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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

—

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

Okay, try this quick quiz: What is the most valuable asset you own? Hands down, almost every business owner answers, “My business.” Good! Next question … What’s your business worth? Silence! Yes, the final and most common answer is no answer — given 15 seconds or 15 months.

What happens in real life when those same business owners or their families must value the business? Stuff happens! Things like gifts of the family business stock to the kids; death (requiring valuation for estate tax purposes); or divorce (where valuation becomes an expensive legal battle).

Or, how about buying or selling a business? The wrong valuation can rob you and your family of hard-earned dollars. It can even cause your business to be sold to pay taxes.Here are three business valuation myths that I hear from business owners and their families when I consult with them. First, the business is worth book value (usually this value is too low); second, the value is eight to 10 times after-tax earnings (usually this value is too high); and third, an S corporation is worth more than a C corporation (a corporation that pays income tax) because an S corporation doesn’t pay income tax. (This is just plain wrong. There’s no difference in value.)

Visualize this: There are two piles of stock in front of you. One pile is made up of publicly traded stock, like Microsoft, IBM and Exxon Mobil Corp. with a total value of $4 million. The second pile is the stock of Your Family Business, Inc. (YFB, Inc.), also worth $4 million by the “right” (even the IRS would agree) valuation method. Think for a minute. Which pile is worth more? Right, the first pile: the publicly traded stock. Just call your broker and you can have the full $4 million in your bank account, less the broker’s commission, in a few days. What about the value of the second pile-YFB, Inc. stock? Well, the fact is that for tax purposes the courts give you a discount for general lack of marketability of about 35 percent, or about $1.4 million.

So, for tax purposes the stock of your $4 million family business is only worth $2.6 million. Surprise! Even the IRS has come around to agree with such discounts. The discount will, in this example, save your estate about $700,000 in estate taxes.

What is the most common reason for valuing a family business? Hands down, when dad (or mom or both) want to transfer the business to the kid(s). Now during dad’s life.

Dad usually has three basic requests: (1) “Make sure my lifestyle (and my spouse’s) can be maintained for life”; (2) “Want to control my business (and my other assets for as long as I live”; and (3) “Transfer my business to my kids tax-free (no income tax, capital gains tax or other taxes).”

Yes, all three basic requests are easy to accomplish if you employ the proper tax-strategies: The core strategies are (1) a well-done valuation (acceptable by the IRS), which is easy to do; (2) a recapitalization (creates voting and nonvoting stock); (3) use an intentionally defective trust (avoids all taxes on transfer of nonvoting stock to kids).

But we need some readers to volunteer their family businesses so we can structure a plan(s) and then write about them in future columns. Real names will be withheld. Don’t worry about your exact facts Maybe you have only one kid in the business; maybe two or more; maybe some in the business, some not; or maybe no kids in the business and you want to get the business to one (or more) employee(s) (and, of course, they have no money).

Just two ground rules: (1) You really want to transfer your business to your kids, other family members or employees (no hypotheticals) and (2) your business has a real fair market value of $3 million or more (your best guess of what a real buyer would pay). Just call me (Irv Blackman) at 239-417-9732 and let’s chat about your exact situation.

The problem is not new. It’s part of the past and, more than likely, will get worse in the future as the bidding war for talented people escalates. What to do?

Nearly 20 years ago, after struggling with the problem for about a year, we decided to develop an organized plan to find the answers. We interviewed our few client/owners who did not have the two problems; we also interviewed their key management people. Then came the hard part: getting permission to interview the key people at clients that were suffering with the problem.

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

The answer turned out to be simple: Mimic ownership. Give them the same challenges as an owner and, if successful, most of the rewards. Additional interviews just kept reconfirming the original answers.

