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IRS estate tax conqured by second opinion

July 9, 2014
Since 1995 we have done a test for the readers of this column We do a complete and comprehensive transfer/estate plan for each reader who responds, and 2013 results are in Most estate plans are really a death plan, which cannot save a dime of estate taxes Key strategies include an IDT, an RPR, and a gifting program Want to participate in the 2014 test?

For years I have been writing, "If you use the right tax strategies, work with the right professional, typically a lawyer, CPA and insurance consultant, you will create a comprehensive plan to conquer the estate tax. Unfortunately, the goal of the typical estate planning advisor is to reduce your estate taxes. My goal is eliminate your estate tax!

Over the years, three types of readers call me for help: No. 1.: Readers that have an estate plan but want a second opinion. No. 2: Readers with no plan. No. 3 Readers that have been working on a plan for years, but just can't seem to get it done.

Which type are you? And why do I ask? Since 1995 we have done a test — for the readers of this column — almost every year. We do a complete and comprehensive transfer/estate plan for each reader who responds. Then we report back to you and always select one reader to tell you the details for that reader's plan.

The results are in for 2013! A total of 14 readers (more than expected) responded. Eight were in category 1; three in category 2 and three in category 3.

One of the respondents — Joe, a 64-year-old, from Kansas married to Mary, age 63  —said in his letter to me, "Been reading your column for years; my gut tells me my current estate plan needs a second opinion."

Joe started his business from scratch. He wants to transfer the business Success Co. to his son, Sam. Joe is rich, but sadly, he doesn't feel rich. Yet, he's enthusiastic and almost always a happy camper.

Yes, you guessed it... Joe's current estate plan is a typical traditional estate plan (with an A/B trust). Really a death plan, which cannot save a dime of estate taxes.

Joe's assets and his goals are an almost perfect cross section of all 14 respondents. Joe basically has five types of assets:

  • Two residences: principal home ($700,000) and vacation home ($400,000). All values are rounded.
  • Success Co. is professionally valued at $9 million.
  • 401(k) plan and IRA ($1.6 million).
  • Investments: mostly real estate and a stock/bond portfolio ($5 million).
  • Life insurance on Joe (death benefit of $1 million/cash surrender value (CSV) of $375,000).

For estate tax purpose, if Joe got hit by the proverbial bus and Mary predeceased him, his estate is worth $17.7 million. His potential estate tax liability is about $2.8 million.

Joe and I had a number of telephone conferences after he sent me some requested financial date and other information. His goals are:

  • To maintain lifestyle for as long as we live.
  • Control assets — including Success Co. — for life.
  • Get Success Co. transferred to Sam in a tax effective way.
  • Get all of his assets to his family, no reduction for estate taxes.

Reducing value of assets

This is the world of getting the maximum discounts allowed by the tax law. Our proprietary system, used for every estate planning client, is asset-based.

(a) Two residents: The title to each resident is put 50% into Joe's living trust and 50% into Mary's living trust (typically called "Trust A" and "Trust B"). Discount 30% or $330,000.

(b) Success Co.: Created voting stock (100 shares) and non-voting stock (10,000 shares). Non-voting stock (ultimately goes to Sam) gets 40% discount or $3.6 million. Joe keeps voting stock and control.

(c) Investments: Real estate put into LLCs. Interest in these LLCs and other investments transferred to family limited partnerships (FLIPs). Discounts 35% or $1.17 million.

Key strategies

(a) An intentionally defective trust (IDT) was created by Joe. He sold the non-voting stock of Success Co. to the IDT for $5.4 million (the discounted price). The cash flow of Success Co. pays the IDT and the trust pays Joe. Every dollar received by Joe for principal and interest is tax-free (no capital gains tax, no income tax). When Joe is paid in full, Success Co. will be out of his estate/owned by Sam.

(b) Retirement plan rescue (RPR) uses the funds in the 401(k) plan and IRA, which is normally double taxed, to buy $5 million of second-to-die life insurance on Joe and Mary. The way we set up the insurance, every penny of the $5 million death benefit will be tax free (no income tax, no estate tax). Joe cancelled the $1 million policy on his life and pocketed the $375,000 CSV (tax-free).

(c) Gifting program. Gifts are made every year: $28,000 ($14,000 each Joe and Mary) to their three kids and seven grandkids/also used a portion of their $10.68 million.

The discounts, key strategies, plus the new $5 million life insurance policy, not only eliminated Joe's estate tax liability, but created additional tax-free wealth for the family.

It's time for the next test! Want to participate in the 2014 test? Please send the following information (send copies, do not send original documents):

  • For your business: Your last year-end financial statement.
  • Personal: Financial statement for you and your spouse.
  • Family tree: Name and birthday for you, your spouse, kids and grandkids.
  • Estate documents: Do not send until we discuss the above.

Send to Irv Blackman, Wealth Transfer Plan Test, 4545 W. Touhy Avenue, #602, Lincolnwood, Ill., 60712.

What's our job? To create the right plan for you, your family and your business (that will totally eliminate the impact of the estate tax) and, if you like, to coordinate and work with your local professionals. Okay, that's the plan. Let's hear from you. If you have a question call Irv at 847-674-5295.

Irv Blackman, CPA and lawyer, is a retired partner of Blackman Kallick 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:

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