Tax Secrets: Eliminate your estate tax liability

Irv Blackman

Typically, closely held business owners create an estate plan that is designed to reduce their estate tax burden. Why? Because their professional estate tax planners tell them estate tax reduction is the best they can hope for. In our office reduction is the wrong target.

Our aim: Go for the estate tax bull’s eye: Elimination!\

More:Tax Secrets: Who should own your business real estate?

Following is a classic example of how it’s done. Bet you say, “That’s me,” more than once as you read.

A husband and wife – readers of this column – from Maine (Joe and Mary) sent us their personal financial statement. The exact asset and its value is shown in the tax strategy section that follows. Their total net worth is $15 million (rounded), which would kick up an estate tax bill of $1.6 million.

The strategies used for the significant assets owned by Joe and Mary are shown below in bold, followed by the asset and its value. In practice, none of the strategies are complicated.

It’s no different than a watch: You don’t have to know how to build one to tell time. Well, you don’t have to know how to draft the pile of documents Joe and Mary had to sign to build a transfer/estate plan that eliminates every cent of their estate tax on their $15 million estate (using the four strategies, explained below).

The QPRT. (Qualified Personal Resident Trust) ... residence (worth $1.4 million). The house was transferred to the QPRT, which allows Joe and Mary to live in it (rent free) for a period of years. After the QPRT terminates, the house will be owned by two of their children: Jack and Jill. (Sam, the third child, is active in the business.) The QPRT allows the $400,000 house to be substantially reduced (to under $150,000) for tax purposes.

The RPR (Retirement Plan Rescue), profit-sharing plan (worth $2.355 million) Joe used the funds in his profit-sharing plan to buy $4 million of second-to-die life insurance (on Joe and Mary). When both have passed on, the $4 million in insurance proceeds will go to their kids… tax-free.

Note: Funds in a qualified plan or an IRA are double taxed… Hit with both income tax and estate tax. Typically, the tax collector gets 70 percent – that’s $70,000 (federal and state) out of every $100,000 – while your family only gets 30 percent. A tax tragedy. An RPR makes the insurance proceeds tax-free. No income tax. No estate tax.

The IDT. (Intentionally Defective Trust) Joe used an IDT to transfer his business (Success Co.) – appraised at $5.6 million – to Sam. The IDT allows Joe to stay in absolute control of Success Co. for life. The transfer is tax free to Joe and Sam. You will actually save about $200,000 in tax per each $1 million of the value of the business being transferred. Want to transfer your business to your kids (or employees)? Check out an IDT.

The FLIP. (Family Limited Partnership). Other assets – cash, real estate stocks and other investments (worth $5.52 million). Joe and Mary will be the general partners of the FLIP; their three children will be the limited partners. All the partners share in the income, but the value of the assets transferred is reduced – for tax purposes – by about 30 percent. Result: About $800,000 in immediate estate tax savings the instant Joe and Mary sign the FLIP documents; more each year that follows as you make tax-free gifts to the kids and grandkids.

Joe and Mary will transfer about $19 million (including the insurance from the RPR) to their family; all taxes paid in full. Instead of losing a portion of their wealth to the IRS, the plan actually increases the after-tax wealth to be left to the kids.

Take another look at your own transfer/estate plan. If it does not target eliminating all of your potential estate tax liability, get a second opinion.

You may just want more information. Here are a few choices: (1) browse my website, or (2) call me (Irv) at, 847-767-5296 with your questions or concerns; or email me (