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Posts Tagged ‘401 k plans’

A Risk-Free Concept To Skyrocket Your Rate Of Return

Wednesday, April 15th, 2009

Tax-free investments are big. Interesting, tax-deferred investments are even bigger. Logically, tax-free should be number one. Sorry, but the cruel fact is that with the exception of life insurance (got to die to get your tax-free reward) or municipal bonds (plagued by low rates of return), there just isn’t much to talk about that’s tax free. Sad, but true.

Ah, but tax-deferred. That’s where the action is. The biggest tax-deferred sandbox to play in, by far, is the qualified plan area. They — profit-sharing plans, 401(k) plans, IRAs of all sorts, and others — abound. Billions pour in every year. Employer-sponsored plans are usually the tax-weapon of choice. Non-employer plans (traditional and Roth IRA) give every taxpayer an opportunity to play in this sandbox.

But IRAs have dollar limits. Tax-deferred annuities (annuities) have no limits. You can toss as many dollars as you like into annuities. All are after-tax dollars. Not one cent is deductible. Annuities earning powers are low (more about this defect later). Severe penalties murder your dollars if you want to get out in the early years. Simply put, there’s no liquidity.

So what’s the magnet that draws billions of dollars into this not-such-a-good-deal-investment? Here’s the answer and the magic words: tax deferred.

A word about annuity rates of return: Fixed annuities are the most popular. They currently pay in the three to three and a half percent range per year. (Older annuities, when interest rates were higher, paid more.) The new darling is indexed annuities. Your yield is pegged to some index, typically the S&P, on an annual basis. Often in a (say the S&P) loss year, you are guaranteed a small yield (usually in the one and a half to three percent range). A small percentage rise (say four percent) in the S&P is the exact percentage (four percent) you get, but a large rise is capped at six percent to eight percent (for example, the S&P increased by 14 percent but you only get seven percent.

Okay, so what’s a tax-deferred investment that doesn’t have all the impediments of annuities and has a huge rate of return without risk? Senior settlements.

An example is the easiest way to explain senior settlements. Suppose Joe, age 68, has a $400,000 life insurance policy with a cash surrender value (CSV) of $50,000. Joe would like to stop his annual premium payments. Instead of canceling the policy and taking the $50,000 CSV from the insurance company, Joe sells his policy as a senior settlement, receiving $120,000. Joe’s a happy camper.

Investors bought Joe’s policy. Senior settlements have been around for about 35 years. The tax consequences are a delight. Your tax liability for profits are completely deferred to the day you actually receive back your entire investment and your entire profit.

There’s a public company (trades on the NASDAQ) offering senior settlements. The average rate of return has been 15.82 percent per year throughout the company’s 15-year operating history. If your goal is to make a killing on your investments, senior settlements are not for you. (Just a note: AIG, the giant insurance company, and Warren Buffett’s Berkshire Hathaway Inc. invest in senior settlements.) But if an average rate of return (almost 16 percent), with no market risk, is of interest to you (or one or more of your qualified plans) you are invited to learn more about senior settlements. Just fax me (239-417-9045) your name, address, phone numbers (business/home/cell) and estimated amount to invest (minimum is $50,000 for accredited investors.)

Tags: 401 k plans, annuity rates, cruel fact, dollar limits, exact percentage, fixed annuities, iras, liquidity, municipal bonds, percentage rise, profit sharing, roth ira, sandbox, tax deferred annuities, tax deferred investments, tax dollars, tax free investments
Posted in Estate Tax, Featured, Investment Strategies, Retirement Tax Advice | No Comments »

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

Sunday, April 5th, 2009

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

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

Taxes that could have been avoided with proper planning.

Tragic!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags: 1 million, 401 k plans, annuities, balance sheet, beneficiaries, business life, business succession plan, capital gain, conservative investments, consultation, deceased person, employee benefit plan, endless stream, estate planning, Estate Tax, estate tax return, income in respect of a decedent, income tax, Insurance, IRA, IRS, marital deduction, moneymaker, potfolio, predictable response, professional advisers, profit, qualified retirement plan, return, sacred cows, stock market, strategy, tax deffer, tax free, tax free investments, tax liability, taxpayers, trusts
Posted in Estate Tax, Family Tax Issues, General Tax Strategies | No Comments »

Save by getting the real estate out of the corporation

Friday, April 3rd, 2009

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

Actually, we could write a small book about the various facts and circumstances you should consider. The book would answer many questions:

Are you a C corporation or an S corporation?

Are there retained earnings? How much?

How much has the real estate appreciated?

Each additional fact might change the tax strategy needed. To cover all the possibilities is beyond the scope of this column.

Instead, let’s set up the facts and circumstances that cover more 95 percent of the calls and the recommended solution to get-the-real-estate-out-of-the-corporation problem.

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

The Solution. Keep in mind that you don’t have to know how to build a car in order to drive one. Don’t sweat the technical details; just concentrate on the unbelievable favorable tax results.

