Joe, a longtime reader of this column and the owner of a family business (Success Co.), hired a new CPA (Claude) about one year ago. At one of their meetings, Joe showed Claude a thick file of this column's articles, which he has been saving for years. Claude studied the articles, then said, "Let's call Irv." They did.
Following is a summary of the strategies taken from the articles used by Joe (age 76, married to Mary, age 67) and Claude. In a way, the strategies are secrets because few professionals know they exist, and if they do, they have no idea how to implement them.
Strategy #1 (tax-free wealth). The myth that if you no longer make out-of-pocket payments to the insurance company, means you no longer pay premiums.
First, burn this fact into your mind: If you have built up enough cash surrender value (CSV) in one or more policies on your life (or spouse's or second-to-die), so you are no longer paying cash premiums to the insurance company -- sorry, but you are still paying premiums (coming out of your CSV).
An example of what to do: Joe and Mary had four policies with a combined CSV of $1.485 million and a death benefit of $2.04 million. They no longer paid cash premiums on any of the policies.
My insurance guru was able to replace the existing policies (using a tax-free exchange) with new policies totaling $2.9 million (in death benefits), a 42% guaranteed increase. Not one penny in cash premium, now or in the future. Works 100% of the time. (Note: sometimes the best insurance strategy is to dump the old single-life policies and buy new second-to-die policies. Joe and Mary could have acquired a $3.65 million second-to-die policy (all taxes paid in full, using only their $1.485 million CSV). Wow!
Lesson: Okay, if you are a column reader who owns one (or more policies) with a large CSV, say $200,000 or more, take a moment and give me a call at (847) 674-5295. You'll be delighted at the tax-free possibilities in increased wealth (without cost).
Strategy #2. Use a comprehensive estate plan (CEP) guaranteed to help every family business owner.
A CEP is actually two plans: (1) the traditional A/B trust (often called the "family trust" and "marital trust") with a pour-over will. Chances are all of you married guys, with a completed estate plan, already have this traditional plan in place. What you really have is a death plan. Sorry, it can't save you even $1 in estate taxes. Yet it's a good start. But you also must have: (2) a lifetime plan.
A lifetime plan contains a number of sub-strategies that allow you to totally conquer the estate tax and often use some strategies that invest a portion of your current wealth to fund the creation of significant additional wealth (that passes to your heirs -- typically the kids and grandkids -- tax-free).
Following are the most important sub-strategies (all lifetime planning) we implemented to save taxes (income taxes and estate taxes) while increasing Joe's wealth.
(a) A family limited partnership (FLIP)
Transferred a little over $6 million of Joe's investments (CDs, cash, stocks, bonds and real estate). Joe keeps absolute control by retaining 1% (all the voting rights) and 99% (called "limited units"), which he can gift to the kids and grandkids. The tax law allows about a 35% discount reducing the $6 million to $4 million for tax purpose (saves estate taxes on $2 million).
(b) Gifting program)
Every year will make the maximum gifts allowed ($14,000 for each child and grandchild for Joe; the same for Mary, $28,000 for the two of them).
(c) Management company)
Formed a separate management company (a C corporation) that is not related to Success Co. for tax purposes. Now, this new company can give fringe benefits to Joe and Sam (Joe's son works for Success Co.) without giving the same benefits to other employees of Success Co. For example, makes 100% of medical expenses and long-term care deductible for the families of Joe and Sam. Total annual savings is about $21,000.
(d) Sale of annuities to charity)
Joe had $850,000 of various annuities. As a practical matter, if kept to death (Joe's prior intention) the annuities were really terrible insurance policies. Instead, we donated them to a charity, getting a $239,000 (according to IRS tables) charitable deduction. Best of all, we are using the annual annuity payments received from the charity to pay for a $4 million second-to-die policy on Joe and Mary. Really a triple play: (1) the $850,000 out of Joe's taxable estate; (2) a $239,000 charitable deduction; and (3) $4 million to Joe's heirs -- tax-free because the policy will be owned by an irrevocable life insurance trust (ILIT).
And, finally, when Joe's plan was done, the various lifetime strategies not only eliminated all of Joe's potential estate tax, but the amount of wealth that his family will receive (because of the tax-free life insurance) will be significantly more than Joe's current wealth. Joe, actually said, "cool."
Be advised, however, that the above plan summary does not discuss every nuance, tax trap, detail and possible exception. But if you work with an experienced and knowledgeable professional, each strategy and sub-strategy works exactly as described.
If you want more information on one or more of the strategies, please contact me.
IRVING L. BLACKMAN has been practicing accounting and law more than 50 years, specializing in wealth transfer, business succession and valuation. He was a founding partner of Blackman Kllick Bartelstein LLP, CPAs, one of the largest accounting firms in the country, and is a member of the Illinois Society of CPAs, American Institute of CPAs and the American Speakers Association, among other organizations. Blackman has authored 21 books on taxation and penned hundreds of articles for trade publications. His company, Tax Secrets of the Wealthy, is headquartered in Naples, FL. He may be contacted at (847) 674-5295 or Irv@IrvBlackman.com.