Who do you think calls me the most to do their estate plan or ask me for my opinion on their completed estate plan? … Men. Nine out of 10 of them are married, and eight out of 10 of them own all or part of a closely held business.
Bet you'll never guess how important the ladies are when it comes to estate planning. Almost half of the guys who call me admit their wives motivated or nagged them to call me. The typical husband, once again Joe, will be our example in this column, procrastinates when it comes to estate planning. What's likely to happen? Joe's wife, Mary (a typical business owner's wife), calls me, almost always with Joe's consent.
Interesting. The ladies, in general, are more businesslike than their husbands — less idle chatter. Let's take a look at a call I received from Mary regarding her and her husband's estate plan.
Mary, who is an avid reader of this column, told me about her concerns. Mary spilled forth a torrent of well organized and thoughtful words as she outlined her concerns for me: how do they maintain their lifestyle for as long as they live; keep Success Co. in the family even though none of their kids can manage the company; and what should they do about Joe's rollover IRA — it went down 40% to $420,000 because of the stock market nosedive and their personal portfolio, which is down 35% to $2.1 million.
Mary also told me that Joe had his own set of concerns: how does he avoid the estate tax on his net worth of $14 million; transfer Success Co. to his kids without getting killed with taxes; keep his two key employees, so they can run Success Co.; and control his wealth — particularly Success Co. — for his lifetime.
Mary also told me about their family. They have three kids, plus eight grandkids. Two of the kids, Sam and Sid, are in the business. Sadly, neither Sam nor Sid can run the business, but two key employees, Jack and Jill, can.
The phone call lasted about 15 minutes and ended with me requesting a package of information from Mary, including personal and business financial statements, a family tree and various documents that made up their very outdated estate plan.
After I received the requested information and reviewed it, I scheduled a conference call with Mary and Joe. With Mary's help, I prepared a detailed agenda to keep the conference call on track. An estate plan was created as a result of the conference call and two follow-up calls.
Now, if you own all or part of a closely held business, listen up. You are sure to see one or more of your own problems here and, more importantly, the solution. There are nine various strategies used to create an estate plan:
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Recapitalization: We replaced Joe's (100% owned) common stock in Success Co. with 100 shares of voting stock and 10,000 shares of nonvoting stock, which is a tax-free transaction.
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Control: Joe kept the 100 shares of voting stock and absolute control of Success Co.
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Intentionally defective trust (IDT): We sold the 10,000 shares of nonvoting stock to the IDT for a $6 million note (fair market value as determined by a professional appraiser), plus interest. Under the crazy tax law, the entire $6 million (as the note is paid, plus interest) is tax-free, which means no capital gains tax and no income tax to Joe. When the $6 million is paid (paying it should take six to eight years), the nonvoting stock will be distributed, tax-free, to the trust beneficiaries: Joe's three kids.
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Death benefit agreement (D/B/A): This agreement is really a wage continuation plan. If and when Joe retires, Success Co. will continue his salary (about 80% of it) until his death. Then, the payments would continue to Mary until her death.
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Non-qualified deferred compensation plan (NQDCP): Often called a “phantom stock plan,” a NQDCP is a well-tested method to keep key employees (in this case Jack and Jill) from leaving your company. Every plan is a bit different to make it a perfect fit for the endless variations required by real closely held businesses. The most important part of the plan is that the key employee shares in the (hoped-for) increased profitability of the business by contract rather than owning stock.
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Tax-advantaged life insurance. Finding the dollars to pay premiums without digging into your own pocket is usually challenging. We did it for Joe and Mary in two ways:
(a) Retirement plan rescue. We used the funds in Joe's rollover IRA to buy $3 million of second-to-die life insurance (for both Joe and Mary).
(b) IDT hold back method. This strategy is cool. We hold back some of the note payments in the IDT and use these funds to pay the premiums on another $3 million of second-to-die insurance, which will go to the kids tax-free.
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Family limited partnership (FLIP): All of Joe's investment assets, income producing real estate and his stock portfolio were transferred to a FLIP. Result: The value of these assets was lowered by $2 million for estate tax purposes.
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Gifting program: We immediately started a gifting program to the kids and grandkids: $12,000 each for Joe and Mary ($24,000 total) for 2008, rising to $13,000 per year (total of $26,000) starting in 2009.
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Private bank software: We started using new software — software that normally enjoys an annual return in excess of 20% per year — to manage funds in the Rollover IRA and the FLIP. (Remember, prior results do not necessarily predict future returns.) Generally, it can start with a $500,000 minimum, but it can also start with a $100,000 test account. If interested in this software, please fax the following information to me, Irv, at 847-674-5299: name and address; business, home and cell phone numbers; and the estimated amount of initial funds. Please write “Software” at the top of the fax.
And once again, “thanks” to Mary for making the initial call that got the ball rolling for Joe's estate planning.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847-674-5295, e-mail [email protected], or on the Web at www.estatetaxsecrets.com.