Here’s the easy six-step process:

1. Joe forms a family limited partnership outside of Success Co. Then Success Co. contributes vacant land to the partnership. (If the land is improved, Success Co. keeps the improvements as leasehold improvements.) Say the land is worth $1 million. In exchange, Success Co. receives ownership of 99 percent of the limited partnership. Joe contributes $10,000 in cash for a 1 percent general-partnership interest. As the general partner, Joe has all the voting rights and makes all the decisions.

2. Success Co. leases the land for $100,000 a year.

3. An independent appraiser values the limited partnership interest at $600,000 after applying a 40 percent discount for lack of marketability. Yes, the $1 million property is worth only $600,000, because it’s in the limited partnership merely for tax purposes.

4. Success Co. contributes 99 percent of its limited partnership to a charitable trust with the following terms: The partnership will pay $99,000 a year to the trust for eight years. (Typically the trust then makes contributions to Joe’s Family Foundation. Follow the money: Success pays $100,000 rent to the partnership, the partnership pays $99,000 to the trust and the trust contributes to Joe’s foundation.

5. Joe’s children buy the remaining 1 percent interest from Success Co. According to the IRS, the value of the $99,000 the trust will receive over the eight years is $569,000. So the value of the part of the partnership that Success Co. still owns is $600,000 minus the $569,000, or $31,000. Simply put, Success Co. owns an asset that according to the IRS is worth $31,000. That’s how much Joe’s children pay.

6. After eight years, the trust ends. Joe’s children, who are the beneficiaries of the trust, receive and now own the 99 percent of the limited partnership. Remember, they bought the other 1 percent from Success Co. eight years ago. So Success Co. and the trust are out of the picture.

Better yet, the real estate is out of the corporation, owned 100 percent by Joe’s children.

And there’s a bonus: The real estate is also out of Joe’s estate. The entire transaction is tax-free to the partnership, the trust, Joe, the kids and Success Co, except that Success might owe tax on the $31,000 sale.

Tags: 1 million, 401 k plans, c corporation, circumstances, common denominator, corporation earnings, covenant, decisions, employee benefit plan, estate planning, Estate Tax, family limited partnership, favorable tax, general partner, income in respect of a decedent, income tax, Insurance, jonathan blattmachr, leasehold improvements, nook and cranny, one don, partnership interest, possibilities, predictable response, real estate, s corporation, sacred cows, scope, tax blunders, tax deffer, tax free investments, tax strategy, technical details, vacant land, voting rights
Posted in Corporate Tax, General Tax Strategies, Investment Strategies, Uncategorized | No Comments »

A smart way to transfer your business

Friday, April 3rd, 2009

This article is about an old IRS letter ruling that is one of my favorites. It might be labeled “The lazy man’s way to plan your business transfer.“

The ruling shows you how to take advantage of some favorable tax law while avoiding pitfalls. Good stuff!

Well, there is one slight problem to using the technique: You must drop dead before your family can enjoy the benefits of Letter Ruling 9116031.

But wait, hold the phone. The ruling has one redeeming quality. Really!

First, the facts: Joe, his wife, Mary, and their children owned all the stock in a family business. Joe died in 1990 and Mary inherited all of his stock.

(Note: Mary’s tax basis — for computing capital gains — is the fair market value (FMV) of the stock on the day Joe died. For example, if the FMV was $1 million and she sold it for $1 million, there would be no capital gains tax.)

The fact that Joe’s tax basis, while he was alive, was $25,000, is immaterial. Mary immediately sold all of her stock back to the corporation.

Here’s the general rule: When you or any member of your family sells stock back to your corporation (called a redemption), the redemption is usually taxed as a dividend — a tax disaster.

But there is a special tax-saving exception for a family member who has owned the stock for 10 years or more: If he/she divests all interest in the company (including any position as an officer or director), the redemption is treated as a sale (gets favorable capital gains treatment, instead of being a dividend).

Since Mary sold all (stock she owned before Joe died and stock she inherited from him) of her interest in the corporation, the purchase by the corporation of her shares was considered a bona fide sale (redemption) and not a dividend — a big tax victory.

When all the smoke cleared, not only had Mary escaped a big dividend income tax bill, but she had succeeded in effectively transferring the business to her children. How? Since the kids now owned all the remaining issued and outstanding stock, they owned 100 percent of the business.

To sum up: Mary walked off with a near-tax-free capital gain, (the price paid to Mary for the stock was a bit more than the exact FMV of the stock inherited from Joe) while the kids walked off with the business.

A fantastic tax result.

Stop and think about your own business succession plan for a moment. Isn’t that the result you want — a fantastic tax-free (for income, gift and estate taxes) result? Yes, you can get that tax-free result every time.

More often than not, succession plans are implemented during life, which means there is a second issue (the first issue is tax-free): control.

The typical business owner wants control of his business for as long as he lives. So, when you sit down with your professional advisors, make sure you accomplish a perfect solution to the two key issues: (1) a tax-free transfer and (2) keeping control for as long as you live.

If any other result is offered (no matter how good or smart it sounds), get a second opinion.

