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Don’t let an estate planner’s software enrich the IRS

Aug. 17, 2017
Computer programs suggest various tax strategies to reduce (but not eliminate) a large estate tax liability.

Are you single and worth over $5.5 million? Married and worth over $11 million? Well, under the current law, the estate tax monster will gobble up 40 percent of every dollar in excess of those numbers.

For example, Joe and Mary (worth $14 million) get hit by that proverbial final bus. The IRS estate tax monster will devour $1.2 million ($3 million times 40 percent) of the family wealth. Incredible! Do you always have to be a heartbeat away from enriching the IRS? No! You can use the same law to get all of your wealth intact, all taxes paid, if any, to your family.

Maybe a better question is how can there be such a big difference? In one case the IRS shares the family wealth. In another case the family keeps all the wealth. Based on my experience, here's the reason the IRS wins so often.

If you recently went to an estate planner, typically a CPA, lawyer, insurance consultant or financial planner, you'll relate to the reason. Armed with a computer program, the planner estimates what your wealth might be when you go to your reward. The program is driven by your estimated life expectancy, inflation, estimated after-tax earnings and what you might spend. Good stuff?

For example, a popular computer program, using the typical assumptions for a husband and wife (both 60 years old), predicts that a present $4 million in assets will grow to $17 million in 28 years (the life expectancy of the last to die of the two 60-year-olds). The program estimates the estate tax liability at $2.4 million. Then the program suggests various tax strategies to reduce (but not eliminate) that whopper of an estate tax liability. The IRS will still get a big payday at the expense of your family.

We don't use computer programs like these. Instead, we focus on your wealth and how to get all — every dime of it — to your family. All taxes, if any, paid in full.

Following is an overview of the five-step approach we often use to keep your wealth in the family.

  1. Freeze your estate. We freeze the value of your assets for estate tax purposes (some of the wealth-preserving strategies we use are shown below). You will continue to control each asset for as long as you live.
  2. Reduce the value of specific assets for tax purposes. (a) A QPRT (qualified personal residence trust) for your residence; (b) An IDT (an intentional defective trust) for your business; (c) a FLIP (family limited partnership) for other assets — typically real estate, publicly held stock, bonds, and other investments; and (d) proper valuation of your family business (taking discounts allowed by the tax law).
  3. Get into a tax-free environment. There are two basic tax-free environments: (a) life insurance (earnings on the cash surrender value of life insurance is tax-free) and charity (a charitable lead trust or a charitable remainder trust). The idea is to get into one or both of these environments as quickly as possible. Then, you can ride the tax-free gravy train for as long as you live. And often, your family can continue the ride even after you pass on.
  4. Create wealth using the government's money. For example, burn a $100 bill. It's gone. Out of your estate. If you are in a 40 percent estate tax bracket, you burned $40 of the IRS' money and $60 of your money. The idea is to buy life insurance (with the IRS paying 40 percent of the premium) and keeping the policy proceeds out of your estate (the policy should be owned by an irrevocable life insurance trust). If you have money in a qualified plan — 401(k), rollover IRA, pension or profit sharing plan — use a strategy called “retirement plan rescue.”
  5. Make the final test. Ask this question: Will my family wind up with all my wealth? (If you are worth $15 million or $40 million or whatever, your family winds up with the entire $15 million or $40 million or whatever, all tax — if any — paid in full). If the answer is not an unequivocally "yes," you know you better get a second opinion.

Take this article to your estate planner and ask the question in Step 5.

And finally, if you want to learn more about this tax-saving subject, browse through my website: You'll be glad you did. If you have a question about anything in this article (or what you read on my website), you are welcome to call me (Irv) at 847-767-5296. Or email me ([email protected]).

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