Many Business Owners Spend a Lifetime Accumulating Wealth for Their Families, Yet Lose it to Their IRS—Why?
The tax law frustrates successful business owners at every turn. Never have I seen this frustration expressed better than in a letter from a reader (let’s call him Joe) of this column, a portion of which follows word-for-word (except the names have been changed).

“Mary and I (Joe) spent the better part of a year creating a plan to leave our worldly goods [Joe and Mary are worth about 4.1 million] to our [two] single sons, one of whom is in our business…”

“You can see from our Wills, Revocable Trusts and the two green manuals from the Family Planning Group, [professional advisors specializing in business succession and estate planning], our tax attorney… and our CPA…, who sat in all of our meetings that we are trying to do the right thing… just what that means, I don’t know but it seems to be that if Mary and I went to Vegas and lost every dime there would be no taxes… yet if we live a reasonably decent life and try to pass on our savings to our children and to charities, Uncle Sam steps in and decimates a lifetime of savings.”

The letter was accompanied by a stack of documents and financial data, (actually the same information made available to Joe’s threesome of advisors). What’s so interesting about Joe and Mary is that they are a poster couple for the six most common maintaining your lifestyle and estate tax problems—that follow—facing millions of family business owners:

1. How to transfer your family business when you have one child (or more) in the business and one child (or more) not in the business

2. How to maintain your lifestyle (and your spouse’s) for as long as you live

3. How to invest your excess funds

4. How to treat your children fairly

5. How to get your wealth to your children (or other family members) without being “decimated” by the IRS.

6. How to control your business for as long as you live.

It should be noted that all of Joe’s advisors were smart and experienced practitioners in their respective areas of practice. Then, why was Joe still searching for better results than this group could deliver? Simply put, Joe saw blue every time he thought of the $1 million-plus tax bill he was told he must pay to the IRS. Since Joe and Mary are like so many other family business owners (the amount of wealth is almost immaterial, it could be $3 million, $30 million or more), following is the basic plan (as your read, think how the same or a similar plan would solve your problems: for the rest of your life and when you get hit buy the final bus) we implemented for them. It is also the six-step core plan (the planning strategies are italicized) we create for most business owners, who want to (1) maintain their lifestyle for as long as they live and (2) to finesse the estate tax and get 100 percent of their wealth to their family… All taxes, if any, paid in full:

1. The business is transferred to the business child (or children) using an intentionally defective trust.

2. A subtrust or retirement plan rescue (using qualified plan funds, typically a profit-sharing plan, 401(k) or rollover IRA) is used to purchase second-to-die life insurance on Joe and Mary (proceeds to the children tax-free).

3. A family limited partnership (FLIP) is created to hold all of Joe’s and Mary’s assets (usually investments, like real estate, stocks and bonds).

4. Invest a portion of available funds (in your qualified plans, business or personal) in senior settlements (SS). Maintaining your lifestyle is easier with SSs, which earn over 15%—without market risk—per year. These SSs are made available by a public company (trades on the NASDAQ) that has been enjoying a 15.82% rate of return on average for 15 years.

5. An annual gifting program is started immediately to transfer the FLIP interests to the children (typically, the non-business children).

6. The death documents (will and trust) are designed to clean up all of your goals and asset distributions that were not accomplished during your life by the first five steps of the plan.

Notice that the first five steps are done while Joe and Mary are alive… a must if you want to maintain your lifestyle and win the estate tax game. A will and trust (really a death plan—as opposed to a lifetime plan) just can’t get the job done.

Joe and Mary will control all their assets—including the business—for as long as they live. Again, we want to pound this point home: The plan is essentially a lifetime tax plan (the first five steps). The real secret is to do life-time planning, not only death or estate planning (the sixth step), like Joe’s advisors did.

After our six-step plan was put in place, the wealth that will ultimately go to the children of Joe and Mary will be in excess of $5 million. We actually created additional tax-free wealth, instead of losing over $1 million to the IRS. Most importantly, Joe and Mary will be able to maintain their lifestyle—allowing for an inflation rate of up to 5%—for as long as they live.

As regular readers of this column know, we do a reader test from time to time (Joe was part of the last-reader test).

So, if you want to maintain your lifestyle for life, have an estate tax problem or own an interest in a closely held business (particularly if you want to transfer the business to one or more of your kids), you are invited to join the test.

In order to participate, please send the following information (send copies, do not send original documents):

1. For your business. Your last year-end financial statement.

2. Personal. A current personal financial statement for you and your spouse.

3. A family tree. Your name and birthday. Same for your spouse, kids and grandchildren.

4. Estate documents. It is not necessary to send copies of your wills and trusts to start.

Send to Irv Blackman, Estate Plan Test, 3830 Estes Ave., Lincolnwood, IL 60712. (If you have a question call us—847-674-5295). What’s our job?… To create the right plan for you, your family and your business, as described in this article, and to coordinate the efforts of your professionals.

