Irv Blackman Irv Blackman
Independent Financialservices Professsional

The Four-Month Estate-Tax Cure

November 1, 2011
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A reader of this column (Joe, age 62) and his lawyer (Lenny) live in Florida. Joe started Success Co. from scratch and now employs 82 people, including his son, Sam, who runs its day-to-day operations.

Joe recently went to Lenny to prepare his estate plan, armed with this information: His wife Mary is 63, and they have three children and seven grandkids. Joe spelled out his basic goals:

• Transfer Success Co. to Sam without Joe or his son getting killed by taxes.

• Treat the two nonbusiness kids equally.

• Keep control of his assets, particularly Success Co., for as long as he lives.

• Minimize or eliminate the estate-tax bite.

• Make a substantial contribution to charity if the gift does not reduce his children’s inheritance.

Success Co. is worth about $9 million. Joe’s other assets include real estate leased to Success Co. ($1.3 million); a 401(k) plan worth $1.8 million; various liquid investments worth $4.6 million, including stocks, bonds and CDs; and two homes ($1.9 million). Other assets bring Joe’s total net worth to just more than $20 million, and he also owns a $3-million life-insurance policy with a cash-surrender value of $462,000. Joe has no debt.

Lenny’s estate plan comprised two documents: a pour-over will with an A/B revocable trust. What’s wrong with this plan? Technically, nothing, but the sad fact is that a traditional estate plan is nothing more than a death plan that does not go into action until Joe and Mary pass a.

To begin to prepare a more refined estate plan for Joe, we carefully considered the three major points laid out in Lenny’s cover letter:

• After Joe’s death, Success Co. would go to Sam.

• After Joe and Mary entered heaven, the rest of the assets would be divided equally to the two nonbusiness children (but significantly less to each child than the $9 million current value of Success Co.).

• The $3 million life-insurance policy, plus the liquid assets, would easily be enough to pay the anticipated estate tax. The letter also suggested that the policy transfer to an irrevocable life-insurance trust.

Two plans are needed to accomplish these goals—a traditional plan (the old-fashioned will and A/B trust); and a lifetime plan, designed to accomplish Joe’s goals based on each significant asset owned.

So, how do you create a lifetime plan that will work for you, your business and family? It’s a simple three-step process:

1) Make a list of each significant asset you own.

2) Opposite each asset, jot down your goals for that asset for the rest of your life (usually includes maintaining control), and its disposition when you and your spouse die.

3) Select the appropriate strategy (we’ll use Joe and Mary as an example) to accomplish your goal for each significant asset.

Following is an outline of the lifetime plan Joe and Mary want to put in place. The goals are to transfer Success Co. to Sam, and the rest of the assets ($9.5 million) to the two non-business kids. To get equal value to each of the kids, we need $18 million—the shortage will be made up with the purchase of second-to-die life insurance on Joe and Mary, including the $3 million in current coverage on Joe, which will be replaced with second-to-die coverage. Further, the 401(k) will fund an additional purchase of $3.6 million in second-to-die life insurance, split between charity ($1.8 million) and amongst the non-business kids ($1.8 million).

So, here’s the lifetime plan:

To Sam: Success Co. was transferred to Sam using an arbitrage ILIT—a combination of an irrevocable life-insurance trust and an intentional defective trust. This type of ILIT transfers the nonvoting stock of Success Co. (via a sale) to trust with Sam as the beneficiary, tax-free. No income tax, no estate tax. Joe keeps control of Success Co. by retaining the voting stock (only 100 shares) while selling the nonvoting stock (10,000 shares) to the ILIT. Dividends from Success Co. (tax-free as an S corporation) are used to pay Joe for the nonvoting stock and to purchase some second-to-die life insurance.

To the nonbusiness kids: The liquid investments ($4.6 million) and the R/E ($1.3 million) transfer to a family limited partnership (FLIP). These assets are entitled to a discount (about 30 percent), making their value about $4.1 million for tax purposes. For 2011 and 2012, a temporary gift-tax window allows $5 million per person ($10 million if married) as a one-time tax-free gift. Joe and Mary take advantage of this law by gifting the limited partnership units (99 percent) to these two kids. Joe and Mary maintain control over the assets by keeping the general partnership units (only 1 percent).

The two homes are left to the two nonbusiness kids using a strategy called a qualified personal residence trust and a small portion of the $5 million window. MF
Industry-Related Terms: Transfer
View Glossary of Metalforming Terms

Technologies: Management

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