THIS ARTICLE IS for you youngsters, 65 or older. If you are younger, read it anyway. Then, give it to one or more of your older family members or friends.
We are about to delve into “Senior Settlements.” Last year was the first time that I wrote anything about SenSet, and I got flooded with questions.
Most of those who responded had never heard of a SenSet. All were fascinated by the fact that the insurance policy they thought was worthless while they were alive (a term life insurance policy) or was worth no more than the cash surrender value of a permanent life policy, did in fact have value greater than the CSV.
A simple analogy should give you a clear understanding of the basics of SenSet. Think of your house. You own it and can sell it. So, a broker goes into the market and finds a potential buyer. One of them buys the house. You get paid when you transfer ownership (title) and the broker gets a commission.
Now, think of any one of your life insurance policies — term or one with CSV. There are people who buy SenSet life insurance policies as an investment. The seller — you — keeps what the buyer pays, less a commission to a broker. You transfer ownership of the policy to the buyer.
You must meet three requirements:
- The policy has a net (after-loans) death benefit of $250,000 or more.
- The policy is at least two years old.
- The insured (and your spouse, if a second-to-die policy) is at least 65 years old.
How much could you get for your policy? The two significant factors are your age and your estimated life expectancy. The buyer/investor is looking for a short life expectancy. The shorter the life expectancy, the more valuable the policy.
It would take a large book to spell out all of the possibilities concerning a SenSet. Here’s how you can get more information.
We will advise you for free. Send a copy of your last premium bill/notice and your name, address and phone numbers (day, evening and cell) along with your policy info (your birthday, death benefit [must be $250,000 or more], type of policy, company and CSV, if any) to: Senior Settlement, Blackman Kallick Bartelstein LLP, 10 South Riverside Plaza, Chicago, IL 60606.
Avoid conventional wisdom
Today’s sermon at The First Anti-Tax Church is titled, “How to Enrich Your Family, Instead of the IRS When Transferring Your Business.” Our preacher is about to update the conventional wisdom (“The Old-Time Tax Religion.”) If you are a tax sinner, please step forward.
This is a true story of good against evil taken straight from the pages of the ever-growing tax business bible. If you’re a business owner, this is must reading.
A real-life business owner (age 66) and reader of this column (we’ll call him Joe) from Kansas told me how two key employees (ages 42 and 51) had helped build his business (Success Co.) over the years. Profits were plowed back into the business. Today the business is worth more than $10 million, with 80% owned by Joe and 10% each owned by the two key employees. Joe and his wife, Mary, have four children, none active (nor likely to be) in the business.
Joe’s goals are simple: After he passes on, the business should go to the two employees; his four children should get the value (more than $8 million) of Joe’s share of the business.
What’s the conventional old-time religion? Have Success Co. own life insurance on Joe’s life. (The actual amount of insurance on Joe’s life is now $11 million. The extra $3 million allows for growth.)
The insurance funds a buy-sell agreement. After Joe dies, Success Co. will buy Joe’s stock for its then value or the insurance proceeds, whichever is higher. Then, the two key employees will own 100% of Success Co. (Good! That’s what Joe wants.) The kids will get the $11 million or more. (And that’s also what Joe wants.) Perfect? Joe’s lawyer, accountant and insurance consultant assured Joe that this is the old-time religion.
So what’s wrong? Each dollar of those insurance proceeds used to buy Joe’s stock will be divided two ways: As high as 55 cents to the IRS; only 45 cents to the kids. The IRS, not Joe’s family, will benefit the most from Joe’s business, which took him a lifetime to build.
What to do? The solution may vary with your particular situation (for example, how many kids you have in the business, how many non-business children, your age, your wife’s age, the value of your business and the value of the rest of your assets). But here’s the new-time tax religion and it’s all legal.
Step No.1. Get the insurance out of the corporation and into Joe’s name and then into an irrevocable life insurance trust. (Now, the insurance proceeds will be free of the estate tax.)
Step No. 2. Recapitalize Success Co. so Joe can keep voting control (a tax-free transaction) for as long as he lives. If Success Co. is not already an S corporation, elect S corporation status. Have Joe sell his nonvoting stock to an Intentionally Defective Trust for its fair market value (say $8 million). The two key employees would be the beneficiaries of the IDT. Future corporate profits will pay off the $8 million to Joe. Then, the employees will own Success Co. (with no out-of-pocket cost).
Step No. 3. Joe leaves the voting stock to the key employees when he dies.
In a more typical example, the employees would be Joe’s children, and Joe’s children would wind up owning 100% of Success Co. (as the beneficiaries of the IDT). The entire IDT transaction is tax-free to Joe and his kids.
This sermon does not attempt to cover all the details of the plan outlined above. Find a professional who knows how to use the above strategies to craft a transfer plan that transfers most (in many cases all) your wealth free of the estate tax.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].