Posts Tagged ‘profit sharing’

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A Risk-Free Concept To Skyrocket Your Rate Of Return

Wednesday, April 15th, 2009

Tax-free investments are big. Interesting, tax-deferred investments are even bigger. Logically, tax-free should be number one. Sorry, but the cruel fact is that with the exception of life insurance (got to die to get your tax-free reward) or municipal bonds (plagued by low rates of return), there just isn’t much to talk about that’s tax free. Sad, but true.

Ah, but tax-deferred. That’s where the action is. The biggest tax-deferred sandbox to play in, by far, is the qualified plan area. They — profit-sharing plans, 401(k) plans, IRAs of all sorts, and others — abound. Billions pour in every year. Employer-sponsored plans are usually the tax-weapon of choice. Non-employer plans (traditional and Roth IRA) give every taxpayer an opportunity to play in this sandbox.

But IRAs have dollar limits. Tax-deferred annuities (annuities) have no limits. You can toss as many dollars as you like into annuities. All are after-tax dollars. Not one cent is deductible. Annuities earning powers are low (more about this defect later). Severe penalties murder your dollars if you want to get out in the early years. Simply put, there’s no liquidity.

So what’s the magnet that draws billions of dollars into this not-such-a-good-deal-investment? Here’s the answer and the magic words: tax deferred.

A word about annuity rates of return: Fixed annuities are the most popular. They currently pay in the three to three and a half percent range per year. (Older annuities, when interest rates were higher, paid more.) The new darling is indexed annuities. Your yield is pegged to some index, typically the S&P, on an annual basis. Often in a (say the S&P) loss year, you are guaranteed a small yield (usually in the one and a half to three percent range). A small percentage rise (say four percent) in the S&P is the exact percentage (four percent) you get, but a large rise is capped at six percent to eight percent (for example, the S&P increased by 14 percent but you only get seven percent.

Okay, so what’s a tax-deferred investment that doesn’t have all the impediments of annuities and has a huge rate of return without risk? Senior settlements.

An example is the easiest way to explain senior settlements. Suppose Joe, age 68, has a $400,000 life insurance policy with a cash surrender value (CSV) of $50,000. Joe would like to stop his annual premium payments. Instead of canceling the policy and taking the $50,000 CSV from the insurance company, Joe sells his policy as a senior settlement, receiving $120,000. Joe’s a happy camper.

Investors bought Joe’s policy. Senior settlements have been around for about 35 years. The tax consequences are a delight. Your tax liability for profits are completely deferred to the day you actually receive back your entire investment and your entire profit.

There’s a public company (trades on the NASDAQ) offering senior settlements. The average rate of return has been 15.82 percent per year throughout the company’s 15-year operating history. If your goal is to make a killing on your investments, senior settlements are not for you. (Just a note: AIG, the giant insurance company, and Warren Buffett’s Berkshire Hathaway Inc. invest in senior settlements.) But if an average rate of return (almost 16 percent), with no market risk, is of interest to you (or one or more of your qualified plans) you are invited to learn more about senior settlements. Just fax me (239-417-9045) your name, address, phone numbers (business/home/cell) and estimated amount to invest (minimum is $50,000 for accredited investors.)

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Posted in Estate Tax, Featured, Investment Strategies, Retirement Tax Advice | No Comments »

How to invest your accumulated cash profits

Friday, April 3rd, 2009

Business owners have many legitimate complaints these days: taxes, regulations, competition (from home and abroad), can’t find good people.

The list goes on and on. Always has, always will.

Yet the pride of the American capitalistic system is the successful family business. These entrepreneurs have found their way through, around or over the seemingly endless obstacles to become a “successful business owner.”

An SBO for short.

For the purposes of this article, SBOs have excess funds to invest (other than back into the operation of their business that produced the funds in the first place). Typically these excess funds are in one (or more) of three places: (1) still in the business, (2) in their (or spouse’s) name or (3) in a qualified plan (profit-sharing, 401(k), IRA or similar plan).

Over the years, the quote that follows has been nicknamed the SBO’s lament:

“I know how to make money in my business, but when it comes to making money with my investment money, either I don’t have time to watch it, don’t know how to watch it or rely on my investment advisor. When the market is up, my advisors do fine, when it’s down they do lousy.”

For the past couple of years, the lament usually ends with, “Now the market is lousy (or down, or uncertain, or similar words). What should I do?”

Now, regular readers of this column know that I am a tax planner prone to finding legal ways to avoid all types of taxes — particularly estate taxes. To do this requires, among other things, getting my client’s personal balance sheet.

Here’s what I can tell you that the balance sheets reveal about the investments of SBOs (and also other estate planning clients). Their success (or failure) in the stock market and a myriad of other investments, in general, mirrors the Dow Jones: happy on the way up and painful on the way down.

Usually, real estate investments are a winner.

