uses trend following are indeed acceptable. In 2008, when the S&P lost 37%, the manager’s trend following strategy was up over 29%. The annualized rate of return from December 2006 (when the strategy was first implemented) to March, 2011 is 18.5 %. (Remember, prior results do not necessarily predict future results).

The strategy was designed and implemented by a portfolio manager working with Sir John Templeton to manage a fund in an advisory firm owned by Sir John’s family.

If you want to make a killing in the market, this strategy is not for you. However, if you want to shoot for a conservative, steady and proven return, you’ll embrace this trend following strategy.

It should be noted that the trend following strategy works the same for all investments: 401(k) plans, other qualified plans (i.e. profit-sharing plans, pension plans or IRAs) and non-qualified investment funds (i.e. personal, corporate or trust funds).

Want more information? Send me (Irv) a fax to (847-674-5299) with your name, snail-mail address, email address and all phone numbers (business, home, cell)… on your stationery if you own a business. Indicate the type of funds (401(k) or otherwise) to be invested. Mark “TREND FOLLOWING” at the top of your fax.

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Irv didn’t invent taxes, just 227 ways to beat them…legally! (01/09)

Tuesday, March 2nd, 2010

Would you believe just the basic tax law – the Internal Revenue Code and the regulations – have about 50,000 pages (small print). Complex! Changes abound! Most of all, no logical, organized theme!

Then there’s a constant stream of IRS rulings and case law. No one person can know it all… certainly not the geniuses in Congress that pass the law… or the IRS that is the designated driver to enforce it.

There are three main ways the federal tax law picks your pocket and becomes your legal partner: first, by taking a portion of your income in two ways… (1) payroll taxes and (2) income tax and finally, a huge slice of your wealth via (3) the estate tax.

Outrageous!

The purpose of this article is to show you how to fight back. One day, just for fun, we (four tax guys) started to count the ways to legally get around paying the three taxes listed. We were just getting warmed up, got to 227 and simply stopped.

Following are five of the dozens of tax-saving areas that come up most often, are not known by most professionals or prevent the biggest loss of your money to the IRS or others. All examples are of real-life taxpayers and readers of this column who asked for help.

A. Payroll taxes. This money-stealing parasite is persistent and expensive: in 2009 $16,404 to the taxman (employer and employee share) on your first $106,800 of earnings. That’s a scandalous 9.76%. Earnings above $106,800 (there is no limit) pay an additional 2.9%. Here are the three most common lose-payroll taxes-to-the-IRS mistakes: (1) Joe (the owner of an S corporation) taxes a large salary (often $500,000 or more) and takes a huge bonus at year end (to bring profits down). A dividend (tax-free if you are an S corporation) instead of

09-01(2)

compensation, would save a bundle of unnecessary payroll taxes and cost not one penny more in income taxes. (2) Wives (and often moms) of the owner taking a salary (either don’t work or way overpaid). Much better taxwise to give ‘em a gift. (3) Operating a business as an LLC, which makes all income to owner(s) subject to payroll taxes… a no, no. Fortunately, there is a way out of this payroll tax trap.

A check of our consulting files over the past three years revealed 11 different ways to save $10,000 or more per year on payroll taxes per reader/client.

B. Asset Protection. In a heartbeat your family wealth (including your business) can be depleted – even destroyed – by a law suit.

For your business, the core strategy is to keep your business thin: Only keep those assets – typically, necessary cash, inventory and receivables – needed for operations in your business. Here are the basics sub-strategies: (1) Elect S corporation status; (2) Any new real estate or expensive equipment (include the little stuff if it adds up) should be owned by you (via separate LLCs) and leased to your operating company. (3) Never, I mean NEVER, own delivery vehicles in your operating company. Put the vehicles into a separate corporation, LLC or just put your best entrepreneur-type driver in business and rent your old vehicles.

The sad fact is… we can’t protect the assets inside of your operating company. That’s why the above precautions. But we can protect you (and your spouse). We do it automatically, without additional cost, as part of your estate plan. All of your significant assets are simply retitled using typical lifetime planning documents – like a family limited partnership, LLCs and appropriate trusts – to protect your assets.

C. Life insurance, whether owned by you (or your spouse or kids), your business or some kind of trust. You are about to be delighted by what you read. Sorry, some of you will be horrified.

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Part of every estate plan we do is to have an insurance expert analyze all existing life insurance policies on you, your spouse and fellow business owners (stockholders or partners). Let’s start with the three critical issues concerning life insurance: (1) premium cost, (2) the death benefit and (3) the tax (usually the estate tax) due at death on the benefit.

Over the 45+ years that I have dedicated my practice to the estate planning area, we (me, an insurance expert and, when necessary, a lawyer with insurance expertise) have looked at over 1,000 insurance portfolios. Only four times did we find everything perfect. All the rest of the times (except when the insured was no longer insurable because of health issues), we were able to modify the insurance plans and save premiums (on average about $30,000 per year) or increase the death benefit (from $500,000 to as high as $11 million) without additional premium costs. Following are the most common situations that always delight our clients: (if the FACTS fit or are close to your situation, make sure to read the RESULTS.

