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.

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

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

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

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

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

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

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

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

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

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

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

Joe’s and Mary’s major assets are:

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

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

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

1. Transfer Success Co. to Sam

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

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

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

2. Remove two homes from estate.

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

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

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

4. Leverage investment assets into tax-free wealth.

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

A. An intentionally defective trust (IDT)

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

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

B. A family limited partnership (FLIP)

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

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

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

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

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

-END OF ITEM-

Unfortunately, my experience with real-life clients also reveals that blunders involving life insurance cause more dollars to be lost to the IRS (and the heirs of these clients) than any other area in the income tax or estate tax. Sad! And, as you will see, unnecessarily so.

Why is life insurance such a powerful weapon (strategy) to enrich our clients at the expense of the IRS?… Because the Internal Revenue Code is very kind to every aspect of life insurance. And why is no a mystery because the insurance industry is very kind to the Washington politicians that keep the tax law favorable. Unfortunately, the law is complex and if you don’t use the law properly, it will eat your lunch.

The rest of this article shows you how to take advantage of the law – no blunders. Actually, when you know how, it’s easy.

Let’s start by examining the very important, but little-known economics of life insurance. The following Schedule shows you the typical annual premium amount to buy a new (universal life) insurance policy with a $1 million death benefit.

Schedule: Typical Annual Premium For $1 Million of Life Insurance

* Purchase a policy insuring a guy

** Insurance purchased on husband and wife who are the same age

Take a look at the Schedule to find your age (or close to your age). Three facts jump out at you:

1. Premiums become significantly higher as you age. (The lesson – invest in life insurance as soon as you can afford it.)
2. It pays to be healthy. “Preferred Risk” males get about a 20% discount compared to “Standard Risk” males.
3. Second-to-die insurance is a true bargain, receiving about a 40% discount and rising as you get older to over 50% at age 75.

NOTE:  If you are healthy (for your age) life insurance works to about age 83 for males, 86 for females and age 88 for second-to-die. Remember, female life expectancy is three to four years more than a male who is the same age, thus lowering female premiums. Health normally declines with age and may put insurance out of range. Simply put, the insurance companies do not want your money unless they think you are going to live.            One significant fact (really a question) does not jump out at you when studying the Schedule: How does the insurance company make money?

For example, let’s take a 60-year-old, male (Max), rated a standard risk with a 20-year life expectancy to age 80. In 20 years, Max will have paid only $383,200 ($19,160 X 20). Sure looks like the insurance company will on average (people living to life expectancy) take a big hit.

Not so fast. Here’s another fact: Every year, continuing studies show that about 90% of so-called “permanent life insurance policies” (like universal life) do not pay a death  benefit. Nice business model: Collect premiums year-after-year and then your customer decides to cancel his/her policy. Then, the insurance company is off of the death benefit hook.

COMMENT:  If you don’t intend to keep the policy to the day you die, don’t buy it in the first place.            Next, let’s take a look at how the friendly tax laws work to make life insurance a tax-advantaged investment to multiply your wealth… without risk.

Let’s use Max as an example. If he lives to age 81 (one year past life expectancy), his premiums would total about $400,000 (rounded). With a $1 million death benefit Max’s profit is $600,000 and every penny is income tax-free. Thank you, tax law.

What about the estate tax? There are many ways to escape the estate tax (currently at a 35% rate, scheduled to go to a top rate of 55% in 2013). In Max’s case we put the insurance into an “irrevocable life insurance trust” (ILIT) and all of the $1 million will escape the estate tax.

We have learned that real-life examples are the best way to teach how to get a life insurance victory and avoid blunders. My files are bulging with such examples. Following are five examples that come up often with real-life clients. As you read the examples, pick out the one (or more) that fits your personal circumstances. You’ll see how easy it is to avoid losing tax dollars to the IRS or increase your wealth (tax-free)… always without risk.

