Page 43 - MetalForming April 2010

Now let’s turn to the solution for the typical family business owner who wants to transfer his business to his kid(s). Most business owners have four kinds of assets:
1) The business (Success Co.);
2) A residence (often two or more); 3) Funds in a qualified plan (for
example, an IRA, 401(k), profit-sharing plan or similar plan); and
4) Investments (like real estate, stocks, bonds cash, CDs and other investments).
The solution (really a system to cre- ate a comprehensive plan) requires two plans: a traditional will and trust (one for Joe and one for Mary). This is real- ly a death plan. It cannot save you a dime in taxes. It just defers the estate tax until both Joe and Mary die.
The second plan—a lifetime plan— beats up the IRS legally. Let’s look at the lifetime-plan strategies most often used in practice. The system uses strategies that are implemented during your life and are based on the assets you own.
1) Your business—We use an inten- tionally defective trust (IDT), which means the trust is intentionally defective for income-tax purposes. What does this accomplish? The transfer of the Success Co. stock (typically nonvoting stock, while Joe keeps the voting stock and con- trol) is tax-free. The tax savings, com- pared to selling the stock to the kids, usually are $456,000 per $1 million of the value of Success Co. ($5,016,000 for Sam and Larry’s mom; $4,560,000 for Joe).
2) Residence(s)—The most com- mon strategy is called “50/50.” We trans- fer the title of each residence by having 50 percent owned by Joe’s traditional trust and the other 50 percent owned by Mary’s trust. Tax result? We get about a 30-percent discount for estate-tax pur- poses (for example a $600,000 house is only valued at $420,000 in the estate). Larry’s mom cannot take advantage of this strategy (her husband is gone).
3) Funds in qualified plans—These funds are double taxed. Sorry, but the
IRS winds up with about 70 percent, the family only 30 percent. For example, $1 million in a rollover IRA will only yield $300,000 to the family. Ouch! We use strategies like a subtrust or retirement plan rescue to boost that $300,000 to the $2 million to $7 million range (all tax- free) depending on age and health of the business owner (and spouse if married).
4) Investments—A family limited partnership (FLIP) is almost always the strategy of choice. Joe transfers his investments to a FLIP (could be more than one FLIP). Immediately the value of the assets transferred to the FLIP are discounted about 35 percent for tax purposes. Hey, $1 million of intrinsic value is worth only $650,000 for tax purpos- es, yields estate-tax savings of $158,000. Works for Joe and Larry’s mom too.
5) Still an estate-tax liability—Often 1 through 4 above kills the estate-tax lia-
bility. But what if it doesn’t? We fall back on one of about 20 life-insurance strate- gies to create tax-free wealth. Easier if you are married, like Joe and Mary, because you can buy second-to-die insurance, which costs much less in premiums than single life to pay the estate tax.
What if the business owner is unin- surable (and so is his wife, if married)? We then use a strategy called a charita- ble lead trust (works very similar to life insurance) to create tax-free wealth for the heirs. That’s exactly what Jacqueline Kennedy—who was uninsurable—did to earn her heirs about $250 million tax-free.
Lesson No. 4—The system as described above always works (kills the estate tax) whether you are young or old, married or single, insurable or uninsurable.
If your professional does not elimi- nate all of your estate-tax burden, get a second opinion. MF
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