How to create an effective lifetime plan

April 1, 2009
If you die and don't have an estate plan, think of the havoc your family and business will face. I want to give you many reasons to do not only your estate plan, but also an easy-to-do lifetime plan.

What's the problem with estate planning? Let me put this gently … If your estate plan is effective you must be in heaven, but thankfully, you are not dead yet. If you die and don't have an estate plan, think of the havoc your family and business will face. I want to give you many reasons to do not only your estate plan, but also an easy-to-do lifetime plan.

Let's assume your estate plan is perfect, but praise the lord, you have the rest of your life to live. The latest life expectancy tables say men should live to age 81 and women should make it to age 85. Stop for a moment, and write down the age you are shooting for. Remember, the recent life expectancy ages are averages. Make sure to add a year or two if your mom/dad has good genes and you watch your weight, exercise and don't smoke.

So, how many years do you have between today and your last breath? Let's play the life expectancy game: make your best “guesstimate” as to the number of years before you get hit by the final bus. If you are married, do the same and “guesstimate” the remaining number of years your spouse has left before getting hit by the final bus.

Now we have an estimated time frame for the number of years for your lifetime plan, which not only saves you a ton of tax dollars, but also significantly increases your wealth and makes the rest of your life less stressful. Of course, your lifetime plan will dovetail with your estate plan.

Joe, a reader from Texas, who is rich, has an almost perfect death plan, but is a poster boy for lifetime planning because he didn't realize that his extreme dissatisfaction with his estate plan was having no lifetime plan.

Whether you are worth more or less than Joe, pay attention to his problems and how easily and quickly our plan solved them. Chances are you'll be able to use one or more of Joe's strategies to enrich your own family at the expense of the IRS.

Joe is worth $44 million. Here are his significant assets at current values: he owns 51% of Success Co. ($19 million); his business real estate is leased to Success Co. ($10 million); he has two residences ($4 million); and he has a rollover IRA ($2 million) and a stock portfolio ($9 million). His assets are worth a total of $44 million.

Joe also has a $10 million life insurance policy with an original term of 15 years, which will end in two years. Joe has five children and only one of them, Sam (38-years-old), is in the business and will take over for Joe someday. Joe also has a sister, Sue, who owns 49% of Success Co.

I had Joe, who is 62-years-old, and his wife Mary, who is 60-years-old, play the life expectancy game with me. They guesstimated that Joe has 25 years to enjoy life (to age 87) and Mary has 33 years (to age 93). Remember, no estate tax is due until Mary gets hit by the final bus — a long time frame for a comprehensive lifetime plan.

Joe hates paying taxes and has spent a small fortune, over a span of five years, trying to create an estate plan with various professional advisors that accomplishes the following key goals: Transfer the business to Sam without Joe losing control; treat his four non-business kids fairly (each child will get about the same dollar amount); allow his wealth to grow, so there will be enough assets to treat the non-business kids fairly and leave at least $10 million to charity (his alma mater); and find a tax-effective way to buy Sue's 49% of Success Co. since she wants to sell it.

The strategies we used to accomplish Joe's goals, based on the assets he owns, are below. Notice that each strategy was implemented as part of Joe's lifetime plan while leaving his estate plan alone.

  1. Success Co.: We created 100 shares of voting stock (51 shares for Joe and 49 shares for Sue) and 20,000 shares of non-voting stock (10,200 shares for Joe and 9,800 shares for Sue). We then created two intentionally defective trusts for Joe and Sue to buy their non-voting stock ($19 million for Sam, and $18 million for Sue). Sam is the beneficiary of both IDTs and will own all of the non-voting stock when the $37 million is paid using the cash flow of Success Co. The entire IDT transaction is tax free to Joe, Sue and Sam — no income tax, no capital gains tax and no estate tax. Joe bought Sue's voting stock for $100,000 and will continue to control Success Co. for life.

  2. Business real estate: We created a charitable lead trust and transferred this real estate to the CLT, which will receive $1.2 million annual rent from Success Co. The CLT was set up to last for 16 years and pay 7% per year or $700,000 to charity. The Joe Family Foundation will receive the $700,000, a portion of which will pay the premium on a second-to-die life insurance policy on Joe and Mary for $10 million (and will ultimately go to Joe's alma mater). The real estate is now out of Joe's estate for tax purposes. After 16 years, the balance in the CLT will go to the non-business kids tax-free.

  3. Residences: We transferred a 50% interest in each of the two residences to Joe's trust from his existing estate plan. The other 50% went to Mary's trust. This strategy provides a minority discount, lowering the value of the residences to $2.8 million for estate tax purposes.

  4. Rollover IRA: We used a strategy called Retirement Plan Rescue to purchase $15 million of second-to-die life insurance, using the IRA funds to pay the premiums. The entire $15 million will go to the kids tax free. The $10 million term policy was allowed to lapse.

  5. Stock Portfolio: We transferred the portfolio to a family limited partnership, lowering its value for tax purposes to $6 million because of discounts allowed by the tax law.

We also amended the current estate plan trusts with the appropriate language to make sure that the various assets, including the insurance would treat the non-business kids fairly.

After four months, the plan was done. When Joe signed the documents, he declared, “I'm finally a happy camper.” Not only did Joe's lifetime plan accomplish all of his goals, but he got a huge dollar bonus: the plan transfers all of his wealth to his kids with all taxes paid in full.

What's the planning lesson to be learned from Joe's story? It's that smart lifetime planning, plus your old traditional estate plan, prevents loss of your wealth to the IRS. Lifetime planning wins ever time.

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

Read more by Irv Blackman

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