5 Little-Known Tax Strategies

Ask your estate planner about these wealth-building plans


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It’s easy to lose big money to the IRS unnecessarily. Following are some easy-to-implement strategies that we have done hundreds of times, yet are little-known. Why? Because most professional advisors don’t know how to implement them.

Retirement Plan Rescue (RPR). Qualified retirement plans, such as a 401(k), IRA, profit-sharing plan and the like, are double-taxed. First, you get nailed for income tax (say 40% for State and Federal); then you get socked for estate tax, (say 55% using 2011 rates). Result: The tax collectors get 73%, your family only 27%. So, if you have $1 million in an IRA, for example, you’ll lose $730,000 to taxes. Ouch!

RPR to the rescue. With an RPR, you use the funds in the plan to buy the insurance—either for a single life or second-to-die for a husband and wife. Two examples from my client files tell the story: 1) A column reader from Ohio turned $274,000 in an IRA into $2.6 million (a single life policy); 2) Another reader from Florida turned $342,000 in a 401(k) into $4.5 million (a second-to-die policy).

Intentionally defective trust (IDT). Do you want to transfer/sell all or a part of your family business to your children (or other family member; or maybe an employee)? Then think IDT.

Here’s why. An IDT is a useful estate planning tool if you wish to remove assets from your taxable estate and to be taxed on income from the trust. An IDT, because of really bad tax law (this time good for our side) allows you to transfer your business tax-free. That’s tax-free to you, and tax-free to the new owner. The amount of tax savings usually work out to be about $750,000 per $1 million of the fair market value of your business. Works all the time. Stop for a minute: Just apply IDT tax-savings to your business succession plan situation. You’ll smile.

Deferred income. A darling of the investment world is “deferred annuities.” Chances are if you own an annuity, you are an unhappy camper. My clients tell me (and this is confirmed by many articles about deferred annuities), “Great taxwise, but a lousy investment.”

Life Settlements (LS) are an investment that beats the pants off of deferred annuities. A life settlement is an agreement between an insurance policy owner and a third party (typically an individual in the business of buying life insurance policies or a settlement company), where the owner agrees to sell his policy in exchange for cash. The company that buys the policy will continue the premium payments necessary to maintain the policy, name a new beneficiary, and eventually collect the death benefit upon the insured’s death. LS, offered by a public company that sells on the NASDAQ, earn an average of 15.83% rate of return per year. And oh, yes, your LS income is deferred until you get back 100% of your investment and, at the same time, pocket all your earnings.

The 50/50 strategy (50/50). When you get hit by the final bus, your home is included in your estate. No question about it, homes are an estate tax trap. The estate tax damage? 55% (using 2011 rates) of the fair market value of each home. Again, stop for a moment… assess your potential loss in estate taxes.

How do you get out of this tax trap? The answer is 50/50, which uses the A/B revocable trusts most readers of this column already have. Here’s what you do: 50% of each home is owned by the husband’s trust; the other 50% by the wife’s trust. Now, neither has control and, according to the often silly American tax law, both are entitled to a minority discount in the 30% range. So a $500,000 house is only worth $350,0000 for tax purposes. Neat!

Family Limited Partnership (FLIP). Now think of your investment type—stocks, bonds, real estate and the like—assets. A FLIP can be used for many good purposes including asset protection and a minority discount. What FLIP refers to is a limited partnership formed to hold the family business or investments, with the idea that the parents will make gifts of their limited partnership interests to their children. Because the limited partnership interests are illiquid, they should be subject to substantial discounts for federal gift and estate tax planning purposes.

However, the FLIP discount is in the 35% range ($1 million in assets are worth only $650,000 for tax purposes). Or put it this way: You don’t lose estate taxes to the IRS on $350,000 out of each $1 million of your investment type assets, transferred to the FLIP.

As my grandkids would say, “Cool!”