It's easy to lose big dollars to the IRS, almost always unnecessarily. The following are some easy-to-do (tax-saving and wealth-building) strategies that we have done hundreds of times, yet are little known. Why? The reason is most professional advisors don't know how to implement them.
Retirement Plan Rescue (RPR)
Qualified retirement plans (like a 401(k), IRA, profit-sharing plan and the like) are double-taxed: First, you get nailed for income tax (say 40% for state and federal); then you get socked for estate tax (say 55% using 2011 rates). Result: The tax collectors get 73%, and your family only receives 27%. So, if you have $1 million in an IRA, for example, you'll lose $730,000 to taxes. Ouch!
Now, stop reading for a moment and do the math for the funds in your qualified plans. Shocking, huh?
An RPR is a simple life insurance strategy — either single life or second-to-die — that turns a tax tragedy into a tax victory. Two examples from my client files tell the story.
Example #1. A column reader from Ohio turned $274,000 in an IRA into $2.6 million (a single life policy).
Example #2. Another reader from Florida turned $342,000 in a 401(k) into $4.5 million (a second-to-die policy).
Intentionally defective trust (IDT)
Do you want to transfer/sell all or a part of your family business to your children (or other family member or maybe an employee)? Then think IDT.
Here's why. An IDT, because of really bad tax law (this time good for our side), allows you to transfer your business tax-free. That's tax-free to you and tax-free to the new owner. The amount of tax savings usually works out to be about $750,000 per $1 million of the fair market value of your business. It works all the time. Stop for a minute and apply IDT tax-savings to your business succession plan situation. You'll smile.
A darling of the investment world is “deferred annuities.” Chances are if you own an annuity, you are an unhappy camper. My clients tell me (and confirmed by many articles about deferred annuities), “Great tax-wise, but a lousy investment.”
Here's an investment that beats the pants off of deferred annuities — life settlements (LS). LS, offered by a public company that sells on the NASDAQ, earn an average of 15.83% rate of return per year. Your LS income also is deferred until you get back 100% of your investment and, at the same time, pocket all your earnings.
The 50/50 strategy (50/50)
When you get hit by the final bus, your home (or homes if you own two or more) is included in your estate. There is no question that homes are an estate tax trap. The estate tax damage is 55% (using 2011 rates) of the fair market value of each home. Again, stop for a moment and assess your potential loss in estate taxes.
How do you get out of this tax trap? 50/50 is the answer. This strategy uses the A/B revocable trusts most readers of this column already have. Here's what you do: 50% of each home is owned by the husband's trust, and the other 50% by the wife's trust. Now, neither has control and according to the often silly American tax law, you are entitled to a minority discount. The discount is in the 30% range. So a $500,000 house is only worth $350,000 for tax purposes. Neat!
Family Limited Partnership (FLIP)
Now think of your investment type assets — stocks, bonds, real estate and the like. A FLIP can be used for many good purposes including asset protection and a minority discount (just like for 50/50). However, the FLIP discount is in the 35% range ($1 million in assets are worth only $650,000 for tax purposes). In other words, you don't lose estate taxes to the IRS on $350,000 out of each $1 million of your investment type assets, transferred to the FLIP. As my grandkids say, “Cool!”
Should the truth be known, the above five tax miracles are just the tip of the tax-saving, wealth-creation iceberg. There are many more. Want to continue learning? Browse my Website at www.taxsecretsofthewealthy.com, or you can call me at 847/674-5295.
Irving Blackman is a retired founding partner in Blackman Kallick Bartelstein, 10 S. Riverside Pl., Suite 900, Chicago, Ill. 60606; tel. 312/207-1040, or via email at [email protected].