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:
- 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.
- How to maintain your lifestyle (and your spouse’s) for as long as you live.
- How to invest your excess funds.
- How to treat your children fairly.
- How to get your wealth to your children (or other family members) without being “decimated” by the IRS.
- 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 we implemented for them. (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.) 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% of their wealth to their family… All taxes, if any, paid in full:
- The business is transferred to the business child (or children) using an intentionally defective trust.
- 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).
- 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).
- 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.
- An annual gifting program is started immediately to transfer the FLIP interests to the children (typically, the non-business children).
- 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 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 more than $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):
- For your business. Your last year-end financial statement.
- Personal. A current personal financial statement for you and your spouse.
- A family tree. Your name and birthday. Same for your spouse, kids and grandchildren.
- 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.
Okay, that’s our plan to help your do your plan. Let’s hear from you.
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