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

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

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

A piece of the action — Typically, this is a percentage of the yearly profits in excess of specific dollar amounts. Often, the percentage grows as the business and profits grow. For example, Sam Eager will get three percent of all before-tax profits in excess of $200,000 and up to $300,000; five percent from $300,000, to $400,000; and eight percent over $400,000. Suppose the amount for a particular year is $24,000. Usually, Sam will get about one-third ($8,000) in cash and the balance ($16,000) is deferred. The deferred portion is invested for Sam’s benefit. When does Sam get the deferred portion and the accumulated earnings on this portion (usually called the side fund)? When he becomes disabled, dies or reaches retirement age (the age is usually set around 58 for younger key employees and in the 65-age range for older key people). When the key employee becomes entitled to collect the side fund (say it is $500,000), it usually is paid out in equal annual installments (say 10 years) or $50,000 per year plus the additional investment earnings for that year.

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

Retirement — The side fund (described in one above) supplements any regular retirement program (like a 401k or profit-sharing plan). Typically, the executive is allowed to direct the investment of the side-fund, which remains an asset of the employer. Following are the tax consequences of the arrangement: The side-fund earnings are taxable to the employer. When the employee receives a distribution, the company gets a deduction for the exact amount distributed and the employee must report the identical amount as taxable income. If the employee leaves for any reason — except because of disability, death or retirement — the entire side fund is forfeited by the employee and remains the property of the company. Hence, the name, golden handcuffs.

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

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

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

In a way this getting-and-keeping good people is a frustrating subject. The reason is that we have never been able to develop a cookie cutter solution. Yes, the four core benefits are almost always the same or similar. But the bells, whistles and unique requirements of each situation makes it impossible to write a complete report — much less a book — on the subject. But if you have a question call Irv Blackman at 239-417-9732. Let’s chat about your specific key employee situation and how to keep ’em.

If you are worth about $6 million (or less) the answer to the question is almost always ‘Yes’; worth more, usually, ‘No.’ Let’s talk real numbers. Joe is worth $10 million and Jack is worth $20 million. Both are married. Joe’s estate tax damage (using 2011 rates) would be about $4 million; Jack’s, a tragic $9.5 million.

The higher your wealth, the less chance you have for killing the estate tax. Ah, but we can always — yes, always — entirely avoid the impact of the estate tax. For example, if you are worth $8 million, we know how to get the full $8 million (all taxes paid in full) to your family; worth $80 million, the entire $80 million to your family. Yes, it can always be done, whether you’re single or married, young or old, and even insurable or uninsurable.

Let’s play the game together. Substitute your own numbers into the little example that follows: Suppose you are worth $12 million and married. Subtract $2 million ($1 million if single), which leaves $10 million; then 50 percent times $10 million gives you your bitter estate tax bite; add 55 percent for your worth in excess of the $10 million.

Now, here’s the secret for legally avoiding the estate tax: create tax-free wealth. There are two ways: charity and life insurance. Both, if you do it right, put you in a tax-free environment.

Here’s a real-life story of Joe, a 63-year old business owner from Nebraska and married to Mary, age 62. Joe and Mary are worth $23 million. Using our little example above, the estate tax monster would eat $11.05 million of their wealth.

We designed a comprehensive and coordinated succession and estate plan for Joe and Mary that included four significant strategies: An intentionally defective trust to transfer Joe’s business to his kids tax-free; A family limited partnership for their investment assets (a stock and bond portfolio and real estate) and two different life insurance strategies, which are described below.

A side note before continuing: Every case is different. Different people, businesses, situations and facts. A big factor for Joe and Mary was their health: excellent for their age. So insurance went front and center.

So Joe has $.7 million in his company’s 401(k) and $1.4 million in various IRAs, which we transferred into the 401(k) a tax-free transfer. Then, we used a strategy called “retirement plan rescue” (RPR) — for the 401(k) — that purchased $6.5 million of second-to-die life insurance on Joe and Mary. Because of double taxation — first income tax and then estate tax —the $2.1 million in the 401(k) (without the RPR) would only net about $.6 million to Joe’s heirs. Sorry, but the tax collector would get the rest: $1.5 million.

