Tax Secrets Of The Wealthy

On The Road To Wealth

Few people become wealthy overnight. Most can tell you great stories of the struggle to accumulate their first $1 million. Wealth Transfer Planning for the “Little Guy” and the “Less Than Medium-Net Worth Individual” (both defined later) contains many of the basic ingredients employed to create a Plan for the wealthiest individuals.

We’ll work our way up by answering the following question first.

What About the Little Guy?

After a couple of false starts, it occurred to me that the best way to write this section was to repeat an article originally written for my monthly tax column. Many of the column readers are wealthy (by the definition used on this website). My best guess (don’t have any number that can be confirmed) is that about half are Little Guys, as defined in the following article.

“SOME SPECIAL STRATEGIES FOR THE LITTLE GUY
TO BEAT THE ESTATE TAX”

Traditionally, when this column attacks an estate tax problem, it uses real-life examples and big-dollar numbers. Why? Because the larger your estate, the bigger the value of your assets and the bigger the potential estate tax liability. Our job is to kill that estate tax liability. No matter how big. And we do. By using the right strategies.

A question often asked by readers of this column — whether by phone, fax, or e-mail — goes something like this: “Irv, do your strategies work for the little guy?”

Absolutely!

Let’s answer the question by first defining Little Guy. If you are:

• Single and your taxable estate is $1 million or less,
• Married and the combined dollar value of your taxable estate and your spouse’s estate is $2 million or less,
• And there is little or no chance your taxable estate will ever exceed $3 million.

Taxable estate means the total value of all of your assets (including the amount of life insurance on your life), less your liabilities on the day you die.

Let’s look at a typical example. Jim, married to Mazie, has no liabilities and owns the following assets (actual numbers—but rounded—from the file of a real-life client):

Now let’s take a look at the three biggest mistakes the Jims of the world make.

1. The most common mistake.
   Jim leaves everything to Mazie; and Mazie does the same for Jim. This blows the benefit of a two-trust arrangement. ($1 million tax-free to Jim and $1 million tax-free to Mazie). Also, the first death is tax-free because of the marital deduction. But the second death would force a horrible $200,000 estate tax (assumes both Jim and Mazie pass on after 2010 with their assets totaling the same $1.5 million).
2. The second most common mistake.
   Everything that Jim and Mazie own—the residence, Jim, Inc. stock and other assets—is held in joint tenancy. Such property automatically passes to the surviving joint tenant when the first joint tenant dies. It makes no difference what you put in your will or trust. The estate tax disaster?… The same as mistake number 1 above… $200,000 to the IRS.
3. A common mistake when dad wants one or more of the kids to eventually own the business.
   Jim sells the business to his son Sam. (This tax blunder is not limited to little guys. Mega-millionaires—based on my experience—are just as guilty.) What’s the tax result? Jim must pay a capital gains tax on the profit when selling his Jim, Inc. stock.

   Jim, in real life, had all of his assets in joint tenancy (like mistake 2 above). So his $600,000 sale of the Jim, Inc. stock to Sam will be hit with a double tax: about $90,000 in capital gains tax and about $200,000 in estate tax.

What did we do to kill Jim’s estate tax liability? Here's the answer:

Correcting first mistake. Used a two-trust arrangement so the first $2 million of Jim’s and Mazie’s wealth is protected.

Correcting second mistake. Blew off the joint tenancy. We divided their assets so Jim owned about half the assets in his name, Mazie the other half in her name.

Correcting third mistake. Jim did not sell the business to Sam. He left it to Sam in his will. No tax—income, capital gains or estate—to Jim. No cost to Sam. All were happy.

We also did a few other tax tricks for Jim: (1) Created a death benefit agreement that continued Jim’s salary from Jim, Inc. (to assure Mazie her lifestyle could be maintained) if Jim died before Mazie. (2) Set up Jim’s 401(k) so it could pay for Jim’s life insurance premiums (significantly lowered the after-tax cost of the life insurance while increasing the death benefit to $450,000). (3) Put language in the wills that would treat the nonbusiness son “fairly,” as defined by Jim and Mazie.

The Little Guy tax strategies is a big subject in the real world (with most of the same problems as the very wealthy). Only the numbers are smaller. So, of course, you want to learn more. Here’s how: Click Here to go to “Online Store”/Order Individual Strategies Chapters and Case Studies.” Then, scroll down (it’s near the end) and click on “Applying the Strategies to the Little Guy.”

LITTLE GUYS AND PROFESSIONALS WHO HELP LITTLE GUYS
“Applying the Strategies to the Little Guy” is a must read for every “Little Guy” and the professionals who serve them. Click Here.

The text and examples tell you what to do and how to do it for Little Guys: individuals or married couples worth less than $3 million.

Less-Than-Medium-Net Worth

A less-than-medium-net worth individual (Less-Than-Medium-NWI) is categorized as having a net worth in the following range:

• $3 million or more, but
• Less than $10 million.

In practice, we have discovered that Less-Than-Medium-NWIs are a hybrid: sometimes tending toward a Medium-NWI, and at other times tending toward a Little Guy. Yes, the actual amount of their net worth counts. But of even greater importance is their attitude toward wealth and what they would like to do with it while alive and at death.

The following two quotes speak volumes about why these individuals are considered a hybrid.

Over the years I have had clients worth in the $10 million (or even much higher) range look me in the eyes and say something like, “You know, $10 million is not really a lot of money.” Or, on the other hand, some clients in the $3 million range say something like, “$3 million seems like all the money in the world.”

So based on our years of experience, we often use two sets of Strategies to create a Wealth Transfer Plan for a Less-Than-Medium-NWI:

1. The Basic Strategies used for the Little Guy and
2. The more Advanced Strategies used for Medium-NWI.

HOW TO LEARN MORE
If you fall in or near the dollar-net worth range ($3 million to $10 million) of a Less-Than-Medium-NWI, you owe it to yourself, your family and your business to read the following:

1. The Special Report (written by Irv Blackman), “Insider Secrets of How to Win the Estate Tax/Business Succession Game… Every Time,” Click Here, and
2. Applying the Strategies to the Little Guy” (from Irv Blackman’s Manual/Book, “Tax Secrets of the Wealthy.” Click Here to go to “Online Store”/”Order Individual Strategies, Chapters and Case Studies.” Then, scroll down (it’s near the end) and click on “Applying the Strategies to the Little Guy.” Click Here.