Example #1. Insurance-funded buy/sell agreements

Warren (56) and his brother Bill (58) have an insurance-funded buy/sell agreement. Both are in excellent health. An audit of the policies showed that Bill’s policy would lapse at age 70 and Warren’s at age 69. My insurance guru was able to arrange for a tax-free exchange for each brother so the policies would be guaranteed to pay the death benefits ($2.1 million for each) no matter how long Warren or Bill might live (without any added premium cost). Nice!

CAUTION:  It is rare that we find insurance-funded buy/sell agreements properly done. There are dozens of possibilities for expensive blunders – tax and otherwise (as above). Always get a second opinion.Example #2. Life insurance no longer needed on husband.

Cal (59) and Cindy (55) are married. Cal has insurance his life: death benefit of $788,000; cash surrender value (CSV) of $213,000; and an annual premium of $9,000. They are worth over $9.5 million (mostly cash or cash-like investments). Cal earns more each year than they spend: so don’t really need single life insurance on Cal.

My network insurance consultant was able to use the $213,000 CSV, continuing the $9,000 annual premium to purchase a second-to-die policy with a  $1.6 million death benefit … almost double the amount of old insurance. Powerful!

Example #3. Using life insurance as a tax-advantaged investment.

Wendy, a 76-year-old widow, is worth over $12 million, mostly liquid investments. Her investment income far exceeds her lifestyle costs. Following is a wealth-increasing, two-step strategy.

Step #1. Wendy paid $2 million for a single premium immediate annuity (means the insurance company will pay Wendy the same annuity dollar amount every year for as long as she lives).

Step #2. Wendy bought a $5.6 million insurance policy (actually owned by an ILIT, so the death benefit will go to her kids tax-free). How are the premiums paid?… The annuity payments are used to pay the premiums. We turned $2 million (which would have been subject to estate tax) into $5.6 million (tax-free)… guaranteed. Awesome!

Example #4. Turning a tax disaster (qualified plan funds) into a tax victory.

Zelda  (73) and Izzy (76) are married and worth $10.5 million, including $2,720,000 in a rollover IRA. We used a strategy called a “Retirement Plan Rescue” to purchase $5 million of second-to-die insurance (again, in an ILIT). The crazy American tax laws hit all qualified plans (including IRAs) with a double tax (income and estate). Here the double tax hit would be an astounding $1.66 million (using current tax rates), leaving he family with only $1.06 million… a tax tragedy.  Using our strategy the family will get the full $5 million (free of all taxes). Cool!

Example #5. You have an old policy and are no longer paying premiums out-of-pocket.

I saved the best for last. If you have a so called “paid-up-policy” (no longer writing checks to pay premiums), for sure you are getting ripped off. The insurance company will not tell you, and the agent who sold you the policy is just not doing his/her job. Either a single-life policy or a second-to-die policy can be the culprit.

What follows is a classic example: Alfred (71) had a policy with a death benefit of $4.2 million, with a CSV of $1.7 million. He no longer paid premiums because the annual earnings on the CSV was large enough to pay the premiums when due. Alfred was able to trade in the old policy (a tax-free transaction) for a new policy with a $7 million death benefit (using an ILIT again to make it all tax-free). Wow!

To give you an example of all the possibilities for using life insurance to (1) increase your wealth without risk or (2) increasing your current policy’s death benefit without increasing premium cost, would take a huge book. So, I cornered my insurance guru and twisted his arm

into agreeing to audit the insurance policies of readers of this column without any obligation. Or maybe you are just looking for a new policy to increase your current wealth without risk.

Either way, send me a fax (on your letterhead if in business) at 847-674-5299 along with a short note about your life insurance situation. Please include all of your phone numbers: business, cell and home. Mark “Life Insurance” on your fax.

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

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

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

The Good News

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

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

The Bad News Makes The Good News A Joke

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

Outrageous!

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

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

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

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

You Own A Closely Held Business

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

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

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

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

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

Business Succession

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

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

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

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

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

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

You Own Investment-Type Assets

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

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

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

You Want To Create Additional Wealth Without Risk

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

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

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

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

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

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

In Conclusion

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

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

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

Because this is a tax column, when readers call me to consult, taxes – usually concerning business transfer or estate planning – are at the center of the stage. Most callers are business owners.

