Strategies for Slaying the Tax Monster

Seasoned advisors can steer you toward techniques that best fit your situation.


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I’m often asked how to kill the estate tax monster that stalks those of us who want to pass along our hard-earned wealth to our heirs. The answer is with a formal financial plan designed to allow you to keep every dollar of your wealth in your family and eliminate the impact of estate taxes.

As I’ve said many times before, a properly designed estate plan must do more than just address what happens to your wealth after you die, however. It must be comprehensive, which means it must also include both a lifetime plan and a plan for your estate. A good lifetime plan allows you to: 

1. Control your wealth, particularly any business you may own, for as long as you live. 

2. Have strategies in place that help you save income, payroll, capital gains and gift taxes.

3. Transfer your business to your children, if you so desire, without incurring taxes. It also enables you to treat any children who will remain uninvolved in the business fairly.

4. Maintain your lifestyle for as long as both you and your spouse live. (This generally does not apply if you are worth $25 million or more.)

5. Keep stock in your business in the family if one your children who owns stock gets divorced.

A comprehensive plan also includes strategies for eliminating taxes on your estate after your death. There are a number of effective techniques that will allow you to accomplish this.

Joe, married to Mary, is the owner of Success Co. He has three children, two of whom are involved in the business. As he nears retirement age, Joe has begun thinking out both his financial future and that of his family. At our recommendation, he has begun to put a system in place that encompasses both a lifetime plan and a plan for his estate that dovetail. In addition to working with a qualified financial advisor like me, he is consulting with a network of knowledgeable professionals, including a lawyer who will amend or rewrite documents as needed, and an insurance consultant who has already reviewed Joe’s existing insurance policies and increased his death benefits from $2.1 million to $3.75 million without any increase in premiums. As a result, Joe and his family will save about $4.1 million in estate taxes and his family will get an extra $1.65 million in tax-free life insurance.

There are a wide variety of strategies Joe should include in his comprehensive plan to help him slay the tax monster. We’ve outlined many of them in this column over the years. They include:

Family limited partnership (FLIP) can be used to house investment assets instead of a person owning those assets outright. Assets in a FLIP are allowed a 35 percent discount on their value for estate-tax purposes.

Retirement Plan Rescue (RPR). We developed this strategy as a way to multiply after-tax dollars using life insurance.

Irrevocable life insurance trust (ILIT) can be used to own life insurance policies.

Intentionally defective trust (IDT) can be used to transfer ownership of a company to an owner’s child without either of them incurring taxes by creating stock in the company. Also allows the owner to retain control of the company for as long as he or she wants.

Spousal access trust (SAT) allows a married couple to get a business out of their estate while still drawing income from the company for the rest of their lives. 

Private placement life insurance (PPLI). This strategy takes otherwise taxable investment profits and income, whether they are capital gains, dividends or interest income, and puts them into a tax-free insurance policy.

50/50 titles on personal residences. Residences that are owned by both the husband and the wife’s personal trusts are afforded 30 percent discounts on their values for estate-tax purposes.

Premium financing (PF). This insurance strategy uses bank loans to pay premiums on policies; those loans are then repaid after the owner’s death.

Buy/sell agreements control what happens to a business after it is out of the owner’s hands. They can help keep the business in the family in the event of a divorce.

Captive insurance company is a property and casualty firm that insures those risks that a typical property and casualty firm does not, such as the loss of a large customer or a key employee.

This is not a comprehensive list of all the strategies at your disposal. It’s best to work with a seasoned advisor or network of advisors who can steer you toward strategies that best fit your specific situation.