Posts Tagged ‘earned wealth’

Irv Didn’t Invent Taxes, Just 227 Ways To Beat Them

Saturday, March 28th, 2009

There are three main ways the federal tax law picks your pocket and becomes your legal partner: payroll taxes, the income tax and the estate tax. So, how can you fight back?  Here are five areas in which you can save money from taxes.

Column from: Modern Machine Shop, Contributed by: Irving L. Blackman

Would you believe that the basic tax law, the Internal Revenue Code and regulations, is about 50,000 pages long with no logical, organized theme? There’s also a constant stream of Internal Revenue Service rulings and case law. No one person can know it all—not Congress, which passes the law, nor the IRS, which enforces it.

There are three main ways the federal tax law picks your pocket and becomes your legal partner: payroll taxes, the income tax and the estate tax. So, how can you fight back? One day, just for fun, we (four tax guys) started to count the ways to legally get around paying the three taxes listed. We were just getting warmed up when we counted 227 options and stopped. The following are five areas in which you can save money from taxes:

1. Payroll Taxes. This money-stealing parasite is persistent and expensive: This year, $16,404 on the first $106,800 of your earnings goes to the tax man. That’s a scandalous 9.76 percent. For earnings of more than $106,800, you pay an additional 2.9 percent.

Here are examples of the three most common ways to lose payroll taxes to the IRS: The first mistake involves Joe, the owner of an S corporation who taxes a large salary (often $500,000 or more) and takes a huge bonus at the year’s end to bring down profits. For this S corporation, a tax-free dividend instead of compensation would save a bundle of unnecessary payroll taxes and would cost no more in income taxes. A second payroll tax mistake is when owners’ wives and moms take a salary when they either don’t work or are overpaid. It is much better tax-wise to give them a gift. The third mistake is operating a business as an LLC, which makes all income to the owner(s) subject to payroll taxes.

2. Asset Protection. In a heartbeat, your family wealth, including your business, can be depleted or even destroyed by a lawsuit.

Keep your business thin by keeping only those assets—typically, necessary cash, inventory and receivables—needed for operations in your business. Here are some basic sub-strategies: Elect S corporation status; personally own (via separate LLCs) any new real estate or expensive equipment, and lease it to your operating company; and never own delivery vehicles in your operating company. Put the vehicles into a separate corporation or LLC.

The sad fact is, we can’t protect the assets inside of your operating company, but we can protect you and your spouse. All of your significant assets are simply retitled using typical lifetime planning documents—such as family limited partnerships, LLCs and appropriate trusts.

3. Life Insurance. You can save money in taxes whether you, your spouse or your kids own the insurance.

Critical issues concerning life insurance are premium cost, the death benefit and the tax due on the benefit at death (usually the estate tax). The following are common ways to modify insurance plans to save premiums or increase the death benefit without additional costs:

• For single life or second-to-die insurance, you can get a cash-surrender value of more than $200,000 on a policy that is 9 years old or older. This results in significantly more death benefit for the same premium cost or a significantly reduced premium cost for the same death benefit.

• If you, the husband, are at least 55 years old, worth more than $5 million and have insurance on your life only, you are wasting premium dollars. Second-to-die coverage with your wife will typically give you the same death benefit for about 35 percent less premium cost.

• If you have more than $400,000 in a qualified plan such as a 401(k) or IRA, that amount is subject to a double tax (income and estate) of as much as 73 percent to the IRS. On average, you can turn every $270,000 of after-tax dollars into $3 to $5 million (tax-free), depending on your age and health. This plan works for second-to-die or single life insurance.

4. Business Succession. This affects your business and your business kids. The typical business owner wants to transfer the business to his kid(s) so that he and his kid(s) don’t get killed by taxes. He also wants to treat his non-business kids fairly, ensure that he controls his business for as long as he lives and ensure that the company stock stays in the family by never going to a kid’s ex-spouse. Every one of these goals is easily accomplished. Best of all, the business can be transferred tax-free, with no income tax, gift tax or estate tax for the owner or the kids.

5. Estate Plan. A proper estate plan is actually two plans: a lifetime plan and a death plan. The plans are designed to cover every significant tax-saving possibility—from the minute the lifetime plan is created until after you get hit by the final bus (covered by the death plan).

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Gaining wealth is easy when compared with human aspect of tax game

Saturday, March 28th, 2009

Recently, I read an article titled What Makes for Success? by Kemmons Wilson, the founder of Holiday Inn. He said, “It is great to attain wealth, but money is really just one way — and hardly the best way — to keep score.”

Interesting quote, huh?

