The typical reader of this column, (we’ll call him Joe), who calls me for estate planning help has two basic characteristics: (1) He has been successful at accumulating wealth. This is almost always in a business he started or that was created by a family elder and passed to him. (2) He hates paying taxes.
Joe is usually married and has children. About two-thirds of the time, one or more of his children are in the business (Success Co.). Joe wants to slow down and sell Success Co. to his children. Rarely does Joe want to retire; he just wants to work less and spend more time with family. He also wants to golf, travel or enjoy other non-business pleasures.
One more bittersweet fact is that Joe’s net worth increases almost every year (sweet), but so does his potential estate tax liability. Joe wants and needs a comprehensive plan to eliminate or reduce the growing estate tax burden. Unfortunately, Joe can’t find a professional who knows how to create, implement and monitor such a plan.
This column is written for the Joes of the world who are struggling to find a way to deal with some, or most, of the above characteristics, facts or concerns.
A network of professionals and I have designed a system that always delivers 100 percent of your wealth to your family (or a portion to charity) instead of losing as much as 55 percent (using 2011 tax rates) of your wealth to the IRS. Best of all, every one of the strategies used in the system is legal, is easy to do and always works. It doesn’t matter if you are young, old, married, single, insurable or uninsurable.
The system revolves around three separate pillars: goals, strategies and assets.
Your job is to identify your specific goals, typically divided into three separate lists: (1) goals for your wife and yourself, (2) goals for your family and (3) goals for your business.
Our job is to select the strategies such as various trusts, partnerships and other techniques. Then we write the documents and implement the plan. Of course, the plan must be monitored over the years and updated when there are changes in your family and/or business circumstances.
That leaves the assets, which are really a personal financial statement. We divide your assets into four distinct categories:
- Funds in a qualified plan such as a 401(k), IRA or profit-sharing plan.
- Investments, such as real estate, stocks, bonds and an interest in other investments that are usually managed by someone else.
Remember, your future income stream/potential cash flow is also an asset. Often, your largest dollar amount continues to enrich not only you, but also your potential estate tax liability to the IRS.
Logic tells you that you must have two plans to legally beat up the IRS: a lifetime plan and a death plan such as the typical will and trust most lawyers draw. The real “don’t lose your wealth to the IRS plan” is always in the lifetime plan.
Your lifetime plan must be designed to utilize strategies that do the following:
- Freeze the value of your various assets. This prevents your taxable estate from growing larger.
- Discount each asset. This lowers the value for estate tax purposes. For example, a piece of income real estate worth $1 million would be transferred to a family limited partnership (FLIP) and the value of the real estate reduced to about $650,000 for tax purposes.
- Gift assets to younger family members. These assets are not necessarily cash, but non-spendable assets such as an interest in a FLIP.
- Create tax-free wealth to pay any estate tax that could not be eliminated by the other strategies. This is usually done with a life insurance program or a charitable lead trust if you and your spouse are not insurable.
One final point: Joe almost always wants to stay in absolute control of his assets—particularly Success Co.—for as long as he lives. It is easy to accomplish this goal when implementing the strategies and creating the supporting documents.