Posts Tagged ‘profit sharing plan’

How to turn a tax tragedy into a wealth-building miracle

Wednesday, April 29th, 2009

Do you have a large amount of money in an IRA, profit-sharing plan, 401(k) plan or other qualified plan? Or know someone — family, friend or co-worker-who does? Then, this article will not only save you a ton of taxes, but will show you how to dramatically increase your after-tax wealth tax-free.

This is one of those bad-news, good-news tax stories. First, the bad news. Some day the money in your plan must be distributed: to you or your beneficiaries. If you make the mistake of becoming rich, those beautiful dollars that took you decades to accumulate will be worth only in the 27 percent range to you and your family. You see, the IRS will get the rest in taxes. Yep, typically you will lose about 73 cents out of every dollar because you must pay two taxes on your plan distributions: income tax and estate tax. It’s even worse in some high-tax states like New York (check with your accountant).

How do I define rich? You are irrevocably in the highest income tax bracket (say 40 percent, state and federal) and highest estate tax bracket (55 percent, using 2011 rates.) Sorry, but the tax collector will take the lion’s share of your plan assets whether you get plan distributions during life, or the distributions go to your heirs after death.

Can anything be done to prevent this tax robbery? Yes! Here comes the good news. Regular readers of this column know I’m part of a national tax network (other professionals who work together and share tax knowledge). Well, some of the experts in the network have devised two tax concepts to enrich your family instead of the IRS. These concepts are designed to help individuals who have accumulated large amounts (from $200,000 to millions of dollars or more) in their plans.

Suppose you have $1 million (fill in your own exact number) in one plan or all of your plans combined. If you fail to take advantage of one or both of these concepts you will lose $730,000 (or more) in taxes to the IRS. Just take 73 percent of the amount in all your plans, and you can clearly see the full tax-disaster picture. Of course, your local tax collectors (state, as well as your local county or city) may grab an additional piece of the tax action. Now, let’s look at each concept separately.

The first concept — called the Single Premium Strategy (SPS) — to overcome the tax robbers combines three strategies:

• An immediate-pay annuity (typically a joint-life annuity if you are married);

• A life insurance policy (second-to-die if you are married) and;

• An irrevocable life insurance trust.

In one real-life case, an unmarried reader of this column turned $325,000 into $2,878,385 (all taxes paid). Another reader, who is married, turned $270,000 into $3,496,063 (all taxes paid). Single or married, it’s smart to get an exact quote of how much tax-free wealth an SPS would create for you and your family.

The second concept is named Retirement Plan Rescue (RPR) When using an RPR, your qualified plan uses the funds in the plan to buy the insurance: either for a single life or second-to-die for a husband and wife. A married reader (Joe) used an RPR to buy $10 million of second-to-die insurance, which will go to his kids tax-free. Joe actually turned $567,900 into $10 million. Joe’s wife Mary called the entire transaction a “tax miracle.”

You’ll also be surprised at how easy the above strategies are to do. So, if you are lucky enough to be rich, but unlucky enough to have a substantial part of your wealth in a qualified plan (IRA, profit-sharing, 401 k or similar plan), you owe it to your family to take a close look at the above two tax-miracle concepts and it’s easy to do.

I have arranged for readers of this column to get a free analysis of their plans for both of these concepts. Just fax your name and birthday (also your spouse if married), the total amount in all your plans combined; and all phone numbers (business/home/cell) where you can be reached to 847-674-5299. Please mark SPS and/or RPR as the top of the page. You are welcome to include other information, questions or problems concerning you, your business or your family.

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

How To Turn A Tax Tragedy Into A Miracle

Monday, April 13th, 2009

Do you have a large amount of money in an IRA, profit-sharing plan, 401(k) or other qualified program? Or know someone — family, friend or co-worker — who does? If so, this article will save you a ton in taxes and show you how to dramatically increase your after-tax wealth.

This is one of those good-news, bad-news situations. First, the bad news. Someday the money in your plan will be distributed: to you or your beneficiaries. If you happen to be wealthy, those beautiful bucks which took decades to accumulate will be worth somewhere in the 27 percent range. The IRS gets the rest in taxes. Yep, typically you lose around 73 cents out of every dollar because you are required to pay two taxes on your plan distributions: income tax and estate tax. It’s even worse in high-tax states like New York (check with your accountant). How do I define wealthy? You are irrevocably in the highest income tax bracket (say 40 percent, state and federal) and highest estate tax bracket (55 percent, using 2011 rates). Sorry, but the tax collector will take the lion’s share of your plan’s assets whether you get distributions during life, or they go to your heirs after death.

Can anything be done to prevent this robbery? Yes! Here comes the good news. Regular readers of this column know I’m part of a national tax network (other professionals who work together and share tax knowledge). Some experts in the network have devised two tax concepts to enrich your family instead of the IRS. These concepts are designed to help individuals who have accumulated large amounts (from $200,000 to millions of dollars or more) in their plans.

Suppose you have $1 million (fill in your own exact number) in one plan or all of them combined. If you fail to take advantage of one or both of these concepts you will lose $730,000 (or more) in taxes to the IRS. Just take 73 percent of the amount in all your plans, and you can clearly see the full tax-disaster picture. Of course, your local tax collectors (state, as well as your local county or city) may grab an additional piece of the action.

Now, let’s look at each concept separately.

The first concept — called the “Single Premium Strategy (SPS)” — combines three strategies: (1) an immediate-pay annuity (typically a joint-life annuity if you are married); (2) a life insurance policy (second-to-die if you are married) and (3) an irrevocable life insurance trust. In one real-life case, an unmarried reader of this column turned $325,000 into $2,878,385 (all taxes paid). Another reader, who is married, turned $270,000 into $3,496,063 (all taxes paid). Single or married, it’s smart to get an exact quote of how much tax-free wealth an SPS would create for you and your family.

Another concept, called “Retirement Plan Rescue” (RPR), uses the funds in the plan to buy the insurance: either for a single life or second-to-die for a husband and wife. A married reader (Joe) used an RPR to buy $10 million of second-to-die insurance, which will go to his kids tax-free. Joe actually turned $567,900 into $10 million. Joe’s wife Mary called the entire transaction a “tax miracle.”

You’ll also be surprised at how easy these strategies are. So, if you are lucky enough to be wealthy, but unlucky enough to have a substantial amount of assets in a qualified plan — IRA, profit-sharing, 401 (k) or similar plan — you owe it to your family to take a closer look at the tax-miracle concepts. It’s easy.

I have arranged for readers of this column to get a free analysis of their plans for both of these concepts. Just fax (1) your name and birthday (also your spouse if married); (2) total amount in all your plans combined; and (3) all phone numbers (business/home/cell) where you can be reached to (847-674-5299). You are welcome to include other information, questions or problems concerning you, your business or your family.

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

Beware of Johnny-One-Note estate planning

Saturday, April 4th, 2009

Writing this column is fun.

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).

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