Diagnose, Then Cure The Disease

A dreaded disease is spreading like wildfire. Known by various names, the most common name is “estate-tax-itus,” an affliction that drains family wealth.

A dreaded disease is spreading like wildfire. Known by various names, the most common name is “estate-tax-itus,” an affliction that drains family wealth.

Some people are not aware that they have the disease. Others know because they have the painful symptoms, and they search in vain for a cure. The afflicted attend seminars; and they read articles, special reports and books; going from advisor to advisor seeking relief.

The good news is that there is a cure. This article shows you how to start the process to eradicate estate-tax-itus for yourself, your family and your business. This process works every time—no matter how young or old you are or whether you are worth $1 million, $10 million or more.

The following three-step process describes how to create this “tax-immune system.” Steps 1 and 2 make the diagnosis, while Step 3 offers a cure.

Step 1: Prepare a personal financial statement for you and your spouse, dividing your assets into five categories: residence, business, qualified plans (pension, profit-sharing, 401(k), rollover IRA or other qualified plans), all other assets (typically, investments) and life insurance.

Step 2: Make a list of your goals and break them down in these three categories: A–for you and (if married) your spouse; B–for your family (typically children and grandchildren); and C–your business.

Here are the core goals we typically see in practice: for category A—maintain your current lifestyle for as long as you (husband and wife) live, and control your assets for as long as you live; for category B—transfer your assets to the children and the grandchildren intact—free of the estate tax—and educate your grandchildren. For category C—transfer your business in a tax-free manner to the child (or children) who will take over the business, and treat the children who do not intend to work for the business fairly.

Step 3: Find an advisor who knows how to identify and implement the exact tax strategies that you want to accomplish through the goals and assets you specified on your financial statement.

What follows is a list of the most commonly used strategies an advisor may employ to accomplish a typical client’s goals.

  1. Residence. Use a qualified personal residence trust to remove the residence from your estate. This allows you to live in the estate and control it for as long as you live.
  2. Business. Transfer your business to the children who will take over for you by using an intentionally defective trust. This removes the business from your estate and transfers it to the children (tax-free), while allowing you to keep control for life (because you retain voting control).
  3. Qualified plans. The funds in these plans are double-taxed, robbing your family of about 75 percent of the plan funds. For example, with a $1 million plan, the tax collectors take about $750,000 and your family receives only $250.000. You should create a subtrust to buy life insurance, which usually at least triples the amount you have in the plan, and your heirs get it all tax-free. For example, $1 million in the plan will turn into $3 million (tax-free) for your family with a subtrust.
  4. All other assets. Transfer these assets to a family limited partnership, which legally reduces the value of these assets for tax purposes by 35 percent. This is necessary because $1 million of real estate, stocks, bonds, and more are only worth $650,000 for tax purposes.
  5. Insurance. Get it out of your corporation and transfer all policies that you or your spouse own to an irrevocable life insurance trust.
    One final caveat—if your estate plan is already done, and it does not effectively eliminate the estate tax, then get a second opinion.