Posts Tagged ‘401 k’

Don’t Let ‘Estate-Tax-Itis’ Drain The Family Wealth

Wednesday, April 15th, 2009

Adreaded disease is spreading like wildfire — in all 50 of the United States.

It debilitates most successful business owners, then, ravages some or all of the kids and eventually hurts the grandkids.

Known by various names, the most common name is “estate-tax-itus.” It drains family wealth.

Some people don’t even know they have the disease. Most know because they have the painful symptoms (a huge tax bill) and search in vain for a cure. They attend seminars, read articles, special reports and books. They go from advisor to advisor looking for relief.

The key question is: “Is there a cure?”

The answer is a resounding :Yes!”

This article shows you how to start the process to totally cure estate-tax-itus for yourself, your family and your business — every time, no matter how young or old you are, whether you are worth $1 million, $10 million (or much more).

There are many ways to fight the disease, but the best way is to build a “tax-immune system.” For best results, start today.

Here’s a three-step process that works every time. Steps No. 1 and No. 2 make the diagnosis. Step No. 3 accomplishes the cure.

Step No. 1: Prepare a personal financial statement for you and your spouse. Divide your assets into the following five categories.

— Residence

— Business

— Qualified plans (pension, profit-sharing, 401(k), rollover IRA or other qualified plans)

— All other assets (typically, investments)

— Life insurance

Step No. 2: Make a list of your goals (actually three lists) — (1) for you and (if married) your spouse; (2) for your family (typically children and grandchildren); and (3) your business.

Here are the typical core goals we see in practice:

For list (1) — Maintain your lifestyle for as long as you (husband and wife) live and allow you to control your assets for as long as you live;

For list (2) — transfer your assets to the children and grandchildren intact — free of the estate tax-and educate your grandchildren;

For list (3) — transfer your business to the business child (or children) tax-free and treat the non-business children fairly.

Step. No. 3: Find an advisor who knows how to identify and implement the exact tax strategies that accomplish your goals using the specific assets on your financial statement.

Following are the are most often-used strategies we use in our practice to accomplish a typical client’s goals, based on the assets owned.

Your Residence. Use a Qualified personal residence trust to remove the residence from your estate, yet live in it and control it for as long as you live.

Your Business. Transfer your business to the business children using an Intentionally Defective Trust. It removes the business from your estate, transfers business to kids (tax-free to you and the kids), yet allows you to keep control for life (because you retain voting control).

Qualified plans. The funds in these plans are double-taxed, robbing your family of about 75 percent of the plan funds (i.e. the tax collectors get about $750,000 if you have $1 million in the plans, your family receives only $250.000).

Create a Subtrust or retirement plan rescue (RPR) to buy life insurance. This usually triples (or more) the amount you have in the plan, and your heirs get it all tax-free. For example, $1 million in the plan (worth only $250,000 to your family) will turn into $3 million (or more) for your family with a Subtrust or a RPR. And the entire $3 million is tax-free.

All other assets. Transfer these assets (all your assets, except those in the first three categories; for example, publicly traded stocks, bonds, real estate and other investments) to a family limited partnership, which legally reduces the value of these assets for tax purposes by 35 percent (yes, $1 million of real estate, stocks, bonds, etc. are only worth only $650,000 for tax purposes.)

Insurance. Get it out of your corporation and transfer all policies you or your spouse own to an irrevocable life insurance trust (But a Subtrust is best, if you can use it. See 3. above). Also, check out premium financing, a wonderful concept that allows you to buy huge amounts of life insurance ($3 million, $10 million or more) without paying premiums.

Finally, if your estate plan is already done, and it does not effectively eliminate the estate tax, get a second opinion.

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Posted in Estate Tax, Family Tax Issues, Investment Strategies, Planning | No Comments »

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

Wednesday, April 1st, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Posted in Estate Tax, Family Tax Issues, General Tax Strategies, Insurance, Investment Strategies, Planning, Tax Strategies | No Comments »

Multi-generational planning means more wealth for all.

Monday, March 30th, 2009

While browsing though my small mountain of files looking for ideas on what to write, I ran across a timely and interesting article in an old issue of Newsweek titled, “Darling, It’ll All Be Yours — Soon.” The article explains how “the inheritance boom is quietly reshaping how we think about death.” How true.

When I began my professional practice as a certified public accountant and lawyer back in the 1950s, a millionaire was hard to find. Today, millionaires are plentiful. And when it comes to estate planning, they scurry around trying to find a professional who can lower their estate tax before they get hit by the “final bus.” The Newsweek article by Robert J. Samuelson, like so many other articles, entertainingly explored the problem but offered no solutions.

Let’s set the scene for how you — whether mom and dad trying to give it away tax-free or one of the kids on the receiving end — can, in fact, solve the problem. Let’s start with the elders, mom and dad, who have the wealth.

