I’m frustrated. I bet many of the readers of this column are frustrated too. And for the same reason. Actually, we have the same goal: eliminate the robber-like impact of the estate tax monster.
To learn how to accomplish this goal, I’ll read (or listen to) anything that offers a way to reduce the potential estate tax bite. So do most readers of this column; that’s what they tell me when they call. Then why the frustration? Because almost all professional estate planners strive for estate tax reduction, rather than making zero estate taxes (my goal) the target.
For years this column has been preaching three basic truths:
- You can pass all your wealth (every dime of it) to your family intact with all taxes – income, gift and estate – paid in full.
- You can control your assets – including your business – for as long as you live.
- You can use a tax-free environment to create wealth so you can increase the amount of wealth your family (typically your children and grandchildren) gets after you are gone, instead of losing any of your wealth to the IRS.
A properly designed estate plan usually takes advantage of all three of the BASIC TRUTHS. Following a list of when to use the most common strategies we actually use in practice to accomplish the “basic truths.”
Pass all your wealth intact
Use a qualified personal residence trust (QPRT) to transfer your residence to your heirs. You can live in your home for as long as you live, yet get it our of your estate.
Use an intentionally defective trust (IDT) to transfer your business (tax-free) to your children in the business. Your tax savings run about $190,000 for every $1 million of business value. For example, if your business is worth $4 million, you will save $760,000. Neat!
Real estate, stocks or bonds, interest in partnerships or other investment property. Use a family limited partnership (FLIP) to hold title to investment assets. Then transfer a portion of your interest in the FLIP to your kids and grandkids. The assets you transfer to your FLIP get a discount (35 percent) for tax purposes. So, $1 million of your assets transferred to your FLIP are only worth $650,000 for tax purposes … saving you estate taxes on $350,000.
Keep control of your assets
Almost all business owners have one common trait – they want to keep control of their assets, (including their business) for as long as they live.
The IRS can’t tax what you don’t own, even though you control it. Following are the strategies we use:
- We make you trustee, for example, for a QPRT and IDT.
- We use voting stock (51 percent or more) for your business corporations so you maintain absolute control while gifting (typically with an IDT) the non-voting stock to your business kids.
- You control all investment assets in a FLIP by keeping as little as one percent of the partnership as the general partner (equivalent to voting stock), while giving away the non-voting FLIP interests to your children and grandchildren.
Creating wealth in a tax-free environment
There are only two tax-free environments that you can use to create huge amounts of wealth: (a) life insurance and (b) charitable trusts. Let's take a look at life insurance.
If you have $400,000 or more in a rollover IRA, profit-sharing plan or 401(k), use a “Retirement Plan Rescue” to turn taxable dollars into tax-free dollars. Example: one client turned $4750,000 into $3.5 million of tax-free wealth for his family.
Buy life insurance in your FLIP, IDT or charitable trusts ... proceeds are tax free.
Get your existing life insurance into an irrevocable life insurance trust [ILIT] (or buy new policies in the ILIT).
The above list does not pretend to be complete. Make sure you work only with experienced and knowledgeable professionals.
Want to learn more? Browse my website: taxsecretsofthewealthy.com. Have a question, call me (Irv) at 847-674-5295. Or email me (email@example.com).