Most readers of this column call me with tax problems because they have attained wealth (no doubt they have and do keep score with money) and they don’t want to share that wealth with the IRS — perfectly normal. Yet, it’s amazing. Once the reader realizes that we really do know how to pass their wealth — all of it and intact — to their family, the conversation turns to other ways that they might keep score. Sure, they are delighted to find there are legal ways to totally win the estate tax game. But they readily admit that they don’t know how to deal with the other problems (other ways to keep score).

The other problems fall into the general category of little kids, little problems; big kids, big problems.

Stuff like which of my kids should run the business? How do I treat the kids fairly? What about the non-business kids?

What happens if one (or more) of my kids get divorced? How do I take care of my wife (the second one who is 15 years — or more — younger than the caller)? The callers tell me about family problems, business problems and/or assorted personal problems. To me every word is important, even though I’ve listened to so many tales of woe before. But, although similar, each problem has its own peculiar twists and turns.

Let’s face it — stuff happens. After years of solving wealth transfer problems, business succession (usually the business is at center stage) and estate planning problems, experience has taught me that solving only the money problems can never yield a perfect plan.

The human stuff — your spouse and kids support your plan — must be solved too.

What about your son-in-law or daughter-in-law? I know. It sounds like cornball. But if you really want to win the game of life after you have won the money game (really the easy part), you must attempt to solve the human part, the emotional stuff.

Here’s my suggestion to start the process. Make two lists: the money-problem list and the human-problem list.

Solve the money problems first (usually you are home free if you solve these three money problems:

• maintain your lifestyle — and your spouse’s — for as long as you live;

• transfer your business to the business kids — tax-free; and

• kill the estate tax.

Then, it’s easier to tackle the human-problem list. Interesting, many times solving the money problems also solve some (often all) of the human problems.

Finally, you must work with experienced professionals who know how to solve both problems: the money problems and the emotional human problems that come with accumulating wealth and trying to pass it on.

One more thing: Each piece of your plan must be part of a single comprehensive and integrated plan, all implemented at the same time. Piecemeal planning, based on my 50 years of experience, is a disaster that not only enriches the IRS, but fails to satisfy the normal human desires of a typical family and its business.

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Truly conservative?

Friday, March 27th, 2009

I never thought there were so many conservative investors.

What makes me think so?

Well, the last time I wrote about this specific subject, I received a blizzard of responses.

I hope to cover the subject again in this column and answer the questions that were posed by my readers. So, if you have a bent for conservative investing, you’ll love what follows.

Every conservative investor tells me: “I don’t want to risk losing my investment.” Fine. A worthy goal. But here’s the problem.

Most conservative choices are in low-yield, fixed-rate stuff like CDs or U.S. Treasury bonds. But municipal bonds are the hands-down favorite for conservatives.

Watch out, when inflation rears its ugly head, conservative investments are anything but conservative. Consider just one additional value-eating bandit who walks hand-in-hand with inflation: interest rates.

Consider the three ways that bandit steals your money and hard-earned wealth when you are heavily invested in municipal bonds:

• The value of the bonds go down as interest rates go up.

• You are locked into a low-interest rate until the bond matures or you sell it (probably at a painful loss).

• Nasty inflation reduces not only the value of the interest you receive, but the already reduced value of the bond has less buying power due to inflation.

What’s the long-term impact?

Here’s a quote from the Currency Options Hotline Operating Manual that drives home the devastating economic impact of inflation over time: “If you were somehow able to take one of today’s greenbacks [dollars] back in time to 1940, you would find it worth only about 6.5 cents.”

Sorry, but it looks like inflation, plus the falling value of the dollar against most foreign currencies, will be our rather unwelcome bedfellow for at least the foreseeable future.

What is a conservative investor to do?

Actually, we all know the answer: Find an investment vehicle that overcomes the three evils of the rising interest-rate bandit.

First, let’s outline the attributes of such an investment, second identify the investment, and finally, give an example of how the investment works.

Here are the attributes of the investment:

• A higher rate of return than on traditional conservative investments like CDs, treasury bills, notes and municipal bonds.

• The interest rate tends to go up as inflation goes up.

• Your investment will never go down in value, and in fact, will always guarantee you a profit.

• The interest earned and your investment profit are income tax-free.

• Your total investment at time of death including original investment, interest earned and profit escapes the clutches of the estate tax (when properly structured).

What’s the identity of this picture-perfect investment? It is simply a type of life insurance, which I call conservative investment life insurance.