Can you guess what the most common request for nontax help has been through the years and still is today?… Hands down, it is “Irv, how should I invest ______?” Okay, let’s fill in the blank: (1) my personal funds, (2) my IRA, (3) my company’s excess funds and (4) my company’s pension plan, profit-sharing plans or 401(k). Often the funds belong to mom or dad, the kids, one or more trusts or an estate.

Most business owners complain, “I don’t have time to handle my own investments” or “my investments turn sour” (“lousy,” or “lose money” or similar complaints).

Since the drubbing the stock market (read Wall Street) took during the recent recession, callers, including my estate planning clients, are pleading for investment help. Sorry, not my skill.

But their constant cries for help motivated me… not to become an investment expert, but to try and determine if there is a logical, profitable and safe alternative to the current way Wall Street does business.

What I discovered about Wall Street startled even me. This is a tough subject. I am about to kill some sacred cows. Let’s start by putting the current Wall Street business model on the table: The investor (Joe) buys a stock, bond or mutual fund. He pays a commission. If Joe has an investment advisor (Sam), he also pays Sam a management fee. Okay with me, if Sam delivers by having Joe’s portfolio go up in value.

But wait, what if the value of Joe’s portfolio goes down?… way down?… like 20%, 30%, even 40% or more? Everyone knows the sad answer: The same commissions and fees continue… increasing your losses. Can you name another industry or even one business that survives over time when it does not deliver its promised product or service?

How has this insane business model survived decade after decade? My research reveals the answer. Jim Shepherd, the author of the Shepherd Investment Strategist says it best:

“The media now calls the last ten years the “lost decade.” But it did not seem “lost” as they reported… Instead, viewers [of TV, radio listeners and print readers] were hit with an unceasing litany of omission and positive spin, effectively coloring a gloomy economy consistently brighter, But why the spin?

Because the media relies on advertisers… they must report the news in a manner that pleases the advertiser or the advertiser takes their business elsewhere… large brokerage houses… want investors to keep buying, or at least not sell stocks. The media is pressured to report financial releases as “news” in as positive a manner as possible.

Over the last decade, this positive spin met its purpose: it kept most investors in equities, even though equities lost almost 35% over ten years!”

Shocking!

Bad enough. But even worse, my research revealed what should be a national scandal. Some quotes from an excellent article by Eleanor Laise in January, 2009 titled, “Big Slide in 401(k)s Spurs Calls for Change,” exposed the scandalous story:

“About 50 million Americans have 401(k) plans, which have $2.5 trillion in total assets, estimates the Employee Benefit Research Institute… In the 12 months following the stock market peak in October 2007, more than $1 trillion worth of stock value held in 401(k)s and other “defined contribution” plans was wiped out…

“the most obvious pitfall…401(k) plans. Shift all retirement – planning risks – not saving enough, making poor investment choices – to untrained individuals, who don’t have the time, inclination or know-how to manage [the risks].”

The plain fact is that the investment losses outlined above are the result of an invest-in-equities, buy-and-hold mentality.

To be thorough, my decision was to research traditional conservative investments. First, municipal bonds: A large number of reliable sources thought municipal bonds (and bonds in general) could be the next bubble about to break. Why?… Interest rates are at an historic low. If (more likely when) rates go up as predicted, along with anticipated inflation, the value of bonds will plummet.

Any hope for other conservative investments? Well, take a deep breath and read what Kiplenger said in its November 2010 newsletter:

“Short-term interest rates are headed even lower… to zero on certificates of deposit with terms under 12 months as well as money market accounts. The average for CDs now 0.85% and likely to slip an additional 5 basis points a month… Money market accounts are typically paying even less, roughly half a percent.”

Now we are ready for the good stuff… information that will help you recapture the profits of yesteryear. Let’s start by looking back at how easy it was during the 1980s and 1990s to hire an investment advisor and get those delightful profitable results as the equity markets roared higher.

What changed?