Tags: 1 million, 401 k plans, annuities, business transfer, capital gains tax, computing capital, dividend income, employee benefit plan, estate planning, Estate Tax, family business, family limited partnerships, family member, favorable tax, fmv, good stuff, income in respect of a decedent, income tax, income tax bill, Insurance, insurance premium, investment interest, IRA, IRS, irs letter ruling, lazy man, note payments, one of my favorites, painful subject, pitfalls, potfolio, predictable response, profit, qualified retirement plan, redemption, return, sacred cows, stock market, strategy, tax deffer, tax disaster, tax free, tax free investments, tax victory, wife mary
Posted in Corporate Tax, Estate Tax, Tax Strategies | No Comments »

Sick of paying tax? Call a tax doctor for a second opinion

Friday, April 3rd, 2009

Often, I feel like an old-fashioned country doctor makin’ house calls. But there is a difference: my patients are sick of paying taxes.

Recently, I visited a successful family business in North Carolina, owned by a semi-retired 64-year-old named Joe and run by his son, Sam, a 36-year-old.

Joe called me. He wanted a second tax opinion for a business transfer plan and an estate plan put in place by Sam (with the advice of his professional advisors, the “best” estate planning team in the county) almost two years ago.

Wow, this patient was really sick (running a high tax fever, bleeding lots of tax dollars).

This is the story of the symptoms, the diagnosis and the “magic tax potions” that cured the patient.

First, the facts:

Joe owns 98 percent of two corporations: a profitable S corporation (Success Co.), which operates a string of stores, and a C corporation (a tax-paying corporation, called R/E Co.), which owns real estate leased to Success Co.

The real estate has an income tax basis of $1 million, but a current fair market value of about $6 million. Sam owns the remaining two percent of the stock of both corporations. Each of the corporations is the owner and beneficiary of a separate $1 million insurance policy on Joe’s life.

Four more little details:

• Joe’s second wife, Mary, is 45 years old and they have a premarital agreement that gives Mary the income from one-half of the value of Joe’s assets at his death for as long as Mary lives. But get this: none of the stock of Success Co. can be used to provide Mary her income.

• An artificially low price in a buy/sell agreement would force Joe’s estate to sell his stock in Success Co. back to Success Co. and the same for R/E Co. (Result: Sam would then own 100 percent of both corporations.)

• Joe has two other grown children who are not in the business.

• Joe is not insurable.

The diagnosis:

• The $1 million in life insurance payable to R/E Co. would kick up an unnecessary alternative minimum tax.

• The full $2 million of insurance would be included in Joe’s estate because he controls both corporations, but the $2 million (less the alternative minimum tax of about $150,000) would belong to the corporations, not Joe’s estate.

• There are not enough liquid assets to satisfy the obligation to Mary. Worse yet, if the obligation to Mary is met, there would be zero dollars (outside of the corporations) to pay an estimated $3.5 million estate tax liability. Simply put, the estate would be broke.

Our objectives to cure Joe’s tax illness are clear:

• Reduce the value of Joe’s estate.

• Get cash to fund the obligation to Mary.

• Pay the estate tax.

Here are the five major tax medicines I recommended to cure Joe’s business transfer and estate plan:

• Merge R/E Co. into Success Co. This maneuver is tax-free. R/E Co. is worth about $6 million as a real estate investment company but, as part of the operating company, its value is reduced by at least $2 million for estate tax purposes. Estate tax saving — over $1 million.

• Transfer the nonvoting stock (created after the merger) to a grantor retained annuity trust (GRAT), which reduces the value of Success Co. by about 40 percent for estate tax purposes. This maneuver saves about $.5 million in estate taxes.

• Joe takes the $2 million in insurance policies out of the corporations and gives it to his children. Result: The value of Joe’s estate drops about $2 million and will save another $1 million plus in estate tax.

• Change Joe’s will to put the entire estate tax obligation on the children. The $2 million in income tax-free/estate tax-free insurance proceeds will handle the entire estate tax load when Joe dies.

• Make sure Joe’s will qualifies for the 100 percent marital deduction for Mary’s one-half share, thus deferring any estate tax on this portion of Joe’s estate until Mary dies. Yes, there are other details and nuances in the plan, including gifts to Joe’s children, but these five tax medicines cured the patient.

What’s the lesson to be learned from this true-life Joe/Sam/Mary story? Always, yes always, get a second opinion after your estate plan is done, preferably before any documents are signed.

Tags: 401 k plans, alternative minimum tax, annuities, business transfer, c corporation, employee benefit plan, estate planning, Estate Tax, family business, income in respect of a decedent, income tax, Insurance, insurance policy, investment income, IRA, IRS, jonathan blattmachr, painful subject, pension plans, planning team, potfolio, premarital agreement, professional advisors, profit, profit sharing, qualified retirement plan, return, s corporation, stock market, strategy, successful family, tax basis, tax bracket, tax deffer, tax dollars, tax free, tax free investments
Posted in General Tax Strategies, General Tax Talk, Uncategorized | No Comments »

Posts Tagged ‘401 k plans’

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

Save by getting the real estate out of the corporation

A smart way to transfer your business

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