Fact number one: You aren’t dead yet. Typical estate plans, such as separate wills and trusts for him and her, don’t speak until you are dead — too late to beat the tax collector. The solutions lie in lifetime planning. A lifetime plan keeps you in control of your wealth for as long as you live, yet transfers it—including your business—to your kids (and grandkids) while you are alive.

Fact number two: Years of experience have taught us that wealth is always passed to the younger generations of the family. And then the younger generations step into mom’s and dad’s shoes and typically increase the family wealth.

This gives the second generation an even bigger estate tax problem than mom and dad had.

Here’s how we solve this do-not-enrich-the-IRS estate-tax problem:

Logic tells you that children, particularly business children, are likely to become wealthy.

Usually these children accumulate more wealth than their mom and dad — to be repeated again when the family wealth goes to the grandchildren two generations later. Because of this generation-to-generation wealth transfer, we view each generation of the family separately in terms of their special needs and objectives.

Yet, the plan should not be just for mom and dad. It should be a comprehensive and integrated plan for the entire family. Following is an overview of how it’s done.

Keep your wealth — every dollar of it — in your family, instead of losing it to taxes.

• First Generation. Install a lifetime plan that removes wealth from your taxable estate during life. Use strategies like a qualified personal resident trust for your residence; an intentionally defective trust for your business; a subtrust for your profit-sharing plan, rollover IRAs and similar plans; a family limited partnership for your other assets (typically investments, like stocks, bonds and real estate); and an irrevocable life insurance trust for insurance, probably second-to-die. All of these strategies — and there are many others — begin their work now while you are alive and allow you to stay in control of your assets, including your business, for as long as you live.

Of course, we’ll dovetail your will and trust (death documents) with your lifetime plan. But when done right, your death documents just clean up what’s left. The first part of the family plan, including a business succession plan, and your wealth transfer plan are completed tax-free while you and your spouse are alive.

• Your Kids—Second Generation. After completing a comprehensive plan for mom and dad, it is easy to project what the financial future of the kids might look like. As soon as we finish the plan for the first generation, we start a plan for each of the kids, based on their individual assets and objectives.

• Your Grandchildren— Third Generation. The plans for this generation are closely tied to the plans of the two older generations. Probably the most important point to keep in mind, because of the young ages in this generation, is getting the children into a tax-free environment as soon as possible, a wealth-building must. These plans center on short-term and long-term tax-advantaged strategies that fulfill lifetime needs: education, buying a house, starting a business and, if they don’t go in to the family business, building a retirement fund.

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Posted in Irv Talk, Planning, Uncategorized | No Comments »

Try two winning tax strategies with a life insurance product.

Thursday, March 26th, 2009

Want to make a grown man cry?

Tell him that all those beautiful dollars in his qualified plans — profit-sharing, 401(k), IRA and the like — are worth only 27 to 30 cents after taxes. Sorry, but it’s true.

The IRS hits you with two taxes: income tax (up to 40 percent or more, including state and federal) and estate tax (up to 55 percent using 2011 rates). Then, depending on where you live, your city, county or state gets a piece of the action.

Outrageous!

The first order of business is to get a fix on how much of your plan money is destined to wind up in some tax collector’s pocket. A call to your plan adviser is all it takes.

Just to get some numbers on the table, suppose you have $1 million in all your plans combined and the estimated tax burden is $730,000. Only $270,000 goes to you and your family. Ouch!

Can anything be done about it? Yes. But you must be proactive.

There are many strategies, but let’s take a look at the two most common: the junk-money strategy and the subtrust strategy.

Both are very complex and need an expert to cover all the details. Yet the wonderful benefits are easy to understand and attain. Think of it as enjoying the ride when you drive a car, but not knowing how to build one.

Both strategies use a common denominator: a life insurance product (usually second-to-die). The eventual proceeds of the life insurance, say $1 million, go to your family free of the income tax and estate tax. Simply put, you have turned $270,000 of after-tax value into $1 million tax-free.

There’s usually still plenty of money left in the plan. For example, as I write this, the cost of a second-to-die policy for a husband and wife, both age 65, is only in the $15,000-per-year range. You must get your own quote.

The junk-money strategy starts by using your plan dollars to buy an annuity — a tax-free transaction. A portion of the annuity is used to pay the life insurance premium.

The subtrust is created as part of your qualified plan (actually the current plan — usually a 401(k) plan or a profit-sharing plan — is amended or a new plan is created). Then your plan trustee transfers the necessary premium dollars to the trustee of your subtrust to pay the policy cost.

As far as I know, there is nothing better in the tax law than these two strategies to snatch a tax victory out of the snarling jaws of a sure defeat. If you have $350,000 or more in your qualified plans — rollover IRA, traditional IRA, 401(k), profit-sharing and the like — you owe it to yourself and your family to look into both strategies.

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Posted in Tax Strategies | No Comments »