Now what about that excess cash? Terrible results. Almost always the investments are conservative: divided between (1) CDs and money market funds, (2) municipal bonds and (3) a “zillion” variety of annuities. After taxes and inflation, your net earnings on (1) investments are typically less than 3 percent, sometimes even negative. Those income tax free bonds, (2), not only have a low rate of return, but fall in value when interest rates rise. Annuities, (3), could fill a large book to describe all the varieties and, most of all, the complaints from clients.

Never has a client told me that he/she is happy with the results of an annuity. (Sure would like to hear from a reader who has personally had a positive experience with any annuity.)

As you can imagine, almost every estate planning consultation with an SBO — and other clients — requires serious consideration concerning the client’s investments: safety, risk, tax consequences, rate of return and other factors. We discuss alternate investments, considering, among other things: profitability, risk and how taxed.

Currently, the most popular alternative investment is senior settlements (SS), also called Life Settlements. The following quote from The Wall Street Journal and USA Today (and other sources) tells you why SS are becoming such a popular investment.

“Life Settlements (have become a) trillion dollar industry, dominated by institutional investors including Berkshire Hathaway (billionaire Warren Buffet’s company), AIG and CNA. Their pursuit of this market is related to the degree of safety, high yields in excess of 15 percent per year and the fact that a Life Settlement is not affected by market forces.

“Life settlements are a very good option for the investor who has as his or her investment philosophy a desire for a secure, safe and ‘no risk’ investment. It is for your ‘nest egg’ money. It is not considered a security by SEC. Therefore it is not normally provided as an investment option by stock brokers.”

Of course, your question is: “Can a little guy (as opposed to an institutional investor) invest in SS?

Yes, it’s all made possible by a small, publicly traded (on the NASDAQ) company. Its average rate of return an SS investments has been 16.28 percent per year on average during the company’s 14-year operating history.

If you want to make a killing on your investments, SS are not for you. But if a 16 percent-plus rate of return, with no market risk is of interest to you (or your IRA, 401(k) or other qualified plan) fax me (847-674-5299) your name, address, phone numbers (business/home/cell) and estimated amount to invest ($50,000 minimum, for accredited investors).

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Sick of paying tax? Call a tax doctor for a second opinion

Friday, April 3rd, 2009

Often, I feel like an old-fashioned country doctor makin’ house calls. But there is a difference: my patients are sick of paying taxes.

Recently, I visited a successful family business in North Carolina, owned by a semi-retired 64-year-old named Joe and run by his son, Sam, a 36-year-old.

Joe called me. He wanted a second tax opinion for a business transfer plan and an estate plan put in place by Sam (with the advice of his professional advisors, the “best” estate planning team in the county) almost two years ago.

Wow, this patient was really sick (running a high tax fever, bleeding lots of tax dollars).

This is the story of the symptoms, the diagnosis and the “magic tax potions” that cured the patient.

First, the facts:

Joe owns 98 percent of two corporations: a profitable S corporation (Success Co.), which operates a string of stores, and a C corporation (a tax-paying corporation, called R/E Co.), which owns real estate leased to Success Co.

The real estate has an income tax basis of $1 million, but a current fair market value of about $6 million. Sam owns the remaining two percent of the stock of both corporations. Each of the corporations is the owner and beneficiary of a separate $1 million insurance policy on Joe’s life.

Four more little details:

• Joe’s second wife, Mary, is 45 years old and they have a premarital agreement that gives Mary the income from one-half of the value of Joe’s assets at his death for as long as Mary lives. But get this: none of the stock of Success Co. can be used to provide Mary her income.

• An artificially low price in a buy/sell agreement would force Joe’s estate to sell his stock in Success Co. back to Success Co. and the same for R/E Co. (Result: Sam would then own 100 percent of both corporations.)

• Joe has two other grown children who are not in the business.

• Joe is not insurable.

The diagnosis:

• The $1 million in life insurance payable to R/E Co. would kick up an unnecessary alternative minimum tax.

• The full $2 million of insurance would be included in Joe’s estate because he controls both corporations, but the $2 million (less the alternative minimum tax of about $150,000) would belong to the corporations, not Joe’s estate.

• There are not enough liquid assets to satisfy the obligation to Mary. Worse yet, if the obligation to Mary is met, there would be zero dollars (outside of the corporations) to pay an estimated $3.5 million estate tax liability. Simply put, the estate would be broke.

Our objectives to cure Joe’s tax illness are clear:

• Reduce the value of Joe’s estate.

• Get cash to fund the obligation to Mary.

• Pay the estate tax.

Here are the five major tax medicines I recommended to cure Joe’s business transfer and estate plan:

• Merge R/E Co. into Success Co. This maneuver is tax-free. R/E Co. is worth about $6 million as a real estate investment company but, as part of the operating company, its value is reduced by at least $2 million for estate tax purposes. Estate tax saving — over $1 million.

