Page 49 - MetalForming March 2015

Seven Most-Used Tax Strategies in 2014 will Work in 2015
Solve motion control problems with multiple-choice answers.
Let’s look back at the 2014 tax year. Interestingly, 2014 is the first year in memory with no significant change in the tax law: neither income tax nor estate tax. So, for tax-planning purposes, 2015 should mirror 2014.
We analyzed clients’ files to deter- mine the strategies most used in 2014 to legally beat up the IRS. These strate- gies rose to the top as the clear winners.
For ease of reading in every strategy, our tax hero is Joe, owner of Success Co., and all numbers are rounded.
1) Family Limited Partnership (FLIP). Joe owned $10 million of various invest- ment assets: real estate, cash-like assets, stocks and bonds. After transferring these assets to the FLIP, the assets are only worth $6.5 million (because of a 35 percent discount allowed by the law) for tax purposes. Result: estate tax sav- ings of $1.4 million.
2) Intentionally Defective Trust (IDT). Joe wants to transfer Success Co. to his son, Steve. Suppose Joe sells Success Co. (worth $10 million) to Steve. The result is a tax tragedy. Steve must earn about $17 million, paying $7 million in income tax, to have the $10 million to pay Joe. Then Joe must pay about $2 mil- lion in capital gains tax...only $8 million left. Steve must earn $17 million for Joe’s family to keep $8 million.
An IDT, under the Internal Revenue Code, allows the transfer (from Joe to Sam) to be tax-free to both of them. No income tax. No capital gains tax. Also, Joe keeps absolute control of Success. Co. for as long as he desires.
3) Captive Insurance Company (Captive). A Captive is a bona fide insurance company (property and casualty). For example, Success Co. (in a 40 percent—state and federal— income tax bracket) pays Captive (owned by Joe’s children) a $500,000 premium. Success Co. deducts the pre- mium, so is only out-of-pocket $300,000. Captive receives the $500,000 tax-free and can invest the entire $500,000. Over the years your Captive will accu- mulate millions of dollars, which will
ultimately go to the Captive owners (Joe’s kids) at only capital gains rates.
4) Retirement Plan Rescue (RPR). An RPR does two things: 1) avoids the double tax (income and estate) that qualified plan (i.e., profit-sharing, 401(k) and IRA) funds are subject to, and 2) uses the plan funds to create additional tax-free (no income tax, no estate tax) wealth. Typically, each $250,000 to $350,000 in the plan is used to create about $1 million of tax-free wealth. Have $250,000 or more in your IRA, 401(k) or other qualified plans? Look into an RPR.
5) Private Placement Life Insurance (PPLI). The prime purpose of PPLI is to turn your taxable investment profits and income (whether capital gains, dividends or interest income) into tax- free income. Imagine $1 million com- pounding tax-free over many years. If your have a large investment portfolio, you will be delighted with your PPLI.
6) Personal Residence “50/50 Title Strategy.” This strategy works on every residence you own. For example, you own a main residence worth $2 million and a country home worth $1 million. The 50/50 Title Strategy entitles you to a 30 percent discount, making your main residence worth only $1.4 million for estate-tax purposes. The country home value is reduced to $700,000. Result: $360,000 in estate tax savings simply by changing titles.
7) Premiums Financing (PF). This combines knowhow involving the tax law, a bank loan and the insurance industry. Result: You can buy a large insurance policy (either single life or second-to-die) with a death benefit of about $8 million to $100 million, depending on your age and health. You don’t pay premiums. Instead, bank loans pay the premiums, which are paid back when you die.
If you are worth more than $10 mil- lion, check out PF. You use your current wealth as leverage to create additional tax-free wealth without spending any of your current wealth. MF
Blackman on Taxes
Pick three.
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