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New Law, Strategies, Information To Make You Wealthy, Or Wealthier

by Irving L. Blackman
Posted On: 6/8/2009

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Irv Blackman, Irving L. Blackman, CPA, Blackman Kallick Bartelstein, tax trends, tax advise, small business, taxation, estate tax problems, vending resources

Knowledge is power. The right kind of new knowledge, if you know what to do with it, is always an economic powerhouse for you and your business. This article is a continuation of my series of articles dealing with "How to make it, how to keep it."


Let's start with some new tax laws Congress is likely to pass before 2009 ends. You must divide these new-tax-law candidates into two distinct groups: the good guys and the bad guys.

First the good guys (clearly great news for the how-to-keep-it fans). The current law (for 2009 only) exempts your first $3.5 million of net worth from the estate tax ($7 million for married folks) with the top rate at 45% ... the rate for 2010 is zero (no tax, even if you are worth a zillion dollars)... and then starting in 2011 a puny $1 million exemption ($2 million if married) and a top rate of 55%. Crazy law!

Two happy new versions are pending in Congress to replace the current estate tax law: (1) The budget outline passed by the House, which keeps the 2009 exemption ($3.5 million) and top rate (45%). I like it. (2) Even better is the Senate's budget outline that raises the exemption to a delightful $5 million ($10 million for married couples) and -- a drum roll please -- lowers the top rate to 35%. Applause!

Place your bets. I'll bet the farm that we wind up with at least the House version. A House/Senate compromise (more than $3.5 million) could happen.

More good stuff: The gift tax exemption currently at $1 million will probably soar to $3.5 million. Yeah!

You won't like the bad guy possibilities: (1) Goodbye to a good old friend: LIFO (if terminated by new law, you'll probably have five to six year to pay the income tax due). (2) The Washington heads are seriously talking about eliminating the longstanding discount rules (typically in the 35% to 40% range) when valuing a closely held business for tax purposes. A terrible and extremely costly tax change!

My advice: If you intend to transfer your business to your kids, don't wait. Take action now. Make your transfer/sale to your kids (when you know how, it can be done tax-free) before the stupid new discount rules become law.

Now let's take a look at two "How to make it" ideas. Each idea sounds too good to be true, yet each is a rock-solid concept. You'll relish both of them.


As a business owner you must carry property and casualty insurance (P&C). Every year you pay your premium dollars (say $400,000) for your usual coverage: workman's compensation, fire, theft, liability, vehicles and other risks. (Note: Healthcare costs are a separate expense.)

Suppose your claims for the year are only $100,000. Sorry, but your insurance carrier keeps the $300,000 excess. Worse yet, it (the premiums you paid significantly exceed your claims) probably happens year after year. But hey, can't complain. That's the way the P&C game is played. Only in a rare year, when your claims -- usually one big one -- exceed premiums paid, does your insurance carrier become a welcome friend.

So here's the real question: Is there some way to keep those excess premiums (premiums you paid less claims paid by your carrier), yet be covered if a catastrophe strikes?

Enter Captives. The Internal Revenue Code [Section 831(b)] allows you to form a Captive. You, or more likely a younger member(s) of your family, owns the Captive. Say Your Co. pays Captive that $400,000 in premiums, which Your Co. deducts. Here's the beauty of the tax law: Captive not only receives the $400,000 tax-free but invests it for earnings. Premiums plus earnings (called "unused reserves") are available to pay your claims. A concept called "reinsurance" covers Your Co. should your unused reserve not be large enough to pay claims.

Wait, there's more. A Captive can insure risks that your regular P&C carrier will not insurance (for example, loss of a key customer, supplier or employee, product warranties and an endless stream of other similar risks)... same too-good-to-be-true-tax deal: You deduct the premiums, Captive receives them tax-free.

Is a Captive for you? ...the Answer is 'Yes' if your annual before-tax profit is in the $1 million range. Check out Captives. You'll be glad you did.


Life insurance is required for many purposes: pay estate taxes, provide for your family, pay debts and, if you know how to do it, life insurance is the best tax-advantaged investment I know. It's an investment that never loses (death is guaranteed) and your profit (policy proceeds less premiums paid) is tax-free (no income tax, no estate tax).

One problem with life insurance: The blasted stuff costs money for premiums. Is there some way to have your cake (a large amount of life insurance coverage) and eat it too (no or minimal out-of-pocket costs for premiums)? Because of the current credit crunch, premium financing for life insurance has been on a long vacation. But it's back. Lenders -- if you know where to find them -- are back in the premium financing game.

How does premium financing work? Instead of you or your trust paying premiums, the lender pays your premiums, creating a loan. Loan interest can be paid or capitalized (or added to the loan). Of course, when you go to heaven, the loan is paid back out of the insurance proceeds... while your heirs get the balance of the insurance coverage tax-free (typically $5 million, or more).

Results: Your family is enriched -- tax-free -- at your death, while your premium cost during life is zero or miniscule.

If you need a large amount of life insurance (or just want an investment that creates tax-free wealth) premium financing is at the head of the class for "How to make it."

And what about the future?

The nature of my work -- primarily lifetime tax planning that dovetails with your estate plan and related areas -- requires me to always keep an eye on what the future economy might look like down the road.

I'm not smart enough to be both a tax guy and an economist. But I read a lot. My favorite and most accurate economic forecaster is Adrian Van Eck; I've been reading his newsletter, "Hotline on Money and the Economy" for about 25 years. He never has missed calling a trend -- good or bad -- in all those years.

Here's a recent quote that says it all, "Instead of a new Great Depression, we may now be looking at boom years ahead such as we have not enjoyed for a long time" (5/1/09 newsletter).

Don't have room to give you all the reasons, but I'm bullish on the economy turning around. Are you? If so, plan for success. Aggressively seek new business. Tighten your business belt as necessary but don't downsize.

Most of all, get your lifetime tax plan and your estate plan done. Enjoy strategies that make you wealthy, or wealthier.

Have a question? Take a look at and In a hurry, call me at (847) 674-5295.

IRVING L. BLACKMAN is a practicing certified public accountant specializing in wealth transfer and business succession and valuation. He is a founding partner in Blackman Kllick Bartelstein LLP, CPAs, one of the largest accounting firms in the country, and is a member of the Illinois Society of CPAs and the American Institute of CPAs. The firm can be reached at (312) 207-1040. Blackman is the author of 31 books on taxation, as well as hundreds of articles for professional publications.