Posts Tagged ‘family business success’

« Older Entries

Yes, you can beat the estate tax, legally, and easily

Saturday, May 30th, 2009

If you use the right tax tools and techniques together with the right professionals (lawyer, insurance consultant, and CPA), you can and will develop a plan to beat the IRS. Every time. And legally.
Unfortunately, the goal of the typical estate planner is to reduce estate taxes. Our goal is always the same: eliminate the robber-like estate tax.
There are three types of readers of this column that call me for help: The reader who (1) has an estate plan but needs a second opinion, (2) has no plan, or (3) has been working on a plan for years and just can’t seem to get it done. Which type are you?…. Write your answer here ____________.
You might be interested in knowing that no matter which type you are, you have lots of company. Here are the percentages: (1) need a second opinion – 55%; (2) no plan – 15%; (3) working on a plan, can’t get it done – 30%.
Following is a real-life, second-opinion plan that should help you no matter which category you happen to be in: A 61-year old from Ohio, who winters in Florida, (let’s call him Joe) falls into the first opinion category. Joe’s letter says in part: “I… enclosed all the information… you asked for. My current plan [it was two short wills and two long revocable trusts. One of each for Joe: the others for his wife Mary] looks good… but somehow I don’t feel comfortable… So request… a second opinion.”
Joe and Mary turned out to be a very interesting case, yet, sadly and as is often the case, contains some common estate plan errors. Sure, their documents – wills and trusts – were near perfect. Problem is they just didn’t work. Let’s see why. Joe and Mary are worth just over $8 million, plus Joe has a number of life insurance policies totaling $2.7 million on his life that name Mary as the beneficiary. The $8 million includes $1.9 million in Joe’s rollover IRA with Mary as beneficiary. The balance of the assets ($6.1 million) – Joe’s business, their Ohio and Florida residences, some rental real estate and other investments – are all held in joint tenancy by Joe and Mary.
The wills and trusts – 46 pages in total – were designed by a large law firm to pass Joe’s and Mary’s assets in a highly organized plan, first to the survivor of Joe and Mary and then to their children and grandchildren. Because Joe is 4 years older than Mary (and females outlive males by about 4 years), it was assumed that Joe would pass on first.
Okay, suppose Joe goes to heaven first in 2009. Everything, and we mean everything (because of the joint tenancy) would go directly to Mary. Joe’s trust would get nothing and be a worthless stack of papers. Mary would get her $2.7 million in insurance. For the same reason – named beneficiary – Mary gets the $1.9 million in the IRA. What about the other assets – worth $6.1 million? All to Mary immediately. Let me repeat: because property held in joint tenancy goes to the survivor.
It should be pointed out that if Mary had died the day after Joe, the tax bite would have exceeded $3.1 million (using current 2009 estate tax rates, top rate of 45%) on the $10.7 million now owned by Mary. Their kids would net only about $7.6 million.
What’s the lesson to be learned from this second opinion story: a will and a revocable trust – no matter how terrific – standing alone can never be a complete estate plan.
We used a number of strategies to change Joe’s and Mary’s estate plan: (1) a qualified personal residence trust for the residences, (2) an intentionally defective trust to transfer Joe’s business to the kids…Tax-free, (3) an irrevocable trust for the insurance, (4) retirement plan rescue for the IRA to pay for the additional life insurance needed, (5) a family limited partnership
to hold the balance (real estate and investments) of their assets, and (6) an organized future-gift-giving program to their children and grandchildren. With minor changes, the original wills and trust were left alone.
Important Note: I predict that Congress will (before December 31, 2009), amend the estate tax law to make the first $3.5 million of your taxable estate tax-free. So for a married couple, $7 million can escape the estate tax monster.
After the above strategies and completed plans are put in place, if Joe and Mary get hit by the same bus, the kids would net, after taxes, about $11.2 million (includes the additional life insurance in strategy (4) above). The longer Joe and Mary live, as the future-gifting program – over time – is implemented, the more tax-free dollars will be transferred to the kids.
If you would like a second opinion on your current estate plan, please send the following information:
1. For Your Business. Your last year-end financial statement (all pages).
2. Personal. A current personal financial statement for you and your spouse.
3. A family tree. Your name and birthday. Same for your spouse, children, children’s spouses and your grandchildren.
4. Documents. Hold them for now. We will request them at a later date.
5. All phone numbers where you can be reached: business, home, cell.
Send to Irv Blackman, SECOND OPINION, 4545 W. Touhy Avenue, Lincolnwood, IL 60712. What’s our job?… To create the right plan for you, your family, and your business… and to coordinate and work with your professionals. If you have a question call Irv at 847-674-5295.
Okay, that’s the plan. Let’s hear from you.

Tags: , , , , , , , , ,
Posted in Corporate Tax, Estate Tax, Featured | No Comments »

Most Estate Plans Enrich The IRS, Not Your Family

Friday, April 17th, 2009

While scanning the pages of one of the trade journals that carries this tax column, a headline for an ad intrigued me: “We install 90 percent of what we sell. That’s one big advantage we have over (names one of the biggest square-footage discount chains).”

Here’s the sad routine when the gizmo doesn’t work:

“The manufacturers,” pleads the installer.

