Second opinion almost doubles family wealth

FOR YEARS I HAVE been preaching that your estate plan is not done unless you pass the "final test": 1) Does my estate plan transfer all dollars of my wealth to my heirs and all taxes, if any, paid in full? 2) Can I control all my assets, including my business, for as long as I live? If you dont get a "yes" to both questions, you must get a second opinion. Thats exactly what a reader (Joe) of this

FOR YEARS I HAVE been preaching that your estate plan is not done unless you pass the "final test": 1) Does my estate plan transfer all dollars of my wealth to my heirs and all taxes, if any, paid in full? 2) Can I control all my assets, including my business, for as long as I live?

If you don’t get a "yes" to both questions, you must get a second opinion.

That’s exactly what a reader (Joe) of this column did recently. Joe and his business, Success Co., are the perfect owner/family business poster example for most readers of this column.

Joe’s estate plan was done. All he had to do was sign the documents. The key to the plan was a sale for $2.5 million of 49% of Joe’s stock in Success Co., a C corporation, to his two business children (Matt, age 34, and Mike, 38). Joe would keep 51% of the stock in order to maintain control. The $2.5 million was a fair price. Joe’s basic estate was worth $8.5 million. Joe, 60, is married to Mary, 58, and they have two non-business children, whom they want to treat equally to Matt and Mike. In addition, Joe owned $3 million in insurance on his life (with Mary as the beneficiary) and $800,000 in a rollover IRA.

So, if Joe got hit by a bus, his total estate would be $12.3 million ($8.5 million, plus $3 million, plus $800,000). The final combined estimated tax (capital gains tax on the sale of Success Co. stock to Matt and Mike, income tax on the rollover IRA and estate tax) would total an incredible $6.1 million. The family would get only $6.2 million

Without boring you with all the details, following is the basic three-step plan we tailored for Joe:

Success Co. S corporation status was elected. We created voting/nonvoting stock. Joe keeps all the voting stock (1% of the total stock) to maintain control. The balance of the stock, 99%, all the nonvoting stock, was sold to a defective trust (Matt and Mike are the beneficiaries) for $6.2 million. All tax-free transactions.

Rollover IRA. We used these funds to create a subtrust to purchase $4.5 million of second-to-die life insurance (on Joe and Mary’s lives), which will be free of income tax and estate tax when Joe and Mary go to heaven. We dropped the $3 million of insurance on Joe’s life and Joe pocketed the policy’s $400,000 cash surrender value (tax-free).

Other assets owned by Joe: real estate, stocks and bonds. We created a family limited partnership. The nonvoting units of the FLIP will be gifted to Joe and Mary’s four kids and six grandchildren at the rate of $22,000 each per year. (Note: All Joe’s other assets, except his residence worth $500,000, were transferred to the FLIP, tax-free).

If Joe and Mary got hit by the proverbial bus immediately after the above second-opinion plan was implemented, their estate would rise to $14.2 million (Success Co. at $5.1 million, plus the other assets of $3.4 million, plus the IRA at $0.8 million equals $9.3 million; next, add the $0.4 million of CSV — this cash was transferred to the FLIP — and the new second-to-die policy of $4.5 million in the subtrust and you have the final new $14.2 million estate total).

The use of the FLIP, the subtrust and the elimination of the capital gains tax slash the tax on the new estate total down to $4.5 million (from $6.1 million before).

The net amount to Joe and Mary’s family mushrooms to $10.1 million ($14.2 million, less $4.1 million). Under the old plan, the family would have received only $6.2 million.

Following are more tax goodies that were part of our tax-saving program.

Before electing S corporation status, Success Co. paid a one-time, long-term care premium for Joe, Matt, Mike and their wives. Success Co was able to deduct 100% of the premiums. Now, all six members of the family will have LTC benefits, with no additional cost, for the rest of their lives. A new twist in the LTC tax law actual allows Joe and his family to not only get their long-term care free (and I mean free), but to actually make a profit (because of the crazy tax law).

Joe, Matt and Mike will save a total of about $15,000 per year in payroll taxes.

A buy-sell agreement makes sure none of the stock in Success Co could ever wind up in the hands of their kids’ spouses should one or more of them get divorced.

We put in a plan that will pay for the education of Joe and Mary’s six grandchildren and provide for their retirement. The benefits for each grandchild will exceed $4 million (or about $25 million for all six grandkids). The average cost per grandchild will be $220,000 (paid over 10 years). Or put another way, $220,000 will return more than $4 million (all of it tax-free).

Irving Blackman is a partner in Blackman Kallick Bartelstein, 300 S. Riverside Plaza, Chicago, Ill. 60606, He can be reached by phone at 312/207-1040, or via e-mail at [email protected]