What’s the problem? Well, for your estate plan to be effective, you must be in heaven. But you ain’t dead yet.
A case in point is Joe, who has an almost perfect death plan but is a poster boy for lifetime planning. Joe didn’t realize his dissatisfaction with his estate plan was due to his lack of a lifetime plan. Chances are you’ll be able to use one or more of Joe’s strategies to enrich your own family.
Joe’s significant assets are: 51% of Success Co., business real estate, residences, a rollover IRA and a stock portfolio. Joe also has a $10 million term life insurance policy. Joe’s sister Sue owns 49% of Success Co. Joe has five children, but only one, Sam, is in the business.
Joe has worked to develop an estate plan that accomplishes the following goals: Get the business to Sam without Joe losing control; treat the four non-business kids fairly; grow his wealth with the goal of leaving an equal dollar amount to the non-business kids; leave at least $10 million to his alma mater; and find a tax-effective way to buy Sue’s 49% of Success Co.
Following are the strategies we used to accomplish Joe’s goals, based on the assets he owns. All the strategies were implemented as part of Joe’s lifetime plan, while leaving his estate plan alone.
1) First we created 100 shares of voting stock (51 for Joe and 49 for Sue) and 20,000 shares of non-voting stock (10,200 for Joe and 9,800 for Sue). We then created two intentionally defective trusts (IDTs) to buy the nonvoting stock. Sam is the beneficiary of both IDTs and will own all the nonvoting stock when the cost is paid using Success Co.’s cash flow. The transaction is tax-free to all parties. Joe bought Sue’s voting stock for $100,000 and will continue to control Success Co. for life.
2) We created a charitable lead trust (CLT) and transferred business real estate to the CLT, which will receive $1.2 million annual rent from Success Co. The CLT was set up to last for 16 years and pay 7% per year (or $700,000) to charity. The Joe Family Foundation will receive the $700,000, a portion of which will pay the premium on a second-to-die life insurance policy on Joe and Mary for $10 million (and will ultimately go to Joe’s alma mater).The real estate is now out of Joe’s estate for tax purposes. After 16 years, the balance in the CLT will go to the non-business kids, all tax-free.
3) Next, we transferred a 50% interest in each of two residences to Joe’s trust (from his existing estate plan). The other 50% went to Mary’s trust. This strategy lowers the value of the residences to $2.8 million for estate tax purposes.
4) For the rollover IRA, we purchased a $15 million of second-to-die life insurance policy using the IRA funds to pay the premiums. The entire $15 million will go to the kids tax-free. The $10 million term policy was allowed to lapse.
5) We transferred the stock portfolio to a family limited partnership, taking advantage of tax law to lower its value for tax purposes to $6 million.
6) Finally, we amended the current estate plan trusts with the appropriate language to ensure that the various assets, including the insurance, would treat the nonbusiness kids fairly.
Not only did Joe’s lifetime plan accomplish all his goals, but he got a huge bonus: The plan gets all of his wealth to his kids, all taxes paid in full.