The RPR allows the entire $6.5 million of life insurance to go to Joe’s and Mary’s heirs tax-free. In effect, we turned $.6 million into $6.5 million. Good for the kids, bad for the IRS. Neat!

One more point: We showed Joe how to invest his $2.1 million funds in his 401(k) in TIPs (“transfer insurance policies,” a form of senior settlements). TIPs currently earns 15.82 percent on average per year, without “Wall Street” risk. TIPs are the brainchild of a public company (sells on the NASDAQ). Joe’s prior investments were averaging a seven percent annual return with stocks, bonds and mutual funds.

Another strategy: Joe and Mary needed an additional $5 million of life insurance. At their age (if you don’t use a RPR) the premiums are normally very expensive. We used a strategy called “premium financing” (PF) to buy $5 million of life insurance on Joe’s life. PF allows you to buy life insurance without paying your premiums in cash. Instead, premiums are paid by having a trust you create pay each premium by the trustee signing a note to the lending bank.

Interest is added to the loan. All premium loans, plus accrued interest, will be paid out of the death benefits when Joe dies. The only costs paid by Joe are to the banks for initiating and maintaining the loan: about $60,000 paid the first year and an additional $180,000, which is paid in small amounts each year to age 100. Really an economic homerun: getting $5 million tax-free to Joe and Mary’s heirs for a small out-of-pocket cost of $240,000 (or less), which is paid over about a 30-year period. No question about it, PF is the most inexpensive way to buy life insurance (whether you buy $5 million, $10 million or more). You must qualify to use PF by being credit worthy and worth a minimum of $5 million.

These subjects — RPR, TIPs and PF — always create a blizzard of questions. So, if you would like to get more information about a RPR fax me your birthday and your spouse’s (if married). Also the total value of all of your qualified plans: 401(k), IRAs, etc. (total should be $200,000 or more). Write “RPR” at the top of the page.

Interested in premium financing? Fax me birthdays for you and your spouse and your net worth (must be at least $5 million, more is better). Write “Premium Financing” at the top of the page.

Interested in earning 15.82 percent on average per year? Fax me the estimated amount you may invest ($50,000 minimum). You must be an accredited investor. Write “TIPs” at the top of the page.

Please fax all inquiries to Irv Blackman at 847-674-5299: Include your name, your company name, home or business address, e-mail address and all phone numbers where you can be reached (home, business and cell) and all additional info requested above for your area of interest.

Finally, if you want to know how to create your own business succession plan and/or estate plan that totally conquers the estate tax, check out one of my web sites:

www.taxsecretsofthewealthy.com

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

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

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

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

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

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

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

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

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

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

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

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

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

You (Joe) operate your family business (Success Co.) as a corporation. The assets of Success Co. include a number of appreciated assets; for example, investments in stocks, land and buildings. Also many assets subject to deprecation — mostly equipment — are on the books for much less than their current value. Now suppose Success Co. is correctly valued at $5 million. The value of the various assets that Success Co. owes is $4 million, but has only a book value of $3 million. So, if Success Co. were to sell the assets or actually liquidated (neither Joe nor Success Co. intend to sell the assets or liquidate), there would be a $1 million profit. Say the tax (state and federal) on the profit would be $400,000. The question that faced the court was could the value of the corporation be reduced by $400,000 to $4.6 million? “Yes,” said the court, turning thumbs down on the IRS’s claim to ignore this built-in-gains discount (actually the potential tax due for an asset sale or corporate liquidation).

Applause! Applause! for the court. Think about it: That discount of $400,000 could save Joe about $210,000 in estate taxes.

As a practical matter, this case allows you to take three distinct valuation discounts: (1) a discount for lack of marketability; (2) discount for built-in gains of assets, even if you don’t intend to sell them or liquidate (technically a part of the marketability discount); and (3) a discount for minority interest if you are transferring 50 percent or less of your stock to one person (for example, Joe Gives 30 percent of his Success Co. stock to each of his two children). After these three discounts, a $5 million company may only be worth in the $3 million range for tax purposes. Or a $2 million discount, yielding estate tax savings of about $1.1 million. Truly a great victory!