“Improperly installed,” counters the manufacturer.

Ultimately — after some grief and unnecessary dollars —the gizmo is fixed and it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life story of a tax disaster.

Joe died, survived by his wife Mary, four grown kids (one, Sam, managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $9.8 million at Joe’s death), Joe and Mary had $275,000 of spendable personal wealth. In addition, they owned various personal property and a nice summer home with a total value of $1.2 million.

About five years before he died, Joe had gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning, and his long-time friend, an insurance agent.

The professionals crafted a great traditional estate plan: no tax due at Joe’s death (the 100 percent marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives. The estate plan probably would get an A-plus in the classroom.

But here are the unfortunate little lifetime details — told to me by Sam in an urgent phone call the professional team missed:

Mary, a healthy age 65, did not have a flow of income or enough spendable assets to maintain her lifestyle. Joe’s $500,000 salary, plus generous perks from Success Co., stopped when he died. Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium. Also, she wanted to continue providing the college education for four of her grandchildren( the other three had completed their education, which was paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of spendable income. Worse yet, they had no suggestions to solve the problem.

First, the solution to Mary’s immediate problem: The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 85 percent of Success Co. (Mary owned the other 15 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co. The large corporate profit will easily provide the income stream-via S corporation dividends-she needs, as the beneficiary of the marital trust (85 percent) and as a direct owner (15 percent).

Now, what lesson should be learned from this sad tale?

The first lesson is that estate planning (as practiced all over the United States) is really death planning. Do the documents: a will and a trust or two, put ’em in the vault, and wait to die.

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board — loud and clear.

Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans: (1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live); (2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you and your spouse for as long as either one of you lives; and (3) a transfer/succession plan for your business. (Note: Not even one of these three was done by the typical traditional estate plan for Joe and Mary.)

If you have yet to do your master plan, make sure it includes the three plans listed above. If your master plan is done and does not include all three of the plans listed above, get a second opinion. And finally, make sure that the professionals who create your plan know in advance that they are responsible for all aspects; he who creates the plan should install it and monitor it to the day you (and your spouse) die.

Remember, just because your estate plan is done, does not mean it is done right. Wouldn’t you want your plan to be in the 10 percent that enriches your family, instead of the 90 percent with a plan that enriches the IRS?

Tags: , , , , , , , , , , , , , , , , , , ,
Posted in Estate Tax, Featured, Tax Strategies | No Comments »

Why Your Estate Tax Plan Often Flunks The Real-Life Test

Wednesday, April 15th, 2009

While thumbing through the pages of a trade journal, I ran across this quote, “We install 90 percent of what we sell. That’s one big advantage we have over (names one of the biggest square-footage discount chains).”

You know the routine: the thing-a-ma-jig doesn’t work. “The manufacturer,” says the installer; “improperly installed,” counters the manufacturer.

Ultimately-after some grief and probably more dollars — and it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life tax horror story.

Joe died, survived by his wife, Mary, three grown kids (one managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $10.3 million at Joe’s death), before Joe died, he and Mary enjoyed about $350,000 of after-tax spendable personal income. In addition, they owned various personal property and a nice summer home with a total value of over $1 million.

About five years before he died, Joe gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning and his long-time friend, an insurance agent.

The professionals crafted a good traditional estate plan: no tax due at Joe’s death (the marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives.

The estate plan probably would get an “A” in the classroom. But here’s the unfortunate big lifetime detail the professional team missed:

Mary, a healthy age 64, did not have enough cash flow to maintain her lifestyle. Joe’s $550,000 salary, plus generous perks from Success Co., stopped when he died.

Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium. Also, she wanted to continue providing for the college education of three of her grandchildren (the other five had completed their education paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of necessary spendable income. Worse yet, they had no suggestions to solve the problem.

First, the solution to Mary’s immediate problem: the cash flow to maintain her lifestyle. The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 90 percent of Success Co. (Mary owned the other 10 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co.

Now the large corporate profit can provide the income stream Mary needs, as the beneficiary of the marital trust (90 percent) and as a direct owner (10 percent).

What lesson should be learned from this sad tale? The first lesson is that estate planning (as practiced all over the United States) is really death planning, put ’em in the vault and wait to die. Do the documents (a will and a trust or two).

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board — loud and clear.

Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans:

(1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live);

(2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you (and your spouse) for as long as you (or your spouse) live;

(3) a transfer/succession plan for your business (that gets the value of the business out of your estate tax-free) to your business kids (or other successor).

Whether your master plan is done or is yet to be done, make sure it includes the three plans listed above. And always get an independent second opinion.

Finally, make sure that the professionals who create your plan know in advance they are responsible for all aspects: he who creates the plan should install it and monitor it to the day you (and your spouse) die.

Tags: , , , , , , , , , , , , , , ,
Posted in Uncategorized | No Comments »

Retiring? How To Keep Getting Income From Your Business

Monday, April 13th, 2009

Joe, a reader of this column, founded a family business, Success, Inc., that he headed for 24 years. His son, Bill, has been running the business for about six years.