As we entered the 21st century, the market switched from a bull market to a secular bear market. A what? Secular bear markets are defined as periods of great volatility (drastic up and down price movements in stocks, indexes, mutual funds and other investments) of investment returns with little or no upward price movement, even though the trading range is large.

For example, say an index today is at 1,000. The index yo-yos back and forth over some period of time (it could be a week, month, year or more) within a range that reaches a high of 1,333 and a low of 691. At the end of the period (say two years) the index closes at 1015… a tiny 15 points up… a rise of only 1.5%.

Such secular bear market periods last – based on market history – between 17-25 years on average.

Following are the unhappy numbers of what actually happened during the last four secular bear markets with the S&P 500 stock index.

The lesson is clear: Buying and holding securities just does not work during secular bear markets.

The real question is, can you make money  during a secular bear market? Yes, but only if you have a proven plan that identifies when market conditions (related to your portfolio) clearly show a change in market direction may be coming.

This is where the investment strategy known as “TREND FOLLOWING” shines. This strategy does not attempt to predict market or stock movements. Instead, the strategy capitalizes on the natural market’s movements (really the volatile ups and downs) whenever or wherever they occur. Trend following managers take 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… or a commodity (like oil, gold or the Euro).

How does a portfolio manager who is a trend follower make money?… He waits for the market to develop a new trend and then invests with that trend, holding that position until there
is a reversal. The manager does not invest at the exact bottom because he wants confirmation that a turn (reversal) has occurred. Likewise, the manager will generally not sell at the exact top (which is more easily identified after the fact). The manager will sell after a clearly identified change in trend (reversal). Therefore, the manager is able to capture 80%-90% of the trend.

What a great concept… You make money when the same investment trends up and make money again when it reverses and goes back down… Then start all over again. Fine, I like it. But where do you find a trend-follower manager with a proven track record?

Enter lady luck. Success! Found a firm that has been using the trend following strategy since 2006. The results: Positive double-digit annual returns every year… and when the stock market crashed in 2008, their return was up over 23%! (Remember, prior results do not necessarily predict future results.)
An exciting fact: The system was designed and implemented by a portfolio manager hired by Sir John Templeton to manage a mutual fund in an advisory firm owned by Sir John’s family. The portfolio manager also received a 5-star rating for the last 10 years.
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 the trend following system.

The SEC rules require that you (and your spouse combined) must be worth at least $1.5 million (including your home, IRA and other assets). Want more information? Send me (Irv) a fax (to 847-674-5299) with your name, address and all phone numbers (business, home, cell)… on your stationery if you own a business. Mark “TREND FOLLOWING” at the top of your fax.

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

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

#1. The Succession Plan

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

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

What to do?

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

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

#3. Estate plan

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

#4. Lifetime plan

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

#1. The IRS and the estate tax.

The IRS doesn’t want you to know that the estate tax – if your plan is properly done – is a voluntary tax. Sadly, if you have only a traditional estate plan (typically, a revocable trust for him and the same for her) you have no chance to avoid the estate tax. Yet, by adding a simple lifetime plan, it’s easy to legally avoid the estate tax. Just use the correct specific strategy for each significant asset that you own.

For example, for each of the following assets: Use the strategies as listed below:

The IRS never gives any public acknowledgment to the thousands of plans that legally beat the estate tax, and, it only attacks those plans that have a tax mistake. Why?… Simply put, they don’t want to acknowledge the right roadmap so others can follow. Unfortunately, their function is not to help you – the taxpayer, but to collect more taxes.

What to do?… Find the professional advisor who knows how to do your estate planning right in the first place… an advisor who can explain to you how each of the above strategies wins the estate tax game for each asset class above.

#2. Succession planning… transferring your business.

The biggest transaction of your life will probably be the transfer (or sale) of your business to your kid(s). (or could be your employee(s) or an outside buyer). The IRS wants you to think that a taxable installment sale is the way to go. Unfortunately, so do most professional advisors.