Now a personal puff of pride for our office, which has a large valuation department. We have been taking similar discounts for built-in gains for years.

The right value of your business, whether transferring to your kids, for estate planning or for other purposes, is one of the most important tax-impact considerations in the law.

Do you have a business valuation problem — particularly if you want to transfer your business to another family member — that is driving you up the proverbial “tax wall?” Then you are welcome to call me (847-674-5295). Let’s chat about your exact situation.

“Irv, can you help me avoid (or beat/or kill/or finesse/and many more variations) the estate tax?” Often, an obscenity or two are tossed into our conversation.

If you are worth about $6 million (or less), the answer to the question is almost always “Yes.” Worth more? Usually, “No.”

Let’s talk real numbers: Say Joe is worth $10 million and Jack, $20 million. Both are married. Joe’s estate tax damage (using 2011 rates) would be about $4 million and Jack’s a tragic $9.5 million.

The higher your wealth, the less your chance for killing the estate tax. Ah, but we can always — yes, always — entirely avoid the impact of the estate tax.

For example, if you are worth $8 million, we know how to get the full $8 million (all taxes paid in full) to your family, or, if you are worth $80 million, the entire $80 million to your family.

Yes, it can always be done, whether you’re single or married, young or old, and even insurable or uninsurable.

Let’s play the game together. Substitute your own numbers into the little example that follows: Suppose you are worth $12 million and married.

(a) Subtract $2 million ($1 million if single), which leaves $10 million;

(b) then 50 percent times $10 million gives you your bitter estate tax bite;

(c) add 55 percent for your worth in excess of the $10 million.

Now, here’s the secret for legally avoiding the estate tax: create tax-free wealth. There are two ways: charity and life insurance. Both — if you do them right — put you in a tax-free environment.

Here’s a real-life story of Joe (a 63-year old business owner from Nebraska and married to Mary, age 62), who winters in Florida. Joe and Mary are worth $23 million. Using our little example, the estate-tax monster would eat $11.05 million of their wealth.

We designed a comprehensive and coordinated succession plan and estate plan for Joe and Mary that included four significant strategies:

(1) an intentionally defective trust to transfer Joe’s business to his two business kids, tax-free;

(2) a family limited partnership for their investment assets (a stock and bond portfolio and real estate);

(3 and 4) using two different life-insurance strategies, which are described below.

A side note before continuing: Every case is different. A big factor for Joe and Mary was their health: excellent for their age.

Now, Strategy No. 3: Joe had $.8 million in his company’s 401(k) and $1.5 million in various IRAs, which we transferred into the 401(k), a tax-free transfer.

Then we used a strategy called the “Qualified Plan Rescue” (QPR) for the 401(k) that purchased $6.5 million of second-to-die life insurance on Joe and Mary.

Because of double taxation — first income tax and then estate tax — the $2.3 million in the 401(k) (without the QPR) would only net about $600,000 to Joe’s heirs. Sorry, but the tax collector would get the rest: $1.5 million.

The QPR allows the entire $6.5 million of life insurance to go to Joe’s and Mary’s heirs, tax-free. In effect, we turned $.6 million into $6.5 million. Neat!

One more point: We showed Joe how to invest his $2.1 million funds in his 401(k) in TIPs (“transfer insurance policies,” a form of senior settlements). TIPs earn in excess of 16 percent on average per year, without risk. Joe’s investments were averaging only 7% per year with stocks, bonds and mutual funds. TIP investments are the creative idea of a 14-year-old public company (trades on the NASDAQ) that has paid a 16.36% average annual return since it has been in business.Ask your professional to check out QPRs and TIPs.

Finally, Strategy No. 4: Joe and Mary needed an additional $5 million of life insurance. At their age (if you don’t use a QPR) the premiums are steep. We used a strategy called “premium financing” (PF) to buy $5 million of life insurance on Joe’s life. PF allows you to buy life insurance without paying your premiums in cash. Instead, premiums are paid by having a trust you create pay each premium by the trustee signing a nonrecourse note to the lending bank. Interest is added to the loan.

