Posts Tagged ‘lawyer’

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 »

Did your lawyer (inadvertently) rip you off

Wednesday, April 29th, 2009

Joe (a 63-year old reader of this column who hails from Iowa, but winters in Florida) almost cried when talking to me on the phone. He said, “I still want to kick myself for thinking my estate plan was done. For years I was convinced that my plan was perfect.

“I never stopped reading and studying. You know, articles. Even books. All my professionals assured me my plan was the best it could be. I religiously attended seminars. I consulted regularly with my CPA and several lawyers. All confirmed that the estate plan drawn by my lawyer Mike was right for me and Mary (Joe’s wife).

“It never occurred to me that so many estate planning experts could be so dead wrong or that there’s a better way to transfer my business to the kids and deal with my other assets. Not until a friend brought me a small pile of your articles.

“I immediately read and reread the articles. The next day, I went to Mike’s office. Basically he gave three reasons why the dozens of concepts and ideas in your articles wouldn’t work for me: don’t apply to me, never heard of it or he’ll check it out and call me.”

The above summarizes about 20 minutes of Joe telling me about his years of planning with Mike (a friend and well-respected lawyer who specializes in estate planning).

Then, I asked Joe a series of blunt questions. His answers revealed Joe’s professionals had crafted a traditional estate plan.

My bet is that 90 percent of you married guys reading this article also have a traditional estate plan. What is it? Here’s the traditional plan Joe had (See if it sounds like your estate plan, as you read further).

Joe’s plan centers on two basic strategies: First, the plan takes advantage of the unified credit (actually $2 million is tax-free in 2006, 2007 and 2008; rising to $3.5 million in 2009. There is no tax in 2010. In 2011 the credit falls to $1 million). By using a two-trust arrangement (most often called Trust A and Trust B; marital trust and family trust or similar names), Joe and Mary each will escape tax on the amount of their unified credit, depending on their year of death. Second, the couple’s plan takes advantage of the marital deduction, which means zero estate tax when the first of Joe or Mary passes.

That’s it: the traditional estate plan that we see in all 50 states. That was Joe and Mary’s plan. Is your plan the same? Similar?

What’s the guaranteed result? The plan prevents the IRS from collecting a dime at the first death (of either Joe or Mary). Good! However, when the second spouse dies, the IRS gets its pound of flesh. In this couple’s case it’s a ton. If their wealth stayed the same, from today until the day both deceased, their estate tax would have been $4,655,000.

You’ll love the rest of the story.

Joe said, “Irv will you give me a second opinion?” I agreed. Joe sent me a standard package of information (tax returns and financial statements — both business and personal; family tree; and his estate plan documents). After two more telephone conversations, we pinned down Joe’s goals: for him and Mary, his successful business (wanted to leave it to his middle son) and his family (four kids and six grandchildren).

Three weeks later I called Joe and outlined the wealth transfer plan I had created (with the help of my network lawyer, Don). Joe’s family will receive every dime of his and Mary’s wealth, probably more (we actually created additional tax-free wealth because we took advantage of the tax-free environments, particularly strategies involving life insurance and charity — available in the tax law). Gone was the $4,655,000 estate tax obligation to the IRS.

A delighted Joe couldn’t help feeling ripped off by his lawyer’s traditional estate plan. Don and I explained that Mike’s plan was the norm.

After our comprehensive plan was reduced to writing (five new documents and some modifications to the trusts that Mike wrote), we submitted the new plan and documents to Mike. He was easy to work with. Don and I answered his stream of questions. Mike — after about three weeks of “review and research” (his words) — fully endorsed our plan.

For me this is a rewarding story, because it shows that the message we try to deliver — you can always win the estate tax game — is getting through to the readers of this column

If you are married and have a traditional estate plan (the same or similar to Joe’s), most likely your plan is not complete.

Think second opinion.

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

Yes, It’s OK To Beat Up The IRS — Legally, Of Course!

Wednesday, April 15th, 2009

The facts, problems and solutions of this article are so typical of the readers of this column who call me for help, that I felt compelled to write about it.

Read slowly, chances are you will see some of yourself or someone you know.

Joe (age 74) owns 52 percent of an S corporation (Success Co.), and each of his three children owns 16 percent of Success Co. He has two boys, Tom (47) and Dick (43), who have been in business with Joe since they graduated from college.

Joe’s daughter, Harriet, was not and never will be involved in the business. Joe lost his first and only wife last year.

Following is a list of Joe’s assets:

• Various liquid investments:$190,000

• 52 percent of Success Co.: $1,630,000

• Real estate leased to Success Co.: $600,000

• Balance in Rollover IRA: $780,000

• Residence and summer home: $435,000

• Total: $3,635,000.

