THE WHOLESALER® —APRIL 2011• Back to the basics A primer on estate tax management


BY IRVING L. BLACKMAN Tax/succession specialist


I


f this article was a college course, it would be called “Estate Taxo- nomics 101.” If you have, or


could have, an estate tax problem, this is must reading. We expose some sacred cows. Every word is true, based on my 40-plus years of experi- ence in the estate tax battlefield.


The IRS and the estate tax The IRS doesn’t want you to know


that the estate tax — if your plan is properly done — is a voluntary tax. Sadly, if you have only a traditional estate plan (typically, a revocable trust for him and the same for her), you have no chance to avoid the es- tate tax. Yet, by adding a simple life- time plan, it’s easy to legally avoid the estate tax. Just use the correct spe- cific strategy for each significant asset that you own. For example, for each of the fol-


lowing assets, use the strategies listed: • Residence — Qualified personal residence trust or 50/50 title • Your business — Intentionally defective trust (IDT) • Funds in a qualified plan (like a


401(k), profit-sharing or IRA) — Re- tirement plan rescue or subtrust • Investments (cash, CDs, stocks, bonds, real estate, etc.) — Fam- ily limited partnership or IDT The IRS never gives any public ac- knowledgement to the thousands of plans that legally beat the estate tax; it only attacks those plans that have a tax mistake. Why? Simply put, they don’t want to acknowledge the right roadmap so that others can follow. Unfortunately, their function is not to help you, the taxpayer, but to collect more taxes. What to do? Find the professional


• Estate tax is voluntary if plan is done right


• Is your sucession plan properly set up?


• Don’t be double taxed! • Get the right life insurance plan


• Life insurance not for everyone


advisor who knows how to do your estate planning right in the first place, an advisor who can explain to you how each of the above strategies wins the estate tax game for each asset class above.


Succession planning — transferring your business


The biggest transaction of your life


will probably be the transfer (or sale) of your business to your kid(s), your employee(s) or an outside buyer. The IRS wants you to think that a taxable installment sale is the way to go. Un- fortunately, so do most professional advisors. What should you do? Tell ’em to


take a look at an IDT. The proof is al- ways in the numbers. Simply ask your professional to run the numbers for the tax consequences of an install- ment sale versus an IDT. Remember, you want to see the tax impact for both the buyer and the seller. Hint: I have never seen an install-


ment sale (or cash sale) beat the after- tax numbers of an intentionally defective trust.


The double taxation of qualified plan funds


Okay, you folks with a large amount of money in a 401(k), rollover IRA or other qualified plan, listen up. Everyone — you, the IRS and your advisor — knows that those funds will be double taxed (hit hard by both income taxes and estate taxes), with as much as 73% going to the tax collector. (That’s $73,000 out of every $100,000 you have in plan funds.) What’s the unfortunate truth?


Again, the IRS doesn’t want you to know that there are multiple ways to avoid the double tax and even to turn the tables on the IRS by multiplying the funds in your plan, risk free. Worse yet, most professional advisors don’t have a clue as to what to do. My files are bulging with clients


that used one of the many strategies available to turn double-tax traps into tax-free victories. For example, a sin- gle (not married) client turned $1.2 million in IRA funds (worth $325,000 after-tax to his kids) into $2.25 million of tax-free dollars. A married couple turned $800,000


(worth $240,000 after-tax to their family) into $4.1 million of tax-free dollars. Would you be open to re- sults like that for your qualified plan funds? Hint: If you are under 59 ½ years old, use a subtrust; if over 59 ½ years old, use a retirement plan rescue. Always use a stretch-IRA for


any funds still in the plan when you go to heaven. Talk to your profes- sional advisor.


How important is life insurance in your estate plan?


Let’s look at the IRS, your profes-


sional advisor and the insurance com- pany. Like it or not, life insurance proceeds are taxable for estate tax purposes. The IRS loves life insur- ance; there’s always the insurance company’s money to pay your tax bill. Fortunately, there are many strategies to convert a potential tax- able life insurance death benefit into a tax-free pool of money. It’s your


to know that there are multiple ways to avoid the double tax and even to turn the tables on the IRS by multiplying the funds in your plan, risk free.


...The IRS doesn’t want you


professional’s job to walk you through the many possibilities for avoiding the estate tax when you buy the policy. What, you already bought the pol-


icy, and it won’t be tax-free? Consult a new advisor immediately. There are many ways to correct this mistake. But hurry, there’s usually a three-year waiting period to get off the taxable boat and onto the tax-free one. Now for the insurance company.


The life insurance industry is highly regulated. Each of the 50 states has an insurance commissioner, and gen- erally they do a great job of protect- ing the public. But hey, insurance companies are in business to make a profit. Here are some important things they don’t want you to know. Do you have a policy on your life


(or second-to-die) that has built up enough cash surrender value (CSV) so you no longer need to pay more premiums to keep the policy in force? So, you think you are getting a free ride? If you are still healthy (could pass a physical to get more in- surance), almost 100% of the time you can dump the old policy and get a new one with a larger death benefit and never pay another premium. But the insurance company won’t tell you that. Nor will the insurance company


tell you that your CSV dies when you die. Yes, you and your family lose it … every penny. The insurance com- pany keeps all of it. What to do? While you are alive and healthy, check out your options (there are many) to use that CSV toward a new


policy. Why? Medical advances have increased life expectancy and premi- ums have gone down over the years. Take a look at the opportunities available using your CSV for posi- tive leverage. Here are a few more things you


should know about life insurance. If you don’t need it, don’t buy it. Only buy life insurance if you intend to keep the policy in force till the day you die, so your family collects the death benefit. Otherwise, don’t buy it. Here’s the big why… something else the insurance companies won’t tell you. What follows is hard to believe: 98% of term policies sold never pay a death benefit; 91.5% of CSV poli- cies sold lapse for various reasons and don’t pay a death benefit. Great business —insurance companies can collect money (called “premiums”) and do not legally have to deliver the product (a death benefit). One final point about life insur-


ance: It is not for everyone. If you think that down the road you may have to choose between maintaining your lifestyle and paying a life insur- ance premium, rethink buying the policy in the first place. On the other hand, if you are fortunate enough to have excess funds (not needed for lifestyle), do not think of premium payments as a cost. The economic fact is that, in such a case, the pre- mium is simply a transfer of capital from a cash-like asset category to an insurance asset category. Again, run the numbers from today, until your life expectancy and at least seven years beyond. You’ll clearly discover that life insurance is always a prof- itable tax-advantaged investment; you (really your family) always win). Finally, make sure that when your


estate plan is done, you will be able to legally avoid the impact of the es- tate tax. If not, you owe it to yourself and your family to get a second opin- ion.


So, join the estate tax saving club.


Learn more. Take a look at my web- site, www.taxsecretsofthewealthy .com. In a hurry, call me (Irv) at 847/674-5295.


n Irv Blackman, CPA and lawyer, is


a retired founding partner of Black- man Kallick Bartelstein, LLP (CPAs) and Chairman Emeritus of the New Century Bank (both in Chicago). Want to consult? Need a second opin- ion? Contact Irv by phone at 847/674-5295, e-mail blackman@es- tatetaxsecrets.com or visit his website at www.taxsecretsofthewealthy.com.


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