Tax Secrets: Does your estate plan need a second opinion?

It's true; a real-life story can be stranger than fiction. Following is the fascinating story of a reader of this column (Joe) who called me for a second tax opinion. Joe, who lives in Michigan, had just finished – after almost two years of endless meetings with his professionals – his estate plan. All documents (wills and trusts for Joe and his wife Mary) had been completed and executed. Joe used an experienced and knowledgeable estate planning lawyer. Yet, he was not a happy camper because of the projected $4.2 million in estate taxes the lawyer said Joe would have to pay.

I asked Joe some basic questions. Based on his answers, Joe’s family would indeed lose over $4.2 million in estate taxes to the IRS. So, I agreed to give him a second opinion.

If you are a successful business owner – with a potential estate tax liability – pay attention. You, like Joe, will become a big estate tax-saving winner.

Two of their kids (Sam and Sue) have been running Success Co. for the past four years. Results: sales up 82 percent (and more growth is projected), profits more than doubled. Joe gladly admits the kids really did it all without him – except for a little coaching here and there – and that his compensation (including fringe benefits) of $325,000 made him a delighted overpaid employee/owner.

We asked Joe and Mary to pinpoint all their important goals. They have only four: (1) maintain their lifestyle for as long as they live; (2) transfer Success Co. to Sam and Sue in the most tax efficient way; (3) treat their third nonbusiness child equally and (4) transfer their other wealth (two residences, a big 401(k) account, some rental real estate and a large stock and bond portfolio) to their kids and grandkids while eliminating (or a least minimizing) the impact of the estate tax.

Note: If we did not create a comprehensive estate plan soon, Joe’s potential estate tax of $4.2 million would grow a bit larger every year.

Joe and Mary were amazed (when I told them based on my 40-plus years of experience) that their goals and circumstances are a rather common situation for family business owners. Actually, the plan we hatched for Joe and Mary is not unique. We (me and my Network of professionals: a lawyer to do the required documents, an insurance expert to arrange for the proper life insurance coverage, and a valuation expert to determine the value of Success Co.) have done similar plans hundreds of times.

Actually we created two plans: a lifetime plan and a death plan, which together make one comprehensive plan. The lifetime plan includes the five following strategies:

1. A salary continuation plan from Success Co. for Joe for as long as he lives and upon his death to continue for Mary.
2. Transfer Success Co. to the business kids using an intentionally defective trust (IDT), which gets the business from Joe to the kids tax-free (no income tax, no capital gains tax, no gift tax).
3. We created a family limited partnership (FLIP) to deal with the real estate and stock and bond portfolio. An annual gifting program (of the limited FLIP interests) was started immediately.
4. We used a retirement plan rescue to buy $3 million of second-to-die life insurance (on Joe and Mary) using the 401(k) funds, turning a potential double tax on the 401(k) funds into $3 million of tax-free insurance for the family.

Note: Joe stays in absolute control of all his assets, including Success Co., for as long as he lives.

The death plan was easy: an updated will and trust for Joe and the same for Mary.

What was the final result? Every goal of Joe and Mary was accomplished. Best of all, the $4.2 million potential loss in estate taxes to the IRS was eliminated.

Want to learn more about how to create a comprehensive lifetime and death plan? Look at my website, taxsecretsofthewealthy.com. In a hurry, call me (Irv) at 847-767-5296 or email me (irv@irvblackman.com).