Second Opinion Conquers Estate Tax (IRS) for Reader

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.

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.