What should you do?… Tell ‘em to take a look at an IDT. The proof is always in the numbers. Simply ask your professional to run the number for the tax consequences of an installment sale versus an IDT. Remember, you want to see the tax impact for both the buyer and the seller.

Hint: I have never seen an installment sale (or cash sale) beat the after-tax numbers of an intentionally defective trust.

#3. The double taxation of qualified plan funds.

Okay, you folks with a large amount of money in a 401(k), rollover IRA or other qualified plan, listen up. Everyone – you, the IRS and your advisor – knows that those funds will be double taxed (hit hard by both income taxes and estate taxes)… with as much as 73% going to the tax collector. (That’s $73,000 out of every $100,000 you have in plan funds.)

What’s the unfortunate truth?… Again, the IRS doesn’t want you to know that there are multiple ways to avoid the double tax and even turn the tables on the IRS by multiplying the funds in your plan… risk free. Worse yet, most professional advisors don’t have a clue of what to do.

My files are bulging with clients that used one of the many strategies available to turn double-tax traps into tax-free victories. For example, a single (not married) client turned $1.2 million in IRA funds (worth $325,000 after-tax to his kids) into $2.25 million of tax-free dollars for his kids.

A married couple turned $800,000 (worth $240,000 after-tax to their family) into $4.1 million of tax-free dollars for their family.

Would you be open to results like that for your qualified plan funds? Hint: If you are under 59 ½ years old, use a subtrust… if over 59 ½ years old, use a retirement plan rescue. Always use a stretch-IRA for any funds still in the plan when you go to heaven. Talk to your professional advisor.

#4. How important is life insurance in your estate plan?

Let’s look at the IRS, your professional advisor and the insurance company. Like it or not, life insurance proceeds are taxable for estate tax purposes. The IRS loves life insurance, there’s always the insurance company’s money to pay your tax bill. Fortunately, there are many strategies to convert a potential taxable life insurance death benefit, into a tax-free pool of money. It’s your professional’s job to walk you through the many possibilities (for avoiding the estate tax) when you buy the policy.

What, you already bought the policy, and it won’t be tax-free. Consult a new advisor immediately. There are many ways to correct this mistake. But hurry, there’s usually a three-year waiting period to get off the taxable boat and onto the tax-free one.

Now for the insurance company. The life insurance industry is highly regulated. Each of the 50 states has an insurance commissioner, and generally they do a great job protecting the public.

But hey, insurance companies are in business to make a profit. Here are some important things they don’t want you to know.

Do you have a policy on your life (or second-to-die) that has built up enough cash surrender value (CSV) so you no longer need to pay more premiums to keep the policy in force? So, you think you are getting a free ride? If you are still healthy (could pass a physical to get more insurance), almost 100% of the time you can dump the old policy and get a new one with a larger death benefit (and never pay another premium). But the insurance company won’t tell you.

Nor will the insurance company tell you that your CSV dies when you die. Yes, you and your family lose it… every penny. The insurance company keeps all of it. What to do?… While you are alive and healthy, check out your options (there are many) to use that CSV toward a new policy. Why?… Medical advances have increased life expectancy and premiums have gone down over the years. Take a look at the opportunities available using your CSV for positive leverage.

Here’s a few more things you should know about life insurance. If you don’t need it, don’t buy it. Only buy life insurance if you intend to keep the policy in force till the day you die, so your family collects the death benefit. Otherwise don’t buy it.

Here’s the big WHY… Something else the insurance companies won’t tell you. What follows is hard to believe: 98% of term policies sold never pay a death benefit; 91.5% of CSV policies sold lapse for various reasons and don’t pay a death benefit. Great business… collect money (called “premiums”) and legally do not have to deliver the product (a death benefit).

One final point about life insurance: It is not for everyone. If you think that down the road you may have to choose between maintaining your lifestyle and paying a life insurance premium, rethink buying the policy in the first place. On the other hand if you are fortunate enough to have excess funds (not needed for lifestyle), do not think of premium payments as a cost. The economic fact is, in such a case, the premium is simply a transfer of capital from a cash-like asset category to an insurance asset category. Again, run the numbers from today, until your life expectancy (and at least seven years beyond). You’ll clearly discover, life insurance is always a profitable tax-advantaged investment (you, really your family, always win).

