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?

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.

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.

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.

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.

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.

I love the Web site for a different reason. Whenever I’m stuck and don’t know what to write for the column, a quick review of e-mails from readers who visited the site gives me plenty to write about.

Following is a wonderful example from a Web site visitor.

We’ll call him Joe.

Joe, 61, the owner of a profitable family business, Success Co., filled out a form on the Web site that included this question: “What are your most burning problems or questions?”

Joe typed in the following four goals:

• Selling the business to a son and nephew.

• Keeping control of the company until it’s paid for.

• Eliminating balance-sheet debt.

• The least possible tax liability to myself and them.

Next, I called Joe. He gave me a bit more information.

Then he shipped even more information. We talked again.

Here’s the full story.

Joe was about to execute a plan that would have put him into the chamber of tax horrors, but he decided to contact me first, via the form on my Web site.

Following is the plan Joe’s lawyer and CPA had suggested:

Joe’s son, Sam, and nephew, Nick, would each buy one share of Success Co. stock from Joe for $1,000. Actually, the $2,000 for the two shares was a fair price. Then Success Co. would buy the balance of Joe’s stock for $2.25 million (also a fair price), plus interest of 6 percent on the unpaid balance.

What’s wrong with this picture?

Aside from selling the business, none of Joe’s other three goals was accomplished:

• Joe would have had no control

• The balance sheet would be destroyed with a $2.25 million debt.

• Worst of all, the tax liabilities would hurt Joe and strangle Success Co.

Let’s take a closer look at the tax liabilities. First, Joe’s capital gain would be $2.2 million. At 15 percent, he would get hit with a $330,000 tax bill. Ouch!

Next, let’s look at the real tax disaster for Success Co. — really Sam and Nick because they would own Success Co. State and federal income taxes would total about 41 percent. Call it 40 percent because the state tax is deductible.

Are you ready for a shock?

Success Co. would have to earn $3.66 million and pay income taxes of $1.66 million to have the $2.2 million to pay Joe for his stock — plus that blasted 6 percent interest. Crazy, isn’t it?

We happily killed the above plan. Instead, we created the following three-step plan:

• We recapitalized the company (created 100 shares of voting stock and 10,000 shares of nonvoting stock), a tax-free transaction.

• Success Co. elected S corporation status, also tax-free.

• Joe sold the 10,000 nonvoting shares to an intentionally defective trust (IDT).

Let’s see how using the IDT accomplished all of Joe’s goals:

• He stays in control by keeping 100 percent of the voting stock.

• Success Co.’s balance sheet is free of any liability after the transfer of the stock.

• Best of all, Joe escapes paying tax on the sale of the nonvoting stock to the IDT. The entire transaction is tax-free to Joe.

And what are the tax consequences to Success Co., Sam and Nick? All tax-free. The future earnings of Success Co.

will be used to pay the $2.2 million price (actually a note payable due from the IDT) for the nonvoting stock, plus interest.

When the note (estimate will take six to eight years) is fully paid, the IDT trustee will distribute all the nonvoting stock to Sam and Nick — tax-free!

It is estimated that more than 1 million family-business owners face the same problem — creating the right succession plan — as Joe and Success Co.

Sadly, the wrong succession plan causes tax mega-disasters for both the owner and the next generation.