• Transfer the nonvoting stock (created after the merger) to a grantor retained annuity trust (GRAT), which reduces the value of Success Co. by about 40 percent for estate tax purposes. This maneuver saves about $.5 million in estate taxes.

• Joe takes the $2 million in insurance policies out of the corporations and gives it to his children. Result: The value of Joe’s estate drops about $2 million and will save another $1 million plus in estate tax.

• Change Joe’s will to put the entire estate tax obligation on the children. The $2 million in income tax-free/estate tax-free insurance proceeds will handle the entire estate tax load when Joe dies.

• Make sure Joe’s will qualifies for the 100 percent marital deduction for Mary’s one-half share, thus deferring any estate tax on this portion of Joe’s estate until Mary dies. Yes, there are other details and nuances in the plan, including gifts to Joe’s children, but these five tax medicines cured the patient.

What’s the lesson to be learned from this true-life Joe/Sam/Mary story? Always, yes always, get a second opinion after your estate plan is done, preferably before any documents are signed.

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Tax Secrets of the Wealthy: These M7 Strategies Are Simply Magnificent

Wednesday, April 1st, 2009

More than 90 percent of contacts with readers of this column are specific questions or concerns involving the “Magnificent Seven” (M7). What are the M7?

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.

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Posted in Estate Tax, Family Tax Issues, General Tax Strategies, Insurance, Investment Strategies, Planning, Tax Strategies | No Comments »

Multi-generational planning means more wealth for all.

Monday, March 30th, 2009

While browsing though my small mountain of files looking for ideas on what to write, I ran across a timely and interesting article in an old issue of Newsweek titled, “Darling, It’ll All Be Yours — Soon.” The article explains how “the inheritance boom is quietly reshaping how we think about death.” How true.

When I began my professional practice as a certified public accountant and lawyer back in the 1950s, a millionaire was hard to find. Today, millionaires are plentiful. And when it comes to estate planning, they scurry around trying to find a professional who can lower their estate tax before they get hit by the “final bus.” The Newsweek article by Robert J. Samuelson, like so many other articles, entertainingly explored the problem but offered no solutions.

Let’s set the scene for how you — whether mom and dad trying to give it away tax-free or one of the kids on the receiving end — can, in fact, solve the problem. Let’s start with the elders, mom and dad, who have the wealth.

Fact number one: You aren’t dead yet. Typical estate plans, such as separate wills and trusts for him and her, don’t speak until you are dead — too late to beat the tax collector. The solutions lie in lifetime planning. A lifetime plan keeps you in control of your wealth for as long as you live, yet transfers it—including your business—to your kids (and grandkids) while you are alive.

Fact number two: Years of experience have taught us that wealth is always passed to the younger generations of the family. And then the younger generations step into mom’s and dad’s shoes and typically increase the family wealth.

This gives the second generation an even bigger estate tax problem than mom and dad had.

Here’s how we solve this do-not-enrich-the-IRS estate-tax problem:

Logic tells you that children, particularly business children, are likely to become wealthy.

Usually these children accumulate more wealth than their mom and dad — to be repeated again when the family wealth goes to the grandchildren two generations later. Because of this generation-to-generation wealth transfer, we view each generation of the family separately in terms of their special needs and objectives.

Yet, the plan should not be just for mom and dad. It should be a comprehensive and integrated plan for the entire family. Following is an overview of how it’s done.

Keep your wealth — every dollar of it — in your family, instead of losing it to taxes.

• First Generation. Install a lifetime plan that removes wealth from your taxable estate during life. Use strategies like a qualified personal resident trust for your residence; an intentionally defective trust for your business; a subtrust for your profit-sharing plan, rollover IRAs and similar plans; a family limited partnership for your other assets (typically investments, like stocks, bonds and real estate); and an irrevocable life insurance trust for insurance, probably second-to-die. All of these strategies — and there are many others — begin their work now while you are alive and allow you to stay in control of your assets, including your business, for as long as you live.

Of course, we’ll dovetail your will and trust (death documents) with your lifetime plan. But when done right, your death documents just clean up what’s left. The first part of the family plan, including a business succession plan, and your wealth transfer plan are completed tax-free while you and your spouse are alive.

• Your Kids—Second Generation. After completing a comprehensive plan for mom and dad, it is easy to project what the financial future of the kids might look like. As soon as we finish the plan for the first generation, we start a plan for each of the kids, based on their individual assets and objectives.

• Your Grandchildren— Third Generation. The plans for this generation are closely tied to the plans of the two older generations. Probably the most important point to keep in mind, because of the young ages in this generation, is getting the children into a tax-free environment as soon as possible, a wealth-building must. These plans center on short-term and long-term tax-advantaged strategies that fulfill lifetime needs: education, buying a house, starting a business and, if they don’t go in to the family business, building a retirement fund.

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by Irv Blackman

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