All premium loans, plus accrued interest, will be paid out of the death benefits when Joe dies. The only costs paid by Joe are to the banks for initiating and maintaining the loan: about $60,000 paid the first year and an additional $180,000, which will be paid in small amounts each year to age 100.

Here a real economic home run: getting $5 million tax-free to Joe and Mary’s heirs for a small out-of-pocket cost of $240,000 (or less), which is paid over about a 30-year period.

No question about it, PF is the most inexpensive way to buy life insurance (whether you buy $5 million, $10 million or more). You must qualify to use PF: be credit worthy and worth a minimum of $5 million.

These subjects — QPR, TIPs and PF — always create a blizzard of questions. So, if you would like to get more information about a QPR (and/or TIPs), send me your birthday and your spouse’s birthday. Also the total value of all of your qualified plans: 401(k), IRAs, etc. (total should be $100,000 or more). Write “QPR” at the top of the page.

Interested in TIPs? Fax the estimated amount you may invest ($50,000 minimum).

You must be an accredited investor. Write “TIPs” at the top of the page.For all inquiries please include your name, your company name, home or business address, e-mail address and all phone numbers where you can be reached (home, business and cell).

Even more fun is consulting with column readers to solve their real-life family and tax problems.

When a reader consults with me, I ask him/her to send some basic data, including a copy of their current estate plan. Recently, a small parade of readers have asked me to review — or give a second opinion on — what I call “Johnny-one-note estate planning.”

If your estate plan is done or is in the process of being done, the rest of this item is “must” reading. Estate plans that are built around one main theme (Johnny-one-note) do not play well in the complex world of dozens of concepts available to eliminate the estate tax.

Of the last 31 plans I have reviewed, 26 were based on a single theme. The runaway winner (really a loser in tax-saving effectiveness) is the creation of a revocable trust (RT) — one for him and one for her, where a married couple is involved.

An RT for married folks is a good start to an estate plan, but its only good tax trick is to defer the big estate tax bite until the death of the second spouse.

Two other strategies that I see regularly as Johnny-one-notes are the sale of a business to the kids by the business-owner dad (SALE) and family limited partnerships (FLIPs).

A SALE is often used as a strategy to sell your business to your kids (usually on an installment basis). Never, but never, have I seen a sale of a family-owned business as a tax-effective way to transfer a business to the next generation. Instead, take a look at an intentionally defective trust (IDT), which is the best way to transfer a business tax-free from Dad/Mom to the business kids.

A FLIP is usually not an effective way to deal with a business, a residence, or money in an IRA, profit-sharing plan or similar plan. But it’s a wonderful tax-saving starting point for almost every other asset you might own (stocks, bonds, real estate, you name it.) Properly used, you can 97-26(2) control the assets for life, protect them from the claims of creditors, and reduce their value for estate tax purposes immediately by 30 percent to 40 percent.

For example, say your transfer $1.5 million of investment assets (stocks, bonds, real estate) to a FLIP. For estate tax purposes, the assets are only worth about $1 million, resulting in estate tax savings of about $250,000.

This column over the years has covered RTs, IDTs and FLIPs in detail.

One way you can tell if your estate plan is really properly done is by looking at the estate tax liability if you and your spouse get hit by that proverbial truck.

Whether the liability is $500,000, $5 million or more, your estate plan needs a second opinion.

Why?

Your target should always be to move all your wealth — intact — to your family (for example, if you’re worth $5 million, then the entire $5 million to your family; $50 million, the entire $50 million, etc.).

Following is a list of the six most common strategies we use to transfer your wealth — intact —and eliminate estate taxes. In parenthesis following each strategy is the type of assets you should own to consider the concept.

(1) Qualified personal residence or QPRT (residence).

(2) IDT (your family business).

(3) Subtrust (junk money and other strategies if you have a total of more than $350,000 in your IRA, profit-sharing or similar plan).

