Second opinion conquers estate tax for column reader

For years I have been writing: “If you use the right tax strategies, work with the right professional (typically, lawyer, CPA and insurance consultant), you will create a comprehensive plan to conquer the estate tax. Every time. And legally. Whether you are young or old... Married or single... Insurable or not.”

Unfortunately, the goal of the typical estate planning advisor is to reduce your estate taxes. My goal: eliminate your estate tax.

Over the years, three types of readers have typically called me for help:

  • One who has an estate plan but wants a second opinion
  • One who has no plan
  • One who has been working on a plan for years but just can’t seem to get it done.

Which type are you? Why do I ask? Because since 1995 we have done a test—for the readers of this column—almost every year. We do a complete and comprehensive transfer/estate plan for each reader who responds. Then we report back to you and always select one reader to tell you the details for that reader's plan.

The results are in for 2013; a total of 14 readers (more than expected) responded. Eight were in category one; three in category two and three in category threee.

One of the respondents—Joe, a 64 year old (from Kansas) married to Mary, age 63 — said in his letter to me, “Been reading your column for years. My gut tells me my current estate plan needs a second opinion.”

Joe started his business from scratch. He wants to transfer the business (Success Co.) to his son, Sam. Joe is rich. Has been for years. But sadly, he doesn’t feel rich. Yet, he’s enthusiastic and almost always a happy camper.

Yes, you guessed it... Joe’s “current estate plan” is a typical traditional estate plan with an A/B trust. Really a death plan that can't save a dime of estate taxes.

Joe’s assets and his goals are an almost perfect cross section of all 14 respondents. Read on — bet you'll see some of yourself.

Joe basically has five types of assets:

  • Two residences: principal home ($700,000) and vacation home ($400,000). All values rounded.
  • Success Co. (professionally valued, $9 million)
  • 401(k) plan and IRA ($1.6 million)
  • Investments: mostly real estate and a stock/bond portfolio ($5 million)
  • Life insurance on Joe (death benefit of $1 million/cash surrender value (CSV) of $375,000)

For estate tax purpose, if Joe got hit by the proverbial bus and Mary predeceased him, his estate is worth $17.7 million. His potential estate tax liability is about $2.8 million.

Joe and I had a number of telephone conferences after he sent me some requested financial date and other information. His goals:

  • “Want me and Mary to maintain our lifestyle for as long as we live”
  • "Control my assets — including Success Co. — for life”
  • “Get Success transferred to Sam in a tax effective way”
  • With an I-know-it-can’t-be-done laugh: “Irv, maybe you can get all of my assets to my family, no reduction for estate taxes?”

Reducing the Value of Joe's Assets for Estate Tax Purposes

This is the world of getting the maximum discounts allowed by the tax law. Our proprietary system (used for every estate planning client) is asset-based.

  • Two residents — The title to each resident is put 50% into Joe’s living trust and 50% into Mary’s living trust (typically called “Trust A” and “Trust B”). Discount 30% or $330,000.
  • Success Co. — Created voting (100 shares) and nonvoting (10,000 share) stock. Nonvoting stock (goes to Sam) gets 40% discount or $3.6 million. Joe keeps voting stock and control.
  • Investments — Real estate put into LLCs. Interest in these LLCs and other investments transferred to family limited partnerships (FLIPs). Discounts 35% or $1.17 million.

Key Strategies

  • An intentionally defective trust (IDT) was created by Joe. He sold the nonvoting stock of Success Co. to the IDT for $5.4 million (the discounted price). The cash flow of Success Co. pays the IDT and the trust pays Joe. Every dollar received by Joe for principal and interest is tax-free (no capital gains tax, no income tax). When Joe is paid in full, Success Co. will be out of his estate/owned by Sam.
  • Retirement plan rescue (RPR) uses the funds in the 401(k) plan and IRA (which is normally double taxed) to buy $5 million of second-to-die life insurance on Joe and Mary. The way we set up the insurance, every penny of the $5 million death benefit will be tax free (no income tax, no estate tax). Joe cancelled the $1 million policy on his life and pocketed the $375,000 CSV (tax-free).
  • Gifting program. Gifts are made every year: $28,000 ($14,000 each Joe and Mary) to their three kids and seven grandkids/also used a portion of their $10.68 million.

The discounts, key strategies, plus the new $5 million life insurance policy, not only eliminated Joe’s estate tax liability but created additional tax-free wealth for the family.

It’s time for the next test

Want to participate in the 2014 test?... Please send the following information (send copies, do not send original documents):

  • For your business — Your last year-end financial statement.
  • Personal — Financial statement for you and your spouse.
  • Family tree — Name and birthday for you, your spouse, kids and grandkids.
  • Estate documents — Do not send until we discuss the above.

Send them to: Irv Blackman, Wealth Transfer Plan Test, 4545 W. Touhy Avenue, #602, Lincolnwood, Illinois 60712.

What’s our job? To create the right plan for you, your family and your business (that will totally eliminate the impact of the estate tax) and, if you like, to coordinate and work with your local professionals.

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