Tax Secrets: Winning the estate tax game

Irv for the Naples Daily News writes: When a reader of this column consults with me, I ask him/her to send some basic data including a copy of their current estate plan. Recently, a small parade of readers have asked me to review or give a second opinion on what I call “Johnny-one-note estate planning.”

Of the last 37 plans I have reviewed, 30 were based on a single theme. The runaway winner (really a loser in tax-saving effectiveness) is the creation of a revocable trust (RT) one for him and one for her where a married couple is involved. At best, an RT is only a good start to an estate plan.

Two other strategies that I see regularly as a Johnny-one-note are: (#1) the sale of a business to the kids by the business-owner dad (SALE) and (#2) family limited partnerships (FLIPs).

1: A SALE is often used as a strategy to sell your business to your kids. Never, but never, have I seen a SALE of a family owned business as a tax-effective way to transfer a business to the next generation. Instead, consider an intentionally defective trust (IDT), which is the best way to transfer a business tax-free from Dad/Mom to the business kids. Read it again slowly tax free! (No income tax. No capital gains tax).

On average, an IDT will save about $195,000 for every $1 million of the price. For example, if Joe wants to sell the family business to his son (Sam) for $7 million, Joe and Sam will save $1,365,000 ($195,000 X 7).

Important: If you are thinking of transferring your family business to your kids, other-shareholders or one (or more) of your employees, an IDT is a must. Call me to discuss your situation.

2: A FLIP is usually not an effective way to deal with a business, a residence, or money in an IRA, profit-sharing plan or similar plan. But, when doing your estate plan, it’s a wonderful tax-saving starting point for almost every other asset you might own (publicly traded stocks and bonds, real estate, you name it.) Properly used, you can control the assets for life, protect them from the claims of creditors, and reduce their value for estate tax purposes immediately by 30 percent to 40 percent.

For example, say your transfer $1.5 million of investment assets (stocks, bonds, real estate) to a FLIP. For estate tax purposes, (after a $500,000 discount), the assets are only worth about $1 million, resulting in estate tax savings of about $200,000.

This column over the years has covered RTs, IDTs and FLIPs in detail.

Following is a list of the seven most common strategies we use to transfer your wealth intact and eliminate estate taxes. In the parenthesis following each strategy is the type of assets your should own to consider the concept. Do you own any of those assets? Make sure you get a complete explanation from your professional advisor as to how the strategy shown can save you a bundle of taxes.

Qualified personal residence trust or QPRT (residence).

IDT (your family business).

Subtrust (if you have a total of more than $350,000 in your 401(k), profit-sharing or similar plan).

Charitable remainder trust or CRT (appreciated assets, including a family business). Briefly, a CRT eliminates the capital gains tax and estate tax.

FLIP (for all assets not list above, generally income producing investments).

Irrevocable life insurance trust or ILIT (insurance is estate tax free to you and your spouse). Use other assets to pay premiums at little or no tax cost.

Premium financing (allows you to buy insurance without paying premiums in cash.

Yes, there are many more strategies. But the above list of seven strategies does the job (eliminate estate taxes or allow you to pass your wealth to your family intact).