(4) Charitable remainder trust or CRT (appreciated assets, including a family business) Briefly, a CRT eliminates the capital gains tax and estate tax.

(5) FLIP (for all assets not list above, generally income producing investments).

(6) Irrevocable life insurance trust or ILIT (insurance is estate tax free to you and your spouse). Use other assets to pay premiums at little or no tax cost.

(7) Premium financing (allows you to buy insurance without paying premiums in cash).

The list goes on and on. Always has, always will.

Yet the pride of the American capitalistic system is the successful family business. These entrepreneurs have found their way through, around or over the seemingly endless obstacles to become a “successful business owner.”

An SBO for short.

For the purposes of this article, SBOs have excess funds to invest (other than back into the operation of their business that produced the funds in the first place). Typically these excess funds are in one (or more) of three places: (1) still in the business, (2) in their (or spouse’s) name or (3) in a qualified plan (profit-sharing, 401(k), IRA or similar plan).

Over the years, the quote that follows has been nicknamed the SBO’s lament:

“I know how to make money in my business, but when it comes to making money with my investment money, either I don’t have time to watch it, don’t know how to watch it or rely on my investment advisor. When the market is up, my advisors do fine, when it’s down they do lousy.”

For the past couple of years, the lament usually ends with, “Now the market is lousy (or down, or uncertain, or similar words). What should I do?”

Now, regular readers of this column know that I am a tax planner prone to finding legal ways to avoid all types of taxes — particularly estate taxes. To do this requires, among other things, getting my client’s personal balance sheet.

Here’s what I can tell you that the balance sheets reveal about the investments of SBOs (and also other estate planning clients). Their success (or failure) in the stock market and a myriad of other investments, in general, mirrors the Dow Jones: happy on the way up and painful on the way down.

Usually, real estate investments are a winner.

Now what about that excess cash? Terrible results. Almost always the investments are conservative: divided between (1) CDs and money market funds, (2) municipal bonds and (3) a “zillion” variety of annuities. After taxes and inflation, your net earnings on (1) investments are typically less than 3 percent, sometimes even negative. Those income tax free bonds, (2), not only have a low rate of return, but fall in value when interest rates rise. Annuities, (3), could fill a large book to describe all the varieties and, most of all, the complaints from clients.

Never has a client told me that he/she is happy with the results of an annuity. (Sure would like to hear from a reader who has personally had a positive experience with any annuity.)

As you can imagine, almost every estate planning consultation with an SBO — and other clients — requires serious consideration concerning the client’s investments: safety, risk, tax consequences, rate of return and other factors. We discuss alternate investments, considering, among other things: profitability, risk and how taxed.

Currently, the most popular alternative investment is senior settlements (SS), also called Life Settlements. The following quote from The Wall Street Journal and USA Today (and other sources) tells you why SS are becoming such a popular investment.

“Life Settlements (have become a) trillion dollar industry, dominated by institutional investors including Berkshire Hathaway (billionaire Warren Buffet’s company), AIG and CNA. Their pursuit of this market is related to the degree of safety, high yields in excess of 15 percent per year and the fact that a Life Settlement is not affected by market forces.

“Life settlements are a very good option for the investor who has as his or her investment philosophy a desire for a secure, safe and ‘no risk’ investment. It is for your ‘nest egg’ money. It is not considered a security by SEC. Therefore it is not normally provided as an investment option by stock brokers.”

Of course, your question is: “Can a little guy (as opposed to an institutional investor) invest in SS?

Yes, it’s all made possible by a small, publicly traded (on the NASDAQ) company. Its average rate of return an SS investments has been 16.28 percent per year on average during the company’s 14-year operating history.

If you want to make a killing on your investments, SS are not for you. But if a 16 percent-plus rate of return, with no market risk is of interest to you (or your IRA, 401(k) or other qualified plan) fax me (847-674-5299) your name, address, phone numbers (business/home/cell) and estimated amount to invest ($50,000 minimum, for accredited investors).