Just one more point: If you want to learn more about SSs (whether or not you join the Estate Plan Test), please fax me (847-674-5299) your name, address, phone numbers (business/home/cell) and estimated amount to invest (the minimum is $50,000 for accredited investors).

Okay, that’s our plan to help your do your plan. Let’s hear from you.
 

Did Your Lawyer (inadvertently) Rip You Off?
Joe (a 63-year old reader of this column from Iowa) almost cried when talking to me on the phone. He said, “I still want to kick myself for thinking my estate plan was done. For years I was convinced that my plan was… perfect…”

“Never stopped reading and studying. You know, articles. Even books. All my professionals assured me my plan was the best it could be. I religiously attended seminars. Consulted regularly with my CPA and several lawyers. All confirmed that the estate plan drawn by my lawyer Mike was right for me and Mary (Joe’s wife).”
“It never occurred to me that so many estate planning experts could be so dead wrong. Or that there is a better way to transfer my business to the kids and deal with my other assets. Not until a friend brought me a small pile of your articles.”

“I immediately read and reread the articles. The next day, I went to Mike’s office. Basically he gave three reasons why the dozens of concepts and ideas in your articles wouldn’t work for me: don’t apply to me, never heard of it or he’ll check it out and call me.”

The above summarizes about 20 minutes of Joe telling me about his years of planning with Mike (friend and well-respected lawyer who specializes in estate planning), his CPA and an old college buddy, his insurance agent.

Then, I asked Joe a series of blunt questions. His answers revealed Joe’s professionals had crafted a traditional estate plan.

And my bet is that 90 percent of you married guys reading this article also have a traditional estate plan. What is it?… Here’s the traditional plan Joe had (See if it sounds like your estate plan, as you read further).

Joe’s plan is built around two basic strategies: First, the plan takes advantage of the unified credit (actually $2 million is tax-free in 2006, 2007 and 2008; rising to $3.5 million in 2009. There is no tax in 2010. In 2011 the credit falls to $1 million). By using a two-trust arrangement (most often called Trust A and Trust B; Marital trust and Family trust or similar names), Joe and Mary each will escape tax on the amount of their unified credit, depending on their year of death. Second, Joe’s/Mary’s plan takes advantage of the marital deduction, which means zero estate tax when the first of Joe or Mary passes on.

That’s it: the traditional estate plan that we see in all 50 states. That was Joe’s and Mary’s plan. Is your plan the same?…. or similar?

What’s the guaranteed result? The plan prevents the IRS from collecting a dime at the first death (of either Joe or Mary). Good! But when the second spouse dies, the IRS gets its pound of flesh. In Joe’s and Mary’s case it’s a ton. If their wealth stayed the same, from today until the day both were gone, their estate tax would have been $4,655,000.

You’ll love the rest of the story.

Joe said, “Irv will you give me a second opinion?” I agreed. Joe sent me a standard package of information (tax returns and financial statements—both business and personal; family tree; and his estate plan documents). After two more telephone conversations, we pinned down Joe’s goals: for him and Mary, his successful business (wanted to leave it to his middle son) and his family (four kids and six grandchildren).

Three weeks later I called Joe and outlined the wealth transfer plan I had created (with the help of my network lawyer, Don) for Joe. Joe’s family will receive every dime of his and Mary’s wealth. Probably more (we actually created additional tax-free wealth) because we took advantage of the tax-free environments—particularly strategies involving life insurance and charity —available in the tax law. Gone was the $4,655,000 estate tax obligation to the IRS.

Joe was delighted, yet he felt he had been ripped off by his lawyer’s traditional estate plan. Don and I explained that Mike’s plan was the norm.

After our comprehensive plan was reduced to writing (five new documents and some modifications to the trusts that Mike wrote), we submitted the new plan and documents to Mike. He was easy to work with. Don and I answered his stream of questions. Mike—after about three weeks of “review and research” (his words)—fully endorsed our plan.

For me this is a rewarding story, because it shows that the message we try to deliver—you can always win the estate tax game—is getting through to the readers of this column. Yet there is much work to be done.

For you, the reader, if you are married and have a traditional estate plan (the same or similar to Joe’s), most likely your plan is not complete.

Think second opinion.

Want to learn more?… browse my website www.taxsecretsofthewealthy.com. Or in a hurry and want to talk about your existing estate plan and situation?… Call Irv Blackman at 847-674-5295.


APRA Global Connection / January 2007

Additional APRA Supported Websites

AutoElectricPro.com
 

Heavy Duty Remanufacturers Group

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