Finally, make sure that when your estate plan is done, you will be able to legally avoid the impact of the estate tax. If not, you owe it to yourself and your family to get a second opinion.

So, join the estate tax saving club. Learn more. Take a look at my website: www.taxsecretsofthewealthy.com. In a hurry, call me (Irv) at 847-674-5295.

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

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

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

What to do?

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

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

1. Want to increase income

2. Want to minimize risk

3. Want to lower taxes

4. Want to maximize inheritance (to their family)

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

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

Hidden Equity Strategy (HES)

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

HES is a simple two-step strategy:

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

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

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

Qualified Plan Rescue (QPR)

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

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

You’ll love the results that follow:

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

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

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

Conservative investors life insurance (CILI)

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

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

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

1. Death benefit $3,000,000

2. Premiums paid

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

3. Interest earned on premiums

paid (at 3%, but would be higher,

If interest rates rise, or lower, if

Interest rates fall) 111,999

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

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

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

Neat! The Internal Revenue Code comes through again.

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

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

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

The 32nd president (FDR) said in 1933, “Fear paralyzes those who succumb to it.” Some things are downright scary. Try taxes… especially estate taxes. Can you guess what area in estate tax planning causes the most anguish? … Hands down it’s business succession.

Over the years your author has consulted with hundreds of business owners. (A little side note: Last year I worked with a business owner in Vermont, which accomplished a long-sought-after goal for my practice: creating an estate plan for a business owner in each of the 50 U.S. states.)

Most successful business owners started their business from scratch… Many took over the business from their dad or other relative… Some bought the business. Few came to be the owner in some other way. All share a common future (no exceptions): Someday they will have to pass the management baton.

Whether the reason for stepping down is age, illness, a desire to travel or play more golf, give into your wife’s pleading to “spend more time with me,” or a host of other reasons, the fear factor is almost always a player.

Following are the six questions (yes, there are many more) that lead the unwelcome-fear-factor parade:

1. How high will my income tax/capital gains taxes be if I sell to the kids (or employees) now?

2. If I don’t sell now, how much will the increasing value of the business increase my estate tax liability?

3. What if the kids mess up? Will I get paid? Will I be able to maintain my (and my spouse’s) lifestyle?

4. Will the bank let me off the hook for the business loans that I guaranteed?

5. How can I treat my non-business daughter (Susan) fairly?

6. What’s the number one fear?… Control! It is rare that a business owner is willing to give up control of his business… even if you satisfy the owner with a perfect answer to all of his other questions and concerns.

Here’s an example of the control-fear factor at work: About one out of every three business owners who call me to do their estate plans own 51% of their business, while the kids own the other 49%. Why 51%? … Hey, the fear of losing control. Worst of all, in my experience, few professionals know what to do to calm the control fear. Read on, to learn the simple solution.

Let’s face it, the author of this article has neither the power nor the know-how to change human nature, which includes the fear factor. Yet experience – having done hundreds of business succession plans – has taught us how to get the succession job done and done right. Our job, as consultants, is to come up with solid (accepted by the IRS) solutions that will calm the business owner’s fears.

Just how do we do that? We take every fear, question or concern that you, as an owner, have and turn it into a goal. Then we show you how to apply the correct strategy (that we have used over and over again for other owners) to accomplish each of your goals.

Following is a true-life example of a reader/business owner (Joe) of this column. Joe is married to Mary. His son Sam (age 31) works in the family business (Success Co.) David (age 36 and the key employee) – not related to the family – has natural business instincts, is respected by the employees and helps Joe run Success Co.

Let’s list Joe’s fears and concerns, which we have turned into goals. The goals are in italics.

#1. Keep control for as long as Joe lives. Joe owns 100% of the stock of Success Co. (an S corporation). We recapitalized (a fancy word for having voting and nonvoting stock) Success Co. so Joe now had 100 shares of voting stock and 10,000 shares of nonvoting stock… a tax-free transaction. The strategy is for Joe to keep the voting stock (and control) to the day he dies. The nonvoting stock will be transferred to the kids (#2, following).