Joe’s lawyer (an estate planning expert with a fine reputation), who just completed Joe’s estate plan, correctly computed the estate tax (using 2011 rates) at $1,419,771. His only recommendation: Buy $1.5 million in insurance to pay the tax.

Joe called me for a second opinion. After a long telephone conference, following is how Joe spelled out his goals:

1. Control Success Co. (and the rest of his assets) for as long as he lives.

2. When he is gone, to have Success Co. owned 50 percent each by Tom and Dick.

3. Make sure he can maintain his lifestyle for as long as he lives.

4. The dollar value that Harriet receives from Joe’s estate should be equal to the amount received by each of her brothers.

5. Find a way to have each of his kids receive one-third of what he is worth now, all taxes paid in full. (Joe laughed a bit at this goal; he didn’t think it was possible).

Stop for a moment. Substitute you own list of assets and goals (remember, if you are married, some day either you or your spouse will be the first to pass on). What follows is the plan we implemented for Joe and the strategies we selected to accomplish Joe’s five specific goals (in the same order as the goals).

We recapitalized Success Co. (a tax-free transaction) so Joe now owned 52 percent of the controlling voting stock (52 of 100 shares) and 52 percent of the nonvoting stock (5,200 of 10,000 shares).

We transferred the liquid investments and the real estate to a family limited partnership (FLIP). As the general partner (owned 1 percent of the FLIP), Joe kept control of these assets. He will make annual gifts ($12,000 each) of limited partnership interests to the kids. These limited interests (99 percent of the FLIP) have no voting rights and are entitled to significant discounts (about 35 percent) for tax purposes. As a result, Joe can give about $19,000 to each kid of limited FLIP interests every year, yet for tax purposes the interests are only worth $12,000.

Joe sold the 5,200 shares of non-voting stock to a so-called defective trust (defective for income tax purposes) for $1.5 million plus interest. The trust paid for the stock with a note. Success Co. will distribute S Corporation dividends each year to the trust, which will then pay off the note to Joe.

Because the trust is defective for income tax purposes, every dime that Joe receives (both for principal to pay off the note and interest) is tax-free. The beneficiaries of the trust are Tom and Dick who will each own half of the 5,200 non-voting shares when the note is fully paid and the trust terminates.

Joe’s 52 voting shares will go to Tom and Dick when Joe dies. The shares owned by sister, Harriet, will be redeemed by Success Co., according to a new buy/sell agreement, when Joe passes on. Then Tom and Dick will each own 50 percent of Success Co.

Joe’s flow of cash to maintain his lifestyle would come from many sources. (a) a small salary from Success Co., plus all of his usual perks; (b) The note payments from the trust (remember, the entire $1.5 million plus the interest is tax-free to Joe because of the defective trust); and (c) distributions from the rollover IRA.

Actually, during the years (about eight to 10) while the note is being paid off, Joe will have more cash than he needs to live. This excess cash will be put into the FLIP (and, of course, will be available for distribution in future years).

Actually, all the assets of the FLIP will be available to Joe if needed.

As a final back up, Joe will enter into a death benefit agreement with Success Co. that will pay Joe $75,000 per year starting when Joe retires (probably never) and continuing until the day he dies.

We created a Subtrust (using the Rollover IRA and Success Co.) to purchase a $1.5 million life insurance policy. The entire $62,187 annual premium will be paid out of plan funds (it won’t cost Joe a penny), and because of the subtrust, none of the $1.5 million ultimate policy proceeds will be included in Joe’s estate.

Appropriate language in Joe’s death documents (will and revocable trust) makes sure Joe’s “goal” will be accomplished; the $1.5 million in tax-free insurance makes this goal easy.

The residence (worth $355,000) was transferred to a qualified personal residence trust (QPRT). The QPRT was set up in such a way that Joe could live in the residence for as long as he lived, yet it would be out of his estate.

If Joe gets hit by a bus the day after the plan described above is put in place, this “goal No. 5” (the entire $3,635,000 to the kids) will be accomplished (along with the four other goals). The longer Joe lives, the less the IRS gets and the more the kids get (in excess of the $3,635,000).

One warning: The above story does not explain all the technical details of Joe’s plan. Only work with a tax advisor who knows, understands and has worked with the strategies used for Joe.

A will and trust alone (no matter how long or how fancy) will not get the job done.

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

Plan wisely to accomplish goals for your estate, before it’s too late!

Friday, March 27th, 2009

The facts, problems and solutions of this article are so typical of the readers of this column who call me for help, that I felt compelled to write about it.

Read slowly, chances are you will see some of yourself or someone you know.

Joe, 74, owns 52 percent of an S corporation (Success Co.), and each of his three children owns 16 percent of Success Co.

He has two boys, Tom, 47, and Dick, 43, who have been in business with Joe since they graduated from college. Joe’s daughter Harriet was not and never will be involved in the business. Joe lost his first and only wife last year.

