Tax Secrets of the Wealthy: ‘Mommy, can people die from diabetes?’

Planning ahead is essential

Unfortunately, the answer is ‘yes.’ The quote that is the title of this article is how a letter sent to me started. The rest of the letter really tugged hard at the heart and had the single goal of getting you to send a donation to a well-known diabetes charitable foundation. I sent a check.

And here’s something you should know: My wife and I both have diabetes. We relate.

Just could not help it, as the thought popped into the creative part of my mind to change the quote to, “Can people die from taxes?”… ‘No.’ But when they do die, the estate tax robber can kill a large portion of the family wealth.

We all know that sooner or later the Grim Reaper will get us all. You can’t escape him. Fortunately, you can escape the estate tax collector (the IRS). But planning ahead is essential. The sooner the better.

You are about to read the true-life-and-death story of Joe (a reader of this column), whose estate tax planning came later ... much later. The story starts with an e-mail (from Joe to me) dated Dec. 12, 2006 and began, “I am 70 and recently sold my principal business. I am in poor health and may not live a year. My wife is 70 and in normal health. I have no estate plan. I would like you to help me prepare one.”

Before one week had passed (via phone, fax, e-mail and courier), my network of professionals had started the planning process. It should be noted that on the rare occasions when we get a terminally ill client, all the necessary professionals (in this case me, my lawyer and my insurance consultant) put everything else on hold. The ill client’s needs always come first. Joe’s son Sam was a big help.

By the following Tuesday we had pinpointed Joe’s goals and had an accurate personal financial statement.

Here are the significant assets Joe owned: (1) $10.3 million of stocks, bonds and cash (mostly cash from the sale of his main business); (2) three other separate businesses had a total value of about $3.8 million (the most valuable — Nice Co. — was run by Sam), while the other two (Okay Co. and Good Co. were run by two different long-time employees, Frick and Frak); and (3) various other assets (including a residence and 401 (k) plan) worth a total of $2.2 million.

Neither Joe nor his wife Mary had any life insurance. Interesting, Joe told me that he and Mary — prior to this current illness, which was discovered in the fall of 2006 — had always enjoyed good health. The network lawyer did a hurry-up will, trust and family limited partnership (FLIP). All were signed by Joe before Christmas. The hope was to fund the FLIP (with the bulk of the cash, stocks and bonds) and make two quick gifts (to Sam and his only other sibling, Jane): One gift before 2006 ended and the second gift on Jan. 2, 2007.

The first blow to our hoped-for plan came when Joe went to the big business in the sky the day after Christmas. Too bad, no time to even complete those two estate tax saving gifts. The second blow came when we found out Mary is uninsurable.

Getting Joe’s will and trust signed before he died turned out to be our single stroke of luck. The blessing of the marital deduction got all of Joe’s assets (except $2 million that went to the family trust estate tax free) into trust for Mary. Now we are in a position to do the same basic estate planning for Mary that we would have done for Joe and Mary if both had lived. Simply put, our quick work paid off … big time.

Just using the following basic strategies for Mary will cut the estimated estate tax burden by about 50 percent (Remember, there was no estate tax liability due because of Joe’s death, courtesy of the marital deduction):

1. The FLIP (future gifts of the FLIP interests will be made every year to Sam, Jane and the three grandkids).

2. An intentionally defective trust to transfer each business Nice Co., Okay Co. and Good Co.) to the proper new owners (Sam, Frick and Frak).

3. A qualified personal residence trust to remove the residence from the clutches of the estate tax collector.

Because insurance is not available, a charitable lead trust (CLT) is a great alternative to do the same tax-free tricks as life insurance, while eliminating the impact of the estate tax. We are working with Mary to determine the exact type of CLT to be used and the amount to fund the trust.

One final note; Sam is not about to follow in his dad’s footsteps. He has started his tax planning, including an estate plan and an insurance plan.

Want to start or upgrade your estate plan? An easy way is to browse my Web site, taxsecretsofthewealthy.com. Even easier is to call Irv (847-674-5295) to discuss your questions and concerns.

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 wealthy@blackmankallick.com or call 417-9732. His Web site is taxsecretsofthewealthy.com.

© 2009 marconews.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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