The typical reader of this column (we'll call him Joe) who calls me for estate-planning help has two basic characteristics: First, he has been successful at accumulating wealth (almost always in a business that he started or was created by a family elder and passed to him). Second, he hates paying taxes. Joe usually is married (but not necessarily to his first wife), has kids, and about two-thirds of the time, one or more of his kids are in the business (Success Co.). Joe wants to sell Success Co. to his kids and slow down (rarely does Joe want to retire, but he would rather work less hours/days and spend more time with family, golf, travel or enjoy other non-business pleasures).
There is one more bittersweet fact. Joe's net worth increases almost every year (sweet), but so does his potential estate tax liability (which is bitter and a major concern). Joe wants and needs a comprehensive plan to eliminate or at least reduce the mushrooming estate tax burden. Unfortunately, Joe can't find a professional who knows how to create, implement and monitor such a plan.
This column is written for the Joes of the world who are struggling to find a way to deal with some or most of the above characteristics, facts or concerns.
A network of professionals and I have designed a system that always delivers 100% of your wealth to your family (or a portion to charity), instead of losing up to 55% (using 2011 tax rates) of your wealth to the IRS. Best of all, every one of the strategies used in the system is legal, easy to do when you know how and always works whether you are young or old, married or single, insurable or uninsurable.
The system revolves around three separate pillars — select time-tested appropriate “strategies” and accomplish your specific “goals” based on the “assets” you own.
Your job is to identify your specific goals, typically divided into three separate lists: goals for you and your wife; goals for your family; and goals for your business. Our job is to select the strategies (various trusts, partnerships and other techniques), write the documents and implement the plan. Of course, the plan must be monitored over the years and updated as necessary when required by changes in your family and/or business circumstances.
That leaves the assets, which really are personal financial statements. We divide your assets into four distinct categories: residence(s); business; funds in a qualified plan (i.e. 401(k), IRA or profit-sharing plan); and investments (real estate, stocks, bonds and an interest in other investments, usually managed by someone else).
Remember, your future income stream and potential cash flow also are assets and often, over time, your largest dollar amount, which continues to enrich not only you, but continues to increase your potential estate tax liability to the IRS.
Logic tells you that you must have two plans to legally beat up the IRS — a lifetime plan and a death plan (the typical will and trust most lawyers draw). The real don't-lose-your-wealth-to-the-IRS plan is always in the lifetime plan.
Your lifetime plan must be designed to utilize strategies that: freeze the value of your various assets (prevent your taxable estate from growing larger); discounts each asset (lowers the value for estate tax purposes, for example, a piece of income real estate worth $1 million would be transferred to a family limited partnership and the value of the real estate reduced to about $650,000 for tax purposes); gift assets (not necessarily cash, but non-spendable assets like an interest in a FLIP) to younger family members; and create tax-free wealth (usually with a life insurance program or a charitable lead trust if you and your spouse are not insurable) to pay any estate tax that could not be eliminated by the other strategies.
One final point — Joe almost always wants to stay in absolute control of his assets, particularly Success Co., for as long as he lives. It is easy to accomplish this control goal when implementing the strategies and creating the supporting documents.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847-674-5295, e-mail [email protected], or on the Web at www.estatetaxsecrets.com.