The typical reader of this column, (we’ll call him Joe), who calls me for estate planning help has two basic characteristics: He has been successful at accumulating wealth (almost always in a business he started or was created by a family elder and passed to him), and he hates paying taxes.
Joe is usually married (but not necessarily to his first wife), has kids and about two-thirds of the time, one or more of his kids are in the business (Success Co.). Joe wants to sell Success Co. to his kids and slow down (rarely does Joe want to retire — just work less hours/days and spend more time with family, golf, travel or enjoy other non-business pleasures.)
One more bittersweet fact: Joe’s net worth increases almost every year, but so does his potential estate tax liability. Joe wants and needs a comprehensive plan to eliminate, or at least reduce, the mushrooming estate tax burden. Unfortunately, Joe can’t find a professional who knows how to create, implement and monitor such a plan.
This article is written for the Joes of the world who are struggling to find a way to deal with some or most of the above characteristics, facts or concerns.
We (me, your author, and a network of professionals) have designed a system that always delivers 100 percent of your wealth to your family (or a portion to charity), instead of losing up to 55 percent (using 2011 tax rates) of your wealth to the IRS. Best of all, every one of the strategies used in the system is legal, easy to do when you know how, and always works, whether you are young or old, married or single or insurable or uninsurable.
The system revolves around three separate pillars as follows: Select time-tested appropriate “strategies” to accomplish your specific “goals” based on the “assets” you own.
Your job is to identify your specific “goals,” typically divided into three separate lists: Goals for you and your wife, goals for your family and goals for your business. Our job is to select the “strategies” (various trusts, partnerships and other techniques, write the documents and implement the plan). Of course, the plan must be monitored over the years and updated as necessary, when required by changes in your family, business circumstances and/or the tax law.
That leaves the “assets” — really a personal financial statement. We divide your assets into four distinct categories: Residence(s), business, funds in a qualified plan (i.e. 401(k), IRA or profit-sharing plan), investments (real-estate, stocks, bonds and an interest in other investments, usually managed by someone else.)
Remember, your future income stream (and potential cash flow) is also an asset. Often this income stream is your largest dollar-amount asset, continuing to enrich not only you, but continuing to increase your potential estate tax liability to the IRS.
Logic tells you that you must have two plans to legally beat up the IRS: A lifetime plan and a death plan (the typical will and trust most lawyers draw). The real don’t-lose-your-wealth-to-the-IRS plan is always — and we mean always — in the lifetime plan.
Your lifetime plan must be designed to utilize strategies that: Freeze the value, particularly your business, of your various assets (prevent your taxable estate from growing larger), then discount each asset (lowers the value for estate tax purposes). For example a piece of income real estate worth $1 million would be transferred to a family limited partnership (FLIP), and the value of the real estate reduced to about $650,000 for tax purposes, gift assets (not necessarily cash, but non-spendable assets like an interest in a FLIP) to younger family members and create tax-free wealth (usually with a life insurance program or a charitable lead trust, if you and your spouse are not insurable) to pay any estate tax that could not be eliminated by the other strategies.
One final point. Joe almost always wants to stay in absolute control of his assets, particularly Success Co., for as long as he lives. It is easy to accomplish this control goal when implementing the above strategies and creating the supporting documents.
Yes. You really can beat the estate tax — whether you are worth $3 million or $30 million. Learn all you can. One way to learn is to keep reading this column. Or browse my Web site, taxsecretsofthewealthy.com. You’ll find a ton of free information. Or if you are in hurry, call me (847-674-5295).
Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection. E-mail him at firstname.lastname@example.org or call 417-9732. His Web site is taxsecretsofthewealthy.com.