Irv Blackman Irv Blackman
Independent Financialservices Professsional

Second Opinion Conquers Estate Tax (IRS) for Reader

November 1, 2014

For years I have been writing, “If you use the right tax strategies and work with the right professional, you will create a comprehensive plan to conquer the estate tax.” Unfortunately, the goal of the typical estate-planning advisor is to reduce your estate taxes. My goal: eliminate the estate tax.

Three types of readers call me for help: 1) has an estate plan but wants a second opinion; 2) has no plan; or 3) has been working on a plan for years but just can’t seem to get it done.

Since 1995, we have completed comprehensive transfer/ estate plans for several readers each year, and report the results. In 2013 we worked with 14 readers—eight were in category 1, and three each in categories 2 and 3.

One respondent, Joe, a 64 year old (from Kansas) married to Mary, age 63, said in his letter to me, “I’ve been reading your column for years. My gut tells me my current estate plan needs a second opinion.”

Joe started his business (Success Co.) from scratch, and wants to transfer it to his son, Sam. And, yes, you guessed it: Joe’s current estate plan is a traditional plan with an A/B trust, which cannot save a dime of estate taxes.

Joe basically has five types of assets:

• Two residences: principal home ($700,000) and a vacation home ($400,000).

• Success Co. (professionally valued at $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 of $375,000)

For estate-tax purpose, the estate is worth $17.7 million. His potential estate-tax liability is about $2.8 million. To reduce the value of Joe’s assets for estate-tax purposes, our proprietary system is asset-based.

a) Two residents: The title to each resident is put 50 percent into Joe’s living trust and 50 percent into Mary’s living trust (typically called “Trust A” and “Trust B”). Discount 30 percent or $330,000.

b) Success Co.: Created voting stock (100 shares) and nonvoting stock (10,000 shares). Nonvoting stock (ultimately goes to Sam) gets 40 percent discount or $3.6 million. Joe keeps voting stock and control.

c) Investments: Real estate put into LLCs. Interest in these LLCs and other investments transferred to family limited partnerships (FLIPs). Discounts 35 percent or $1.17 million.

Key Strategies

a) Joe creates an intentionally defective trust (IDT) and sells the nonvoting stock of Success Co. to the IDT for $5.4 million. 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. When Joe is paid in full, Success Co. will be out of his estate/owned by Sam.

b) Retirement plan rescue (RPR) uses the funds in the 401(k) plan and IRA (normally double taxed) to buy $5 million of second-to-die life insurance on Joe and Mary. Every penny of the death benefit will be tax free. Joe cancels the $1 million policy on his life and pockets the $375,000 CSV (tax-free).

c) 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 and $5 million life-insurance policy not only eliminated Joe’s estate-tax liability but created additional tax-free wealth for the family.

Want to participate in the next 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 to Irv Blackman, Wealth Transfer Plan Test, 4545 W. Touhy Ave., #602, Lincolnwood, IL 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.
Okay, that's the plan. Let's hear from you. Have a question? Call Irv at 847/674-5295. MF
Industry-Related Terms: Transfer
View Glossary of Metalforming Terms

Technologies: Management


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