The seven wonders of the (estate tax-saving) world

Let's start with two facts you must burn into your mind: 1) Your estate plan must start now with a life-time plan. Waiting for your plan to become effective when you go to heaven (like a typical A/B trust for husband and wife) can never be a tax-saving plan, but an estate tax trap that enriches the IRS instead of your heirs (usually your kids and grandkids), and 2) Your life-time, tax-saving plan must be asset-based. For each significant asset you own, decide a) what you want to do with that asset for the rest of your life and b) who (and when) will inherit it when you (and your spouse, if married) are gone.

Each of the our seven wonders that follows identifies the asset (or like-kind group of assets) that the wonder (actually an estate tax-saving strategy) deals with.

Read the wonders closely. Based on my 40-plus years of experience, you probably will save hundred of thousands (some of you, even millions) of estate tax dollars.

Intentionally defective trust

Joe wants to transfer Success Co. (an S corporation) to his son, Sam. Suppose Joe sells Success Co. (worth $10 million ) to Sam. The result is a tax tragedy. Sam must earn about $17 million, pay $7 million in income tax (federal and state) to have the $10 million to pay Joe.) Then Joe must pay about $2 million in capital gains tax – only $8 million left. Unbelievable. Sam must earn a stratospheric $17 million for Joe’s family to keep $8 million. That’s crazy.

Under the Internal Revenue Code, an intentionally defective trust allows the transfer (from Joe to Sam) to be tax-free to both of them. No income tax. No capital gains tax. Wow!

Also, Joe keeps absolute control of Success. Co. for as long as he wants.

Spousal asset trust

This time Joe is concerned about maintaining his (and wife Mary’s) lifestyle if they live well into their 90s or beyond (both are healthy and in their early 60s).

A spousal asset trust is an immediate gift to Sam of Success Co. (using up $10 million of their lifetime exemption, which is $5.45 million for each for 2016/$10.9 million for both of them). But here’s the real wonder: Success Co. is out of Joe’s and Mary’s estate, but they retain the income from Success Co. for life, and Joe keeps absolute control.

Family limited partnership

Joe owns $11 million of various investment assets: real estate, cash-like assets, stocks and bonds. After transferring these assets to the family limited partnership, the assets are only worth $7.15 million (because of a 35 percent discount allowed by the law) for tax purposes. Result: estate tax savings of $1.54 million.

Retirement plan rescue

A retirement plan rescue does two things:


  • Avoids the double tax (income and estate) that a qualified plan (i.e. profit-sharing plan, 401(k) and IRA) funds are subject to.
  • Uses the plan funds to create additional tax-free (no income tax, no estate tax) wealth.

Typically, each $250,000 to $350,000 in your plan is used to create about $1 million of tax-free wealth. Have $250,000 (or more) in your IRA, 401(k) or other qualified plans? Look into an RPR.

Private placement life insurance

The prime purpose of private placement life insurance is to turn your taxable investment profits and income (whether capital gains, dividends or interest income) into tax-free income. Imagine $1 million ($10 million or whatever) of your stock and bond portfolio compounding tax-free over many years.

Personal residence ‘50/50 title strategy’

This strategy works on every residence you own (whether one, two or more). For example, Joe owns a main residence worth $2 million and a country home worth $1 million.

The “50/50 title strategy” entitles Joe to a 30 percent discount, making his main residence worth only $1.4 million for estate tax purposes. And the country home value is reduced to $700,000. Result: $360,000 in estate tax savings simply by changing titles.

Premium financing

This combines know-how involving the tax law, a bank loan and the insurance industry. Result: You can buy a large insurance policy (either single life or second-to-die) with a death benefit of about $9 million (usually more, even to more than $100 million) depending on the amount of your wealth. You don’t pay premiums. Instead, a bank loan pays the premiums, which are paid back when you go to heaven.

Worth over $10 million? Then check out premium financing. It almost sounds too good to be true: You use your current wealth as leverage to create additional tax-free wealth spending only a minuscule amount to pay interest on the loan. But it is true.

The IRS accepts every one of the above strategies. None create any problems. But one warning: Each strategy must be done right (easy to do when you know how). So, make sure you work with an advisor that is experienced with the wonders you are interested in.

Want more info or have a question? Call me at 847-674-5295. Or email me at    

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