He’s doing a good job too. Joe, age 64, has cut back his work time to three to four hours a day for nine months of the year. The other three months are spent in a warm climate (mostly Florida) or traveling.

As Success grew over the years, Joe took only enough salary to maintain his family’s lifestyle. Simple put, profits were not taken out of Success, but reinvested. The business is still profitable, and it’s Joe’s only source of income. Success is a C corporation (tax paying).

In the past, Joe had taken a rather modest salary during the year, but he took a big bonus (when profits were available) to fund large family cash requirements (college, vacations, condo, etc.). His professionals had advised him to continue this compensation practice — the same salary and bonus arrangement — even though Joe was putting in about one-third of the time of prior years. Joe called me to get a second opinion.

The IRS would probably attack Joe’s current compensation arrangement on two fronts: First, the bonus would be regarded as a dividend, because it’s not taken until after the end of the year when the amount of the profit could be determined; and second, the salary would be regarded as unreasonable (too high) compensation.

Would the IRS win? On the first attack, Joe and the business wouldn’t stand a chance. The IRS would win hands down with the result being a nondeductible dividend for Success, and a taxable dividend for Joe. Second, the IRS could probably knock out about half of Joe’s current salary as being too high for services actually rendered. Unfortunately the (unreasonable) salary issue is tough to pin down (when challenged by the IRS) with any certainty.

What should Joe do? He needs the current income to live. The answer is to kill the C corporation and elect S corporation status. This would automatically remove the unreasonable compensation problem. What about the bonus? As an S corporation, Joe could take a tax-free dividend from Success (up to the amount of S corporation profits). This means that Success’ profits would only be taxed once when taken as an S corporation dividend, instead of twice, when taken from a C corporation as a dividend. A big tax saving! Better yet, the same trick will continue to work when Joe completely retires (take those delightful tax-free dividends).

One more thing: S corporation dividends (the economic equivalent of a bonus to Joe) are not subject to Social Security tax or other payroll taxes … another big tax saving. And here’s an extra bonus: Joe can collect Social Security benefits even if he continues to work for Success.

If you’re not tuned into the many advantages of electing S corporation status, you owe it to yourself to get the true tax facts. So, to be or not to be an S corporation? That is the question.

In practice, many factors can impact your decision. Still have doubts? Call Irv (417-9732) and I’ll walk you through to the right C or S decision.

Tags: , , , , , , , , , , , , , , , ,
Posted in Corporate Tax, Estate Tax, Family Tax Issues, General Tax Strategies | No Comments »

Why Your Real Estate Plan Often Flunks The Real-Life Test

Monday, April 13th, 2009

While thumbing through the pages of a trade journal, I ran across this quote, “We install 90 percent of what we sell. That’s one big advantage we have over (names one of the biggest square-footage discount chains).”

You know the routine: the thing-a-ma-jig doesn’t work.

“The manufacturer,” says the installer.

“Improperly installed,” counters the manufacturer.

Ultimately — after some grief and probably more dollars — it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life tax horror story.Joe died, survived by his wife Mary, three grown kids (one managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $10.3 million at Joe’s death), before Joe died, he and Mary enjoyed about $350,000 of after-tax spendable personal income.

In addition, they owned various personal property and a nice summer home with a total value of over $1 million.About five years before he died, Joe gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning and his long-time friend, an insurance agent.

The professionals crafted a good traditional estate plan: no tax due at Joe’s death (the marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives.

The estate plan probably would get an “A” in the classroom.

But here’s the unfortunate big lifetime detail the professional team missed: Mary, a healthy age 64, did not have enough cash flow to maintain her lifestyle. Joe’s $550,000 salary, plus generous perks from Success Co., stopped when he died. Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium.

Also, she wanted to continue providing for the college education of three of her grandchildren (the other five had completed their education paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of necessary spendable income. Worse yet, they had no suggestions to solve the problem.First, the solution to Mary’s immediate problem: the cash flow to maintain her lifestyle. The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 90 percent of Success Co. (Mary owned the other 10 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co. Now the large corporate profit can provide the income stream Mary needs, as the beneficiary of the marital trust (90 percent) and as a direct owner (10 percent).

What lesson should be learned from this sad tale?

The first lesson is that estate planning (as practiced all over the United States) is really death planning. Do the documents — a will and a trust or two, put ‘em in the vault, and wait to die.

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board — loud and clear:

Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans: (1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live); (2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you (and your spouse) for as long as you (or your spouse) live; and (3) a transfer/succession plan for your business (that gets the value of the business out of your estate tax-free) to your business kids (or other successor).

Whether your master plan is done or is yet to be done, make sure it includes the three plans listed above. And always — I mean always — get an independent second opinion. And finally, make sure that the professionals who create your plan know in advance that they are responsible for all aspects: he who creates the plan should install it and monitor it to the day the you (and your spouse) die.

Tags: , , , , , , , , , , , , , , , , , , ,
Posted in Estate Tax, General Tax Strategies, General Tax Talk | No Comments »

« Older Entries

Estate Tax Blog

by Irv Blackman

First and foremost, Irv Blackman is both a CPA and a lawyer. Irv is a tax guy. Stay tuned to the site by signing up for the RSS feed.