Webster’s Dictionary defines guarantee, “an assurance that something will be done as specified.” Let’s try an example: Can a commercial airline guarantee that you will get from city A to city B safely?
Well, almost. They use their years of experience, take a long list of precautions and follow well-tested rules. With the thousands of worldwide flights every day, it is very rare that all passengers do not arrive safely. Yes, flying is safe, but not guaranteed.
Next, let’s define “beating the estate tax.” Here’s the definition we have used with our clients starting in 1976: “All of your wealth — every dollar of it — to your heirs, all taxes (if any) paid in full.”
For example, if you are worth $3 million, then the entire $3 million to your family; if $33 million, then 100 percent of the $33 million to your family. Stop for a moment! Substitute your own amount of wealth. Yes, it is truly easy to get all of your wealth to your family legally. Keep reading.
Over the years — for hundreds of clients — we have always successfully met the definition. Yet, we would not be so bold as to say we “guarantee” it.
People (particularly other professionals and potential clients) always ask, “Irv, how do you do it?” The plain fact is that it’s simple and easy to do. How? Just like the airlines, we have years of experience, have a long-list (actually very long) of precautions and follow two sets of pre-tested rules: (1) the Internal Revenue Code (including rulings, case law and regulations) and (2) a System of our own rules applied on a case-by-case basis for each client.
Chances are you don’t know how to fly a plane, but you have learned to trust the airline system that gets you to your destination safely. Well, our system (proven over three decades) beats the IRS (particularly the estate tax) every time; whether you are old or young, single or married, insurable or uninsurable, and the host of other unique characteristics that differentiates the parade of estate planning clients we have legally helped to beat the tax collector. Simply! And easily.
Let me give you an example. Joe and Mary (age 69 and 67, respectively) are retired. Still own 100 percent of the family business (Success Co.; a C corporation) which has been run by their son (Sam, age 42) for the last five years. Their two other kids are not in the business. There are seven grandchildren.
Success Co. is worth $16 million (Joe’s best “guesstimate”). Joe and Mary are worth an additional $25 million (rental real estate worth $6 million, two residences valued at $2.6 million, a stock and bond portfolio at a current value of $11 million, $3.4 million in a 401 (k) and various IRAs and $2 million in other assets. Surprisingly, Joe and Mary — although healthy — have no life insurance.
Joe and Mary have a typical estate plan (a will and A/B trust) drawn by the “best” estate planning lawyer (Lenny) in their county, which has hundreds of lawyers specializing in estate taxes. Joe and Mary have significant charitable intent: During the remainder of their lives and at death. Lenny, after two years, is still working on a charitable giving plan.
Lenny figured the estate tax bill (before any gifts that might go to charity) would be about $21 million. He is right. Of course, gifts to charity (yet to be set up) would reduce the estate tax bite by $550,000 (using 2011 rates) for each $1 million gifted.
Joe called me asking for a second opinion. We discussed how our system would get his entire $41 million of wealth to his three kids and seven grandchildren (all taxes paid in full) and get about $20 million to charity.
Sorry, no guarantee, but Joe relished our history of 100 percent success in “beating the estate tax” using the system.
How does a plan using the system differ from a typical estate plan, which is really a death plan (nothing happens until you die)? A system plan is two separate plans: (1) a lifetime plan (starting from the day the plan begins and continues until you get hit by the final bus) that dovetails with (2) your death plan (really your will and trust).
Our Network (a team of professionals) began working on Joe and Mary’s plan immediately: The lawyer on the necessary documents, the insurance consultant on the life insurance, while I created the plan and coordinated the efforts of all the professionals (including Lenny).
In order to accomplish all of the goals Joe and Mary have (including “beating the estate tax”) we employed the following tax strategies:
1. A family limited partnership (to transfer a portion of the rental real estate and a portion of the stock and bond portfolio);
2. An intentionally defective trust to transfer Success Co. to Sam (tax-free to both Joe and Sam);
3. What we call a “50/50 play” to reduce the value of the two residences to $1.8 million for tax purposes;
4. Used a “Retirement Plan Rescue” the avoid the double tax (income and estate) on the 401 (k) and IRA funds and purchase $6 million of second-to-die life insurance with the tax-savings;
5. Created a charitable lead trust using the other portions of the rental real estate and stock and bond portfolio, to accomplish Joe and Mary’s charitable goals; and finally,
6. Using the government’s money, in effect, to purchase large amounts of life insurance with funds in the charitable lead trust and intentionally defective trust.
Lenny and Joe’s CPA handled all the details (that were not done by Network professionals) to make the entire planning experience more fun than work for Joe and Mary. With the exception of the insurance aspects, the entire plan was completed, with all documents signed, 3.5 months after the planning process started.
Two weeks later, we finally got the proposals from the insurance company. Then it took just 30 days to complete the entire plan: Insurance policies issued and the related documents signed. Lenny’s documents (will and trusts) were not changed.
Clients often want to know how we do a comprehensive and complete plan so quickly, while other professionals work on the estate plan for years, yet are never done. Well, here’s the secret: We have done plans like Joe’s and Mary’s (and endless variations) hundreds of times over the years. As a result about 90 percent of their plan was routine, while only a small portion (the most time-consuming part) required attention to numerous details to give Joe and Mary the perfect plan that fulfilled all of their goals.
What were the final results in dollars? Mary and Joe’s children and grandchildren will wind up with an estimated $43 million (with all taxes paid in full) and various charities will receive an estimated $24 million. The numbers show you the power of proper estate planning: Joe’s $41 million of wealth turned into $67 million ($43 million to his family; $24 million to charity). Planning pays!
Two more points: (1) Joe continues to have absolute control of all of his assets — including Success Co. — for as long as he lives and (2) the maintenance of the plan will be handled locally by Lenny and Joe’s CPA (including the required professional work when Joe and Mary ultimately go to the big business in the sky).
Want to learn more about how a plan — using the system — might work for you, your business and your family? Take a look at my Web site: taxsecretsofthewealthy.com. Or if you’re in a hurry, call me at (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.