Want to beat the estate tax? You must ask the right questions

Over the years we have talked to and consulted with hundreds of readers of this column. Hands down, here are the two most common questions we are asked: Is it possible to pass all of my wealth to my family, instead of losing any of it to the IRS? And can I keep control of all my assets — including my business — for as long as I live?

Burn the answer to both questions into your mind: a very loud YES. And we mean YES all the time. No matter what kind of assets you own. No matter how much you are worth. And no matter how old you are. But you need the right plan to make it happen. Forget about what your friends or neighbors did. Your plan must be tailored to your specific goals, assets owned and unique facts and circumstances.

Don’t wait. Your plan should be put into action now… whether you are 50 years old or 80. The sooner the better. Procrastination favors the IRS.
Be warned: If your plan is only a will and trust (no matter how perfect), it is almost certain to become an expensive tax trap. The sad fact is that most estate plans contain only a will and a trust, and when you (and your spouse) pass on, the IRS is guaranteed a big payday. You and your family lose.

For more than 40 years this is the short sermon we have been preaching to our clients: Making money, while trying to build after-tax wealth, has always been the first challenge for a family business. Keeping that wealth away from the IRS – legitimately – is even a bigger challenge. In a heart beat, almost half the wealth it took you a lifetime to accumulate can be robbed by the tax collector.

When you (and your spouse are gone) there are only three places your wealth can go: (1) to your family (heirs); (2) to charity; or (3) to the IRS. The simple fact is that a well-conceived plan will enrich your heirs; if you desire, help charity without any cost to you or your heirs; and eliminate the IRS. Also, your estate plan should include a business transfer plan and a retirement plan that will provide the after-tax cash flow needed so you (and your spouse) can maintain your lifestyle.

The right plan can only be achieved if your professionals ask the right questions. Like what are your objectives?... For your family?... Your business?... Your retirement? How can you be assured to have enough after-tax income to maintain your lifestyle for as long as you live?... The same for your spouse? Do you want to keep control of your business? How do you treat the kids fairly?... Those in the business… Those not in the business? The type and number of questions vary depending on your type of business, the make-up of your family, your goals (particularly your long-term goals), the type of assets you own, your overall wealth and other factors.

Why so many questions?... Because your answers dictate the tax strategies and techniques we must use to beat the IRS over the head with its own rules. Some of the common tax rules, strategies and techniques we use include:

  1. Intentionally defective trusts, (transfer your business to your kids… tax-free to you and the kids: no income tax, no gift tax and no estate tax.)
  2. Family limited partnerships (protects your investments and gives you a discount (35%) of the assets – like stocks, bonds and real estate. For example, $1 million of assets are valued at $650,000 for tax purposes... yielding estate tax savings of about $140,000. 
  3. Nonvoting/voting stock (keeps you in control of your business); 
  4. Retirement plan rescue (creates tax-free wealth with your 401(k), IRA or other qualified plans, instead of being double taxed); and 
  5. Charitable-giving plans (give huge amounts to charity without reducing your family’s inheritance). 

The list goes on and on. If you use the right tax strategies and techniques together with the right professionals (typically a lawyer, insurance consultant and CPA), you can develop a plan to beat the IRS. Every time. And legally.

Remember, the goal of almost every estate plan — usually based on the advice of a well-meaning professional advisor — is to merely reduce your estate taxes. An unacceptable goal. Our goal is to transfer all your wealth — every dime of it — to your family. For example, if you are worth $16 million, the entire $16 million to your family all taxes (if any) paid in full. The same if you are worth any other number, whether – $50 million (more or less). Stop for a moment… substitute your own net worth.

Now, gather ’round, y’all. Let’s take a look at the typical plan (we have done hundreds of them) that can capture all these tax goodies for  you, your family, and your business. There are three types of readers that call us for help: the reader who 1. has an estate plan but needs a second opinion, 2. has no plan or 3. has been working on a plan for years and just can’t seem to get it done. Which type are you? Whatever type you are, you are welcome to join us in a tax planning test.

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