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

Irv Blackman

Sorry, you do not get a second chance to do your estate tax plan. Wrong plan, wrong strategy or missed opportunities available under the law will cost your family dearly after you go to heaven.

Following is an example: This is a true, sad, tax-war story. A reader of this column (Joe), had just completed his estate plan. He used competent lawyers, accountants, and insurance consultants ... but Joe was not comfortable. He sent the plan to me for a second opinion.

Tax Secrets

After examining the small mountain of documents and reviewing the plan, two things became clear: Each of the professionals had done a good job on his part of the plan, but taken as a whole, the plan was a tax disaster. Impossible? No! Typical. Here’s the story.

Joe is 63 years old, his wife, Mary, 60. They have five key goals:

  • Have a flow of income to maintain their lifestyle for as long as they live.
  • Transfer the business, Success Co., to their son Sam.
  • Treat their two other nonbusiness children fairly.
  • Provide for Mary if Joe dies first.
  • Minimize or, if possible, eliminate death taxes.

Here are Joe's significant facts: He's worth about $15.3 million: $8 million is the approximate value of Success Co. Most assets are owned jointly with Mary. But get this: when dead, Joe will be worth almost $20 million. Why? Because Success Co., a tax-paying C corporation, owns and is the beneficiary of a $4.6 million insurance policy on Joe’s life.

Stop! Don’t read any further for a few minutes. Jot down your own transfer/estate plan objectives and your fact pattern. It makes little or no difference if your numbers are more or less than Joe’s. Chances are you and Joe have much in common.

What should Joe do? First, Joe should get the insurance out of the corporation and into an irrevocable life insurance trust. Then, he should get one-half of the joint property titled into his name and the other half into Mary’s name.

Joe must elect S corporation status for Success Co.; save about $10,000 a year in payroll taxes. S corporation dividends will provide him with a tax-advantaged flow of income.

In addition, we created an intentionally defective trust (IDT) to transfer Success Co. to Sam, but Joe keeps control by retaining all the voting stock (the nonvoting stock went to the IDT).

A family limited partnership (FLIP) was created to own the investments and the nonvoting FLIP interests were transferred to the non-business kids, while Joe kept the voting interests to maintain control.

We used the cash flow of Success Co. to buy additional life insurance on Joe and Mary (second-to-die) via the IDT. The new life insurance -- set up to be tax-free -- will create enough dollars to equalize the two nonbusiness children.

The existing life insurance ($4.6 million) on Joe was taken out of Success Co. and replaced with $7.5 million of second-to-die (on Joe and Mary) insurance... also set up to be tax-free.

Success Co. adopt a wage continuation plan for Joe in case he could no longer work... satisfied Goals 1 and 4.

Finally, a gifting program was put in place to take advantage of the $28,000 annual gifts ($14,000 each for Joe and Mary) for each of the three children and seven grandchildren.

The results after our second opinion: Each of Joe’s five key goals were satisfied. Goals two and three were covered above. What about goal 5. “Minimize death taxes?” The increase in the insurance (and removing the death benefit from the clutches of the estate tax monster) leaves enough insurance to more than cover any possible estate tax liability.

Now, the main point this article wants to drive home: If you have your plan in place, but are still faced within an estate tax liability, you owe it yourself and your family to get a second opinion.

Have any questions or concerns, call me (Irv) at 847-674-5295 or email me