Next, let’s look at an example. Joe and his wife, Mary, are both 70 years old. They buy a $1 million policy (it could be any amount, usually more) of second-to-die life insurance with an annual premium of $23, 516. The policy currently earns 5.7 percent.

The payoff on their investment comes after the second death. For the purpose of this example assume after 10 years, at age 80, both Joe and Mary get hit by the same bus.

Their heirs would receive:

1. Death benefit: $1 million.

2. Premiums paid: $235,160 ($23,516 times 10 years).

3. Interest earned on premiums paid (at 5.7 percent, but could be higher if interest rates rise, or lower, if interest rates fall): $75,411.

The total amount (tax-free) to their heirs is $1,310,571.

Next, suppose the second death of either investor happens at age 90. Their heirs would get a total of $1,816,458 (tax-free).

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

If you are single, or married and your spouse is uninsurable, conservative investment life insurance can be purchased on a single life. However people younger than 50 years of age should not buy this insurance whether single or married. You have better insurance alternatives.

Here’s the big question most readers asked: “How does the insurance company make money?”

Don’t worry, those guys are not about to serve you a free lunch. Companies simply charges you enough premium in the first place to actuarially cover the final anticipated death benefit based on your age, sex, health and other factors.

For more information on how a conservative life insurance might work for you, your parents or your grandparents, contact me and I will get you the information you need and will answer your questions.

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Rising interest rates may wound conservative investments

Friday, March 27th, 2009

It’s amazing how often the voice at the other end of the phone says something like, “Irv, I’m very conservative.”

Then they prove it. They tell me they have parked all or a large amount of their extra cash in what they consider conservative investments.

Most conservative investments are in low-yield, fixed-rate stuff like CDs or U.S. Treasury bonds. But municipal bonds are the hands-down favorite conservative investments.

Here’s a well-known fact: When inflation rears its ugly head, conservative investments are anything but conservative.

Consider just one additional value-eating bandit that walks hand in hand with inflation: interest rates.

Here are the three ways the bandit steals your hard-earned wealth when, for example, you are heavily invested in municipal bonds:

1. The value of the bonds goes down as interest rates go up.

2. You are locked into a low-interest rate until the bond matures or you sell it, probably at a painful loss.

3. Nasty inflation reduces not only the value of the interest you receive, but also the buying power of the already reduced value of the bond (see No. 1 above).

Here’s a quote from the Currency Options Hotline Operating Manual that drives home the devastating economic impact of inflation over time: “If you were somehow able to take one of today’s greenbacks (dollars) back in time to 1940, you would find it worth only about 6.5 cents.”

Sorry, but it looks like inflation — plus the falling value of the dollar against most foreign currencies — will be our rather unwelcome bedfellow for at least the foreseeable future.

What is a conservative investor to do?

Actually, we all know the answer: Find an investment vehicle that overcomes the three evils of rising interest rates.

First, let’s outline the attributes of such an investment; second, identify the investment; and finally, give an example of how the investment works.

Here are the attributes of the investment:

• A higher rate of return than on traditional conservative investments like CDs, Treasury bills and notes, and, of course, municipal bonds.

• The interest rate tends to go up as inflation goes up.

• Your investment will never go down in value and, in fact, will always guarantee you a profit.

• The interest earned and your investment profit are income tax-free.

• Your total investment when you die — original investment, interest earned and profit — escapes the clutches of the estate tax when properly structured.

And now — drumroll, please — the identity of the investment: a particular type of life insurance that I call conservative investment life insurance, or CILI.

Finally, let’s look at an example. (Note: This investment concept works for any age, but is typically used by an individual or a married couple who are 50 or older.)

Joe and his wife, Mary, are both 70. They buy a $1 million second-to-die CILI policy (it could be any amount) with an annual premium of $23,516.

The policy currently earns 5.7 percent.

The payoff on Joe and Mary’s investment comes after the second death. It is determined assuming that after 10 years — age 80 — Joe and Mary get hit by the same bus.

Their heirs, children and grandchildren would receive:

• Death benefit — $1 million.

• Premiums paid ($23,516 times 10 years) — 235,160.

• Interest earned on premiums paid (at 5.7 percent, but it would be higher if interest rates rise or lower if interest rates fall) — $75,411.

• Total amount tax-free to heirs — $1,310,571.

Next, suppose the couple’s second death happens at age 90. Their heirs would get $1,816,458 tax-free.

To summarize the investment:

1. You get your investment (premiums paid) back, dollar for dollar, plus earnings (5.7 percent here).

2. You get a guaranteed bonus, the death benefit ($1 million here).

3. It’s all tax-free (no income tax, no estate tax).

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