Cure the estate tax killer

A dreaded disease is spreading like wildfire – in all 50 of the United States. It debilitates most successful business owners … then, ravages some or all of his kids and eventually hurts the grandkids. Known by various names, the most common name is “estate-tax-itus”: It drains family wealth.

The key question is, is there a cure? The answer is a resounding ‘yes’. There are many ways to fight the disease. For best results, start today.

Here’s a three-step process that works every time. Steps #1 and #2 make the diagnosis. Step #3 accomplishes the cure.

Step #1: Prepare a personal financial statement for you (and your spouse, if married). Divide your assets into the following five categories:

1. Residence

2. Business

3. Qualified plans (pension, profit-sharing, 401(k), rollover IRA or other qualified plans)

4. All other assets (typically, investments like CDs, bonds, a stock portfolio, real estate, etc.)

5. Life insurance (on your life or second-to-die with your spouse)

Step #2: Make a list of your goals. Actually three lists: (1) Goals for you and (if married) your spouse; (2) goals for your family (typically children and grandchildren); and (3) goals for your business.

Step #3: Find a professional advisor who knows how to identify and implement the exact tax strategies that accomplish your goals for each asset on your financial statement. Following are the most often-used strategies we use in our practice to accomplish a typical real-life client’s goals, based on the assets owned.

1. Your residence. A qualified personal residence trust removes your residence from your estate, yet you can live in it for as long as you live.

2. Your business. Transfer your business to the business children using an Intentionally Defective Trust (IDT). Removes the business from your estate, transfers business to kids (tax-free to you and the kids), yet allows you to keep control for life (because you retain voting control).

Warning: Never, and I mean never, sell your business to your kids (or employees). You (the seller) and the kids (the buyer) get taxed to death. An IDT saves about $200,000 in taxes for every $1 million of the business’ purchase price. Ask your professional to run the numbers (for the tax damage) for a sale and an IDT. You’ll embrace an IDT… guaranteed.

3. Qualified plans. The funds in these plans are double taxed, robbing your family of about 64 percent of the plan funds (i.e. the tax collectors get about $640,000 if you have $1 million in the plans … your family receives only $360,000). Create a Subtrust or Retirement Plan Rescue (RPR) to buy life insurance. Usually triples (or more) the amount you have in the plan, and your heirs get it all tax-free.

4. All other assets. Transfer these assets (for example, publicly traded stocks, bonds, real estate and other investments) into a Family Limited Partnership, which legally reduces the value of these assets for tax purposes by 35 percent (yes, $1 million of real estate, stocks, bonds, etc. are only worth $650,000 for tax purposes.) Estate tax savings: in the $140,000 range.

5. Life insurance. Get all policies on you or your spouse out of your corporation and into an Irrevocable Life Insurance Trust. (But a Subtrust is best, if you can use it. See 3 above.) Also, check out Premium Financing, a wonderful concept that allows you to buy huge amounts of life insurance ($5 million, $10 million or more) without paying out-of-pocket premiums.

Finally, if your existing estate plan does not eliminate the estate tax, get a second opinion.