Following is a list of Joe’s assets:

Various liquid investments — $190,000

52 percent of Success Co. — $1,630,000

Real estate leased to Success Co. — $600,000

Balance in Rollover IRA — $780,000

Residence and summer home — $435,000

TOTAL — $3,635,000

Joe’s lawyer (an estate planning expert with a fine reputation), who just completed Joe’s estate plan, correctly computed the estate tax (using 2011 rates) at $1,419,771. His only recommendation: Buy $1.5 million in insurance to pay the tax.

Joe called me for a second opinion. After a long telephone conference, Joe spelled out his goals:

• Control Success Co. (and the rest of his assets) for as long as he lives

• When he is gone, to have Success Co. owned 50 percent each by Tom and Dick

• Make sure he can maintain his lifestyle for as long as he lives

The dollar value that Harriet receives from Joe’s estate should be equal to the amount received by each of her brothers.

Find a way to have each of his kids receive one-third of what he is worth now, all taxes paid in full. (Joe laughed a bit at this goal; he didn’t think it was possible).

Stop for a moment. Substitute your own list of assets and goals (remember, if you are married, some day either you or your spouse will be the first to pass on). What follows is the plan we implemented for Joe and the strategies we selected to accomplish Joe’s five specific goals (in the same order as the goals).

We recapitalized Success Co. (a tax-free transaction) so Joe now owned 52 percent of the controlling voting stock (52 of 100 shares) and 52 percent of the nonvoting stock (5,200 of 10,000 shares).

We transferred the liquid investments and the real estate to a family limited partnership (FLIP). As the general partner (owned 1 percent of the FLIP), Joe kept control of these assets.

He will make annual gifts ($12,000 each) of limited partnership interests to the kids.

These limited interest (99 percent of the FLIP) have no voting rights and are entitled to significant discounts (about 35%) for tax purposes. As a result, Joe can give about $19,000 to each kid of limited FLIP interests every year, yet for tax purposes the interests are only worth $12,000.

Joe sold the 5,200 shares of nonvoting stock to a so-called defective trust (defective for income tax purposes) for $1.5 million plus interest. The trust paid for the stock with a note.

Success Co. will distribute S Corporation dividends each year to the trust, which will then pay off the note to Joe.

The beneficiaries of the trust are Tom and Dick who will each own half of the 5,200 shares when the note is fully paid and the trust terminates.

Joe’s 52 voting shares will go to Tom and Dick when Joe dies.

The shares owned by sister Harriet will be redeemed by Success Co., according to a new buy/sell agreement, when Joe passes on. Then Tom and Dick will each own 50 percent of Success Co.

Joe’s flow of cash to maintain his lifestyle would come from many sources. (a) a small salary from Success Co., plus all of his usual perks; (b) The note payments from the trust (the entire $1.5 million plus the interest is tax-free to Joe because of the defective trust); and (c) distributions from the rollover IRA. Actually during the years (about 8 to 10) while the note is being paid off, Joe will have more cash than he needs to live. This excess cash will be put into the FLIP (and, of course, will be available for distribution in future years). Actually, all the assets of the FLIP will be available to Joe if needed.

As a final back up, Joe will enter into a death benefit agreement with Success Co., that will pay Joe $75,000 per year starting when Joe retires (probably never) and continuing until the day he dies.

We created a Subtrust (using the Rollover IRA and Success Co.) to purchase a $1.5 million life insurance policy. The entire $62,187 annual premium will be paid out of plan funds (it won’t cost Joe a penny), and because of the subtrust none of the $1.5 million ultimate policy proceeds will be included in Joe’s estate.

Appropriate language in Joe’s death documents (will and revocable trust) makes sure Joe’s “goal” will be accomplished; the $1.5 million in tax-free insurance makes this goal easy.The residence (worth $355,000) was transferred to a qualified personal residence trust (QPRT).

The QPRT was set up in such a way that Joe could live in the residence for as long as he lived, yet it would be out of his estate.

If Joe gets hit by a bus the day after the plan described above is put in place, this “goal 5″ (the entire $3,635,000 to the kids) will be accomplished (along with the four other goals). The longer Joe lives, the less the IRS gets and the more the kids get (in excess of the $3,635,000).

One warning: The above story does not explain all the technical details of Joe’s plan.

Only work with a tax advisor that knows, understands and has worked with the strategies used for Joe. A will and trust alone (no matter how long or how fancy) will not get the job done. (All your wealth to future generations, while totally eliminating the impact of the estate tax.)

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

Answers to tax troubles may be only a few keystrokes away!

Thursday, March 26th, 2009

Readers of this column must love my Web site, www.taxsecretsofthewealthy.com, because so many of you visit it. It’s really a learn-more extension of this column.

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.

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