1. FACTS: A cash surrender value over $200,000 on a policy that is 9 years old or older… can be single life or second-to-die. (RESULT: Significantly more death benefit for same premium cost or significantly reduced premium cost for same death benefit)

2. FACTS: You (the husband) are 55 years old (or older), worth $5 million (or more), and have insurance on your life only. (RESULT: You are wasting premium dollars… second-to-die coverage with your wife will typically give you the same death benefit for about 35% less premium cost.)

3. FACTS: You have $400,000 (or more) in a qualified plan (probably a 401(k) or IRA), which is subject to a double tax (income & estate) of up to 73% to the IRS. (RESULT: On average, you can turn every $270,000 of after-tax dollars into $3 million to $5 million (tax-free), depending on your age and health… works for second-to-die or single life.

4. FACTS: You are worth $10 million to $40 million (or more). (RESULT: You can buy $10 to $40 million of [single life or second-to-die] coverage with no out of pocket premium cost.)

A simple fact: Over 99% of the time a second opinion of your insurance situation, followed by proper planning, will save you significant premium dollars, increase the death benefit and/or make the insurance proceeds tax free. Be smart. Get a second opinion.

D. Your business and your business kids (essentially business succession). Here are the goals the typical business owner with kids in the business gives me:

1. Transfer the business to my kid(s) so I and my kid(s) don’t get killed by taxes.

2. Show me how to treat my nonbusiness kids fairly.

3. Make sure I stay in control of my business for as long as I live.

4. Make sure the company stock stays in the family (never goes to a kid’s ex-spouse).

Every one of the above goals is easily accomplished. We have done it hundreds of times. And best of all, the business can be transferred tax-free: no income tax, gift tax or estate tax for the owner or the kids.

E. Estate plan. A proper estate plan is actually two plans: a lifetime plan and a death plan. The plans are designed to cover every significant tax-saving possibility (many more than 227 ways)… from the minute the lifetime plan is created until you get hit by the final bus (covered by the death plan)… and yes, even after you’re gone.

The above is only the tip of the iceberg in don’t-lose-taxes-to-the-IRS planning. Want to learn more?… Browse my website: www.taxsecretsofthewealthy.com… Or in a hurry, call me (847-674-5295).

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EVERYTHING YOU SHOULD KNOW ABOUT WHO SHOULD OWN BUSINESS REAL ESTATE

Saturday, May 30th, 2009

The first commandment of my someday-I-will-write-it bible of taxation would be “Thou shalt not put real estate into a corporation.”
We see it at least a dozen times year: When readers of this column ask us to do a tax consultation (usually for transfer/succession/estate planning), we find the business real estate in a separate C corporation (sometimes an S corporation) and leased to the operating corporation. Often, the real estate is owned by the operating corporation. Wrong! All are wrong. Actually a tax disaster waiting to happen. Why?
Someday, when you try to get the real estate (invariably, depreciated down to a low tax basis and appreciated in value) out of the corporation, you will run straight into a double tax. Again – why? Well, the first tax will hit the corporation when the real estate is sold (or transferred to the stockholders). Problem is, the sales proceeds are stuck inside the corporation and there are only two ways to get at those proceeds: via a dividend or a corporation liquidation. Sorry, both are subject to a second tax. A transfer of the property to the stockholders also triggers a double tax.
So what’s the answer?… Imagine a business owner (Joe) who is married to Mary. Joe should take title at the time the real estate is purchased and then lease it to his operating corporation. Here are some of the tax goodies that can come Joe’s way over time:
1. The rent Joe collects is not subject to social security tax (or other payroll taxes), nor does the rental income interfere with his social security benefits.

2. Joe can borrow (tax-free) against the property if he needs cash.

3. A sale of the property is subject to only one capital gains tax, which Joe can report on the installment method if he takes back a mortgage for a portion of the
purchase price. Joe might even exchange it tax-free for another piece of property (called a “1031 exchange”).

4. When Joe dies, his heirs get a raised basis, for example: Say Joe bought the property 25 years ago for $100,000, and it is now fully depreciated down to $20,000 (the cost of the land). The value of the property on his date of death is $620,000. Now get this – that built-in $600,000 of profit escapes income tax. Forever! And also this – Mary now owns the real estate (free of income and estate taxes) with a brand new tax basis of $620,000… Just as if she had bought the property for the $620,000 price. Yes, she can depreciate this property (except for the value of the land) using her new $620,000 tax basis, which will shelter her rental income.

5. The property can be put into a Family Limited Partnership (FLIP), which has many tax and non-tax benefits. For example, a $1 million piece of real estate transferred to a FLIP can receive a discount for estate tax purposes of about $350,000. The estate tax savings could be as high as $157,500 (using current estate tax rates)

And, oh yes, when Mary dies, the law allows her to repeat the raised-tax-basis trick (to raise the value of the property at her death) all over again when she leaves the property to the kids.
Now you know why owning real estate in a corporation is not only a tax trap, but it also prevents you from reaping a tax harvest during your life, at your death and beyond.
Want to learn more tax tricks that will save you a bundle?… take a peek at my website: www.taxsecretsofthewealthy.com. If you have a question call Irv (847-674-5295).

