5 Areas to Examine for Tax-Saving Strategies

What to look at when cutting costs and payouts.


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One day, just for fun, we (four tax guys) started to count the ways to legally get around payroll, income and estate taxes. We were just getting warmed up, got to 227 and simply stopped.

Following are five of the dozens of tax-saving areas that come up most often, are not known by most professionals or prevent the biggest loss of your money to the IRS or others.

1) Payroll taxes. This money-stealing parasite is persistent and expensive: in 2009 $16,404 to the taxman (employer and employee share) on your first $106,800 of earnings. That’s a scandalous 9.76%. Earnings above $106,800 (there is no limit) pay an additional 2.9%. Here are the three most common lose-payroll taxes-to-the-IRS mistakes: 1) Joe, the owner of an S corporation, takes a large salary of $500,000 and a huge bonus at year end in order to bring profits down. A dividend, which is tax-free if you are an S corporation, rather than compensation, would save a bundle of unnecessary payroll taxes and cost not one penny more in income taxes. 2) For a non-working wife of the owner, it is much better tax-wise, to give her a “gift” rather than a “salary.” 3) Operating a business as a LLC, which makes all income to owner subject to payroll taxes, is a no no.

2) Asset protection. In a heartbeat your family wealth and business can be depleted by a lawsuit. For your business, the core strategy is to keep your business thin: Only keep those assets—typically, necessary cash, inventory and receivables—needed for operations in your business.

Here are the basic sub-strategies: 1) Elect S corporation status; 2) Any new real estate or expensive equipment should be owned by you via separate LLCs and leased to your operating company. 3) Never, and I mean never, own delivery vehicles in your operating company. Put the vehicles into a separate corporation, LLC or just put your best entrepreneur-type driver in business and rent your old vehicles.

The sad fact is that we can’t protect the assets inside of your operating company—that’s why the above precautions are needed. But we can protect you and your spouse by simply retitling all of your significant assets using typical lifetime planning documents, like a family limited partnership, LLCs and appropriate trusts to protect your assets.

3) Life insurance, whether owned by you, your spouse or kids, your business or some kind of trust. Part of every estate plan is to have an insurance expert analyze all existing life insurance policies on you, your spouse and fellow business owners (stockholders or partners). Let’s start with the three critical issues concerning life insurance: 1) premium cost, 2) the death benefit and 3) the tax due at death on the benefit.

In 45 years in estate planning, we (me, an insurance expert and, when necessary, a lawyer with insurance expertise) have looked at more than 1,000 insurance portfolios. Only four times did we find everything perfect. In all the other instances, we were able to modify the insurance plans and save premiums of an average $30,000 per year or increase the death benefit, from $500,000 to as high as $11 million, without additional premium costs.

Following are the most common situations that always delight our clients:

  1. Fact: A cash surrender value of more than $200,000 on a policy that is nine years old or older can be single life or second-to-die. The result is significantly more death benefit for the same premium cost (or significantly reduced premium cost for same death benefit).
  2. Facts: You are 55 or older, worth $5 million or more, and have insurance on your life only. Results: You are wasting premium dollars. Second-to-die coverage on your spouse will typically give you the same death benefit for about 35% less premium cost.
  3. Facts: You have $400,000 or more in a qualified plan such as a 401(k) or IRA, which is subject to a double tax (income and estate) of up to 73% to the IRS. Result: On average, you can turn every $270,000 of after-tax dollars into $3–$5 million (tax-free), depending on your age and health. This works for second-to-die or single life.
  4. Facts: You are worth $10–$40 million or more. Results: You can buy $10–$40 million of single life or second-to-die coverage with no out -of-pocket premium cost.

A simple fact: Over 99% of the time a second opinion of your insurance situation, followed by proper planning, will save you significant premium dollars, increase the death benefit and/or make the insurance proceeds tax-free. Be smart. Get a second opinion.

4) Business Succession. Here are the goals the typical business owner with kids in the business gives me: 1) Transfer the business to my kids so we don’t get killed by taxes. 2) Show me how to treat my nonbusiness kids fairly. 3) Make sure I stay in control of my business for as long as I live. 4) Make sure the company stock stays in the family and never goes to a kid’s ex-spouse.

Every one of the above goals is easily accomplished. In fact, my colleagues and I have done it hundreds of times. And best of all, the business can be transferred completely tax-free, with no income tax, gift tax or estate tax for either the owner or the kids.

5) Estate planning. A proper estate plan is actually two separate plans: a lifetime plan and a death plan. The two plans are designed to cover every significant tax-saving possibility (many more than the 227 ways my colleagues and I came up with) from the minute the lifetime plan is created until you get hit by the final bus (covered by the death plan)… and yes, even after you’re gone.