Tax secrets: Tax robbery

I’m about to kill a few sacred cows. Qualified-employee-benefit-plan cows to be exact. This is a painful subject.

The best introduction I ever heard of the subject was in a speech by Jonathan Blattmachr, a brilliant New York estate planning lawyer, who said, “… what I’m going to talk about now is the most heavily taxed receipt in estate planning… It is called income in respect of a decedent, typically known by its initials IRD. I could tell you the story about the physician who came to me with $8 million in IRAs and pension plans. Within a year after he died without planning, his estate had been whittled down to under $800,000 …

“… Everybody you known in your neighborhood, the lawyers, the doctors and dentists, are loaded up with income in respect of a decedent…”

And add closely held business owners to the list of those who can get clobbered by IRD. As a matter of fact, anyone who has accumulated even a small amount of dollars, in a qualified retirement plan is an IRD disease carrier. The disease eats the dollars (via taxes) in your pension plans, profit-sharing plans, 401(k) plans and similar plans. Can it be cured? Yes.

My usual explanation of IRD to a client: “The IRS gets 70 percent or more, while your family gets 30 percent or less of the funds in your qualified plan,” has a predictable response — ranging from a look of horror to an expletive utterance.

How does this tax robbery take place? Well, if you are in a high tax bracket and take a distribution during your life from your qualified plan, you are hit with about a 40 percent income tax, including state and federal, (say each distribution is $100,000). This leaves you $60,000. When you die, another 50 percent (it could be as high as 55 percent) for estate taxes slices the $60,000 in half. Now only $30,000 (30 percent of the $100,000) is left for your family. Taxes gobbled up $70,000.

Note: You lucky Florida residents escape the state income tax.

What if you die with money in your qualified plan? The balance in your account is taxed twice as IRD: first for income tax and the second time for estate tax. Result? The same 30/70 percent tax disaster as the when-you-were-alive example. Yep… 30 cents of each dollar for your family: 70 cents to the tax collector.

A new concept — as far as I know, this author was the first person to write and lecture about it — called the IRD-avoidance concept can turn that 30 cents back into a dollar (or $300,000 back into $1 million or whatever the number may be).

The concept is easy to implement and can be explained as a simple three-step process:

Step 1

The plan participant (let’s call him Joe) takes his distribution in the form of an annuity payable for life

Tax Results

a. Income tax: Tax-free

b. Estate tax: No value at death, so no estate tax.

Step 2

Joe collects the annuity payments for life.

Income tax: Taxable as ordinary income.

Step 3

Joe uses an irrevocable life insurance trust (often called “the super trust”) to purchase a life insurance policy, using the after-tax balance of the annuity payment to pay the premiums

Insurance proceeds are free of estate tax and income tax.

If you have about $350,000 or more in your qualified plans (add your pension, profit sharing, 401(k) and IRAs together) you owe it to yourself and your family to check with your tax professional to determine how the IRD-avoidance concept can save you and your family huge amounts of taxes, and also create wealth greater than the original amount in the plans. Do it.

Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP (CPAs) and Chairman Emeritus of the New Century Bank (both in Chicago). Contact Irv at 847-674-5295 or Visit

© 2008 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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