Tags: 1031 exchange, business owner, business real estate, c corporation, dividend, heirs, liquidation, s corporation, social security benefits, social security tax
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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 »

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
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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 »

Experience Has Taught Us how To Attract, Keep Great People

Saturday, April 18th, 2009

Our typical consulting assignment is to put together a wealth transfer plan for a successful business owner.

Invariably, the client brings up two critical and related operational problems: “How do I keep my top executives?” (The headhunters — usually working for a competitor — are always circling.) And “How do I attract new quality people?”

No, the problem is not new. It’s been a problem in the past and, more than likely, will get worse in the future as the bidding war for talented people escalates. What to do?

Almost 20 years ago, after struggling with the problem for about a year, we decided to develop an organized plan to find the answers. We interviewed our few client/owners who did not have the two problems; we also interviewed their key management people.

Then came the hard part: getting permission to interview the key people at clients that were suffering with the problem.

What quickly became clear was that almost 100 percent of the best key people had the soul of an entrepreneur. But for various reasons they did not want to strike our on their own or couldn’t (usually because they could not raise the required capital).

The answer turned out to be simple: “Mimic ownership” — give ‘em the same challenges as an owner and, if successful, most of the rewards.

Additional interviews just kept reconfirming the original answers. The top (non-owner) executives wanted four core benefits of ownership: (1) A piece of the action (a share of company profits); (2) get paid when they are sick or become disabled; (3) receive adequate retirement pay when its time to leave the company; (4) and a death benefit for their family (“Like my piece of the equity if I get hit by a bus” is the way most executives put it.)

Over the years we have created hundreds of contracts (the technical name is a nonqualified deferred compensation agreement; the non-technical name is a golden handcuff agreement) that attract and keep the kind of people you want in your organization.

Let’s take a closer look at each of the four desired benefits:

A piece of the action — Typically, this is a percentage of the yearly profits in excess of specific dollar amounts. Often, the percentage grows as the businessand profits grow.

For example, Sam Eager will get 3 percent of all before-tax profits in excess of $200,000 and up to $300,000; 5 percent from $300,000, to $400,000; and 8 percent over $400,000. Suppose the amount for a particular year is $24,000. Usually, Sam will get about one-third ($8,000) in cash and the balance ($16,000) is deferred.

The deferred portion is invested for Sam’s benefit. When does Sam get the deferred portion and the accumulated earnings on this portion (usually called the side fund)? When he becomes disabled, dies or reaches retirement age (the age is usually set around 58 for younger key employees and in the 65-age range for older key people).

When the key employee becomes entitled to collect the side fund (say it is $500,000), it usually is paid out in equal annual installments (say 10 years) or $50,000 per year plus the additional investment earnings for that year.

Disability — The employee gets paid when sick or disabled — whether for a day or for a lifetime. This benefit is covered by long-term disability insurance. It is essential that “disability” is defined “word for word” in your agreement the same as the word is defined in the disability insurance contract.

Retirement — The side fund (described above) supplements any regular retirement program (like a 401(k) or profit-sharing plan). Typically, the executive is allowed to direct the investment of the side fund, which remains an asset of the employer.

Following are the tax consequences of the arrangement: The side fund earnings are taxable to the employer. When the employee receives a distribution, the company gets a deduction for the exact amount distributed and the employee must report the identical amount as taxable income.

If the employee leaves for any reason-except because of disability, death or retirement-the entire side fund is forfeited by the employee and remains the property of the company. Hence, the name, “Golden handcuffs.”

A set amount of money at death — When an owner dies, the family can sell the business (assuming it is not transferred to the kids). A similar benefit (really a death benefit) should be given to the employee. Of course, this benefit should be insurance funded.

We have been doing these non-qualified plans for years. Done right, they work. Often, when an owner does not have a family member to pass the business to, the side fund serves as the down payment by one or more of the key people to buy the business from the owner.

Two warnings: (1) This article does not attempt to cover every detail and the endless variations for tailoring an agreement that is perfect for your company. Always work with an experienced advisor. Years of experience has proved that the right agreement will make your good people even better. (2) But sadly, there is no agreement we have ever seen that will make a bad employee even a little bit better.

In a way, this getting-and-keeping good people is a frustrating subject. The reason is that we have never been able to develop a cookie cutter solution. Yes, the four core benefits are almost always the same or similar.

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Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection.

Tags: bidding war, business owner, closer look, company profits, compensation agreement, competitor, contracts, core benefits, death benefit, entrepreneur, headhunters, key management, nonqualified deferred compensation, operational problems, retirement pay, rewards, successful business, top executives, wealth transfer
Posted in Corporate Tax, Estate Tax, General Tax Strategies | No Comments »

Don’t Lose A Lifetime Of Wealth To The IRS