It should be pointed out that if Joe had owned only 51% of Success Co., the strategy would work the same, but after the recapitalization, Joe would own only 51 shares of the voting stock (keeping control) and 5,100 shares of the nonvoting stock.

#2. Transfer Success Co. to Sam now (freeze the value) without getting beat up with income/capital gains taxes. Sell the nonvoting stock to an intentionally defective trust (IDT). The tax beauty of an IDT is that Joe legally avoids capital gains tax on the sale (say the price is $8 million – paid with a note – and the profit is $6 million). No capital gains tax is owed on the $6 million profit and no income tax is due on the interest Joe is paid on the $8 million note.

Typically the note is paid in full over 5 to 8 years, using the cash flow of Success Co. When the note is paid in full the trustee of the IDT distributes the stock to the trust beneficiary (Sam). As you can see Sam never pays even a dollar to own the nonvoting stock. Neat!

An IDT sure wins taxwise over a typical sale to Sam. Why?… The huge tax burden on Sam for a typical sale disappears. For example, if the income tax rate is 40% (state and Federal combined), Sam must earn about $167 dollars, pay $67 in income taxes to have $100 left to pay his dad. With an $8 million price, Sam must earn over $13 million to pay Joe the $8 million.

Ouch! So bless the IDT.

#3. Make sure that Joe and Mary can maintain their lifestyle for as long as they live.

First, a little more information: Sam does a good job as one of 80 employees at Success Co… Is well liked by his fellow employees, but simply does not have what it takes to now or ever

manage the business. Yet, Joe and Mary want to keep Success Co. in the family… So Sam then is the only choice. But what to do about management?

David, the key employee, is the logical choice. We created a non-qualified deferred compensation plan that gives David the benefits of ownership – a share of the profits, gets paid if he gets sick (covered by insurance) and $1 million (again insured) for his family if he gets hit by a bus… all without owning any Success Co. stock.

David immediately took over as president of Success Co. and took over the day-to-day management of the company. Joe continued as chairman of the board and consulted with David regularly. Interesting, Joe technically had absolute control (owned all the voting stock) but never (so far, two years after the sale to the IDT) found a reason to exercise the control.

Joe continued to work, at full salary, but only worked half days. The intent is for Joe to cut his salary and days worked once his IDT note is paid in full.

An interesting note: Success Co. has grown in sales and net profit since David took over.

#4. Remove Joe’s bank guarantee for Success Co.’s loans? That was easy. A meeting at the bank caused the term-loan provisions to be rewritten, removing the guaranty once the IDT loan to Joe was paid.

#5. Treat Susan (the nonbusiness child) fairly. Besides Success Co. Joe and Mary have only $4.5 million in other assets, not enough to treat Susan equally, which is their definition of fairly. Remember, Success Co. is an S corporation and every year the IDT will receive a dividend from Success Co. equal to about that year’s profit. Here’s the strategy: We had the IDT buy second-to-die life insurance on Joe and Mary. Susan is the beneficiary of the IDT for the amount of the insurance, enough to treat Susan fairly. Where do the premium dollars come from?… The dividend distributions, each year, are first used to pay the insurance premiums, and the balance to pay the $8 million IDT note.

Finally, let me point out that most succession plans are similar to the hundreds of others we have done through the years. Yet each one, like Joe’s above, has some unique fears, problems and concerns. Do you have a business succession fear/problem?.. with or without a unique twist? We would like to write about your story and the proper solutions (without revealing your identity) in a future column. Please contact me by fax (847-674-5299), phone (847-674-5295) or email (Blackman@estatetaxsecrets.com). I’d love to hear your story.

In the meantime, if you have a question concerning the succession of your closely held business, call me (Irv) at 847-674-5295.



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

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

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

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

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

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

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

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

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

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

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

How can you help?… In two ways:

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

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

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

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