In Being “Comfortable” Deserves A Second Opinion

This column has always had two purposes: 1) to educate and help my readers and 2) to serve as a lazy man’s way of marketing. The marketing part is often frustrating.

This column has always had two purposes: 1) to educate and help my readers and 2) to serve as a lazy man’s way of marketing. The marketing part is often frustrating. The first contact with a reader/potential client often starts with a telephone chat. Through the years, any use of the words, “I’m comfortable,” meant a flat-out “no” to my client-seeking attempt.

About 6 years ago, a marketing guru and good friend, Jay Abraham, suggested I follow the “comfortable” words with, “I’ll give you a second opinion on your current plan, no charge if I can’t help you.” So simple, yet so effective.

To write this column, I reviewed ten “I am comfortable” second-opinion files. Three of them have some common denominators that you may find interesting. 1) Joe is married to Mary. 2) Joe owns a business, Success Co., that he founded. 3) one or more of Joe’s kids work in the business and will eventually own Success Co. 4) Joe and Mary have one or more nonbusiness kids who they want to treat equally. 5) Joe wants to control the assets he owns, including Success Co., for as long as he lives. The main differences between the three Joes (and Marys) is the dollar size of their wealth, the other assets they own, their charitable intent and, of course, their ages. All the Marys are insurable, but the richest Joe (Joe #3) is not (he has heart problems), yet he is acceptable to the insurance carrier for second-to-die insurance.

Now let’s take a closer look at couple separately (all dollar numbers are rounded). Joe and Mary #1 are worth $3 million. Their present plan would kick up an estate tax of $1 million, including the tax on a $500,000 life insurance policy on Joe’s life. (Only the cash surrender value of the policy is included in the $3 million.)

Our plan totally eliminates the $1 million estate tax and saves about $18,000 a year in payroll taxes. We 1) elected “S” corporation status for Success Co.; 2) created a qualified personal residence trust (QPRT) for Joe and Mary’s residence; 3) transferred the real estate (leased to the business) and a small stock portfolio to a family-limited partnership, and; 4) bought a $1 million second-to-die policy in a subtrust of the company’s 401(k) plan.

Joe and Mary’s family will receive $4 million after both are gone—all without paying a cent of estate tax. The business stock will be bequeathed to the business son. The balance in the 401(k) when both Joe and Mary are gone will go to their church.

Joe and Mary #2 are worth $10 million. Their plan was similar to Plan #1. We did not use a QPRT, and nothing was left to charity. But we did use an intentionally defective trust (IDT) to transfer Success Co. (already an “S” corporation) to the two business kids (after a recapitalization to create voting and nonvoting stock, with Joe keeping the voting stock and control and the nonvoting stock going to the IDT). The subtrust bought $3 million worth of second-to-die life insurance (after transferring $800,000 in a rollover IRA to Success Co.’s 401(k) plan).

The final results: Joe and Mary’s old plan would have netted their family only $5.7 million, after taxes. Our new plan increased the after-tax number to $11 million. (It could be more if they live long enough to complete the planned gifting program to the children and grandchildren.)

Joe and Mary #3 are worth $50 million. We used $20 million of Joe and Mary’s wealth to do some remarkable tax planning tricks. We married the two tax-free environments—charity and life insurance—in the law. The final results: The $20 million (worth only $9 million after taxes if subject to the 55 percent estate tax bracket returning in 2011) is turned into $90 million. The family gets $45 million (taxes paid in full), and $45 million goes to charity. How did we do it? Look at my new Web site: Click on “Overview” on the home page; then “The Results You Want”; and last, “Wealthy by Any Definition.” You’ll be amazed how easy it is to legally multiply your wealth.