Here’s the story. A reader of this column (Joe) and his lawyer (Lenny) live in Florida. Joe (age 62) started his business from a friend’s garage. Now, he’s successful: a profitable and growing corporation (Success Co.). His son, Sam, runs the company.
When Joe got the let’s-do-my-estate-plan itch, he called me. Here's the essence of what Joe told me: My wife, Mary, is 63. We have 3 kids and 7 grandkids. Everyone is healthy. Sam (age 38) is the only child working at Success Co. (an S corporation) and runs it.
Then Joe spelled out his goals:
1. Get Success Co. to Sam without Joe or his son getting killed by taxes.
2. Treat the two non-business kids equally.
3. Keep control of his assets, particularly Success Co., for as long as he lives.
4. Minimize (if possible, eliminate) the estate tax bite.
5. Make a substantial contribution to charity if the gift does not reduce his children’s inheritance.
Joe’s total net worth is a bit over $20 million. He has no debt. Also, Joe owns a $3 million life insurance policy insuring him, with a cash surrender value of $462,000.
Joe's current plan was simply two documents: a pour-over will with an A/B revocable trust. Joe's traditional documents were fine, and with a few minor changes were used as part of his final estate plan.
What’s wrong with Joe's current plan? Technically, nothing. That’s the problem. On the surface a pour over will, accompanied by an A/B trust (called a “traditional estate plan”), looks good and sounds good.
A good start. But standing alone, a traditional estate plan does not have a chance at conquering the estate tax and accomplishing the goals of the typical Joe and Mary.
So, what’s the answer? Two plans.
First, a traditional plan (yes, the old-fashioned will and A/B trust is still a worthy friend) and second, a lifetime plan, designed to accomplish your goals, based on each significant asset you own.
Hint: Life insurance, either already owned or to be acquired, is consider an asset.
Following is an outline of the lifetime plan Joe and Mary — with my guidance — put in place.
To Sam: Success Co. ($9 million) was transferred to Sam using an “arbitrage ILIT” (a combination of an irrevocable life insurance trust and an intentional defective trust). This type of ILIT transfers the nonvoting stock of Success Co. (via a sale) into a trust with Sam as the beneficiary; tax-free to Joe and Sam: No income tax. No estate tax. Joe keeps control of Success Co. by retaining the voting stock (only 100 shares) while selling the non-voting stock (10,000 shares) to the ILIT.
To the non-business kids. The liquid investments ($4.6 million) and the R/E ($1.3 million) are transferred to a family limited partnership (FLIP). These assets receive a discount (about 30 percent), making their value about $4.1 million (rounded) for tax purposes. Joe and Mary maintain control over the assets by keeping the general partnership units (only 1 percent).
The two homes will ultimately go to the two non-business kids using a strategy called a “qualified personal residence trust.” Joe and Mary will occupy both homes for life.
In the end, the lifetime plan created for Joe and Mary easily accomplishes all of their goals.
It should be noted that no attempt is made in this article to cover every possible strategy, rule and exception to structure every conceivable lifetime plan. Yet in practice, over the years every challenge presented by a client or column reader has been met.
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Would you like a second opinion on your existing estate plan (particularly if it does not include a lifetime plan)? Or would you like to win the estate tax game by creating your new (or updating your old) plan? Then call me (Irv) at 847-767-5296 or email me (firstname.lastname@example.org).