Tax Secrets: Johnny-one-note estate planning can be dangerous to your economic health

Writing this column is fun. Even more fun is consulting with column readers to solve their real-life family and tax problems. When a reader consults with me, I ask him/her to send some basic data including a copy of their current estate plan. Recently, a small parade of readers have asked me to review or give a second opinion on what I call “Johnny-one-note estate planning.”

If your estate plan is done or is in the process of being done, the rest of this item is must reading. Estate plans that are built around one main theme (Johnny-one-note) do not play well in the complex world of the dozens of concepts available to eliminate the estate tax.

Of the last 37 plans I have reviewed, 30 were based on a single theme. The runaway winner (really a loser in tax-saving effectiveness) is the creation of a revocable trust (RT) — one for him and one for her where a married couple is involved. An RT for married folks is a good start to an estate plan, but its only good tax trick is to defer the big estate tax bite until the death of the second spouse.

Two other strategies that I see regularly as a Johnny-one-note are the sale of a business to the kids by the business-owner dad (SALE) and family limited partnerships (FLIPs).

A SALE is often used as a strategy to sell your business to your kids (usually on an installment basis). Never, but never, have I seen a SALE of a family owned business as a tax-effective way to transfer a business to the next generation. Instead, take a look at an intentionally defective trust (IDT), which is the best way to transfer a business — tax-free from Dad/Mom to the business kids. Read it again… slowly… tax free!

If you are thinking of transferring your family business to your kids, other-shareholders or one (or more) of your employees, an IDT trust is a must.

A FLIP is usually not an effective way to deal with a business, a residence, or money in an IRA, profit-sharing plan or similar plan. But, when doing your estate plan, it’s a wonderful tax-saving starting point for almost every other asset you might own (stocks, bonds, real estate, you name it.) Properly used, you can control the assets for life, protect them from the claims of creditors, and reduce their value for estate tax purposes immediately by 30 percent to 40 percent.

For example, say your transfer $1.5 million of investment assets (stocks, bonds, real estate) to a FLIP. For estate tax purposes, (after a $500,000 discount), the assets are only worth about $1 million, resulting in estate tax savings of about $250,000.

This column over the years has covered RTs, IDTs and FLIPs in detail.

One way you can tell if your estate plan is really properly done is by looking at the estate tax liability if you and your spouse get hit by that proverbial truck. Whether the liability is $500,000, $5 million or more, your estate plan needs a second opinion. Why? Your target should always be to move all your wealth — intact — to our family. For example, if you’re worth $5 million, then the entire $5 million to your family; $50 million… the entire $50 million. Fill in your own wealth number.

Following is a list of the seven most common strategies we use to transfer your wealth — intact — and eliminate estate taxes. In the parenthesis following each strategy is the type of assets your should own to consider the concept. Do you own any of those assets? Make sure you get a complete explanation from your professional advisor as to how the strategy shown can save you a bundle of taxes.

(1)Qualified personal residence or QPRT (residence)

(2)IDT (your family business)

(3)Subtrust (if you have a total of more than $350,000 in your IRA, profit-sharing or similar plan)

(4)Charitable remainder trust or CRT (appreciated assets, including a family business). Briefly, a CRT eliminates the capital gains tax and estate tax.

(5)FLIP (for all assets not list above, generally income producing investments).

(6)Irrevocable life insurance trust or ILIT (insurance is estate tax free to you and your spouse). Use other assets to pay premiums at little or no tax cost.

(7)Premium financing (allows you to buy insurance without paying premiums in cash)

Be assured there are many more strategies and an endless stream of combinations of two or more strategies. But the above list of seven strategies does the job (eliminate estate taxes or allow you to pass your wealth to your family — intact) in more than 95 percent of the cases. Review the list with your advisor.

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 Vist

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

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