10 Ways to win the estate tax game

It all started with a question. While speaking at a recent seminar “Tax Secrets of the Wealthy” one of the business owners — also an avid reader of this column — in the audience jokingly asked me, “Irv, do you have a Top 10 list?” I didn’t, but promised to make one and publish it in my tax column. The list follows, divided between "Do not" and "Do."

1. Do not keep property (other than a convenience bank account) in joint tenancy. Not with your spouse. Not with anyone else. Why? When you go to heaven, the surviving joint tenant owns all the property. Your will or trust does not count.
    
2. Do not put money in a pension or profit-sharing plan — IRA or other qualified plan — if you are rich or likely to become rich. Rich means you are in the highest income tax brackets (about 40%, State and Federal combined, for residents of most states) and highest estate tax bracket (currently 40%). Sorry, but qualified plans are double taxed with the tax collector getting about 64% (exact percent depends on your state's tax rate) of your plan funds. That's $640,000 per $1 million. Your family only gets $360,000. OUCH!
    
3. Do not be fooled. A will is not an estate plan. A revocable trust is not an estate plan. They are death documents. Your wealth transfer plan (if you want to legally beat the estate tax) must start while you are alive. It’s called a “lifetime plan.” If your lifetime plan is properly done, except in rare circumstances, you can easily and legally beat the estate tax before you get hit by the final bus.
    
4. Do not put real estate in a corporation that operates a business. Not a C corporation. Not an S corporation. Instead, use a family limited partnership (FLIP) or a limited liability company (LLC) to own the real estate. Then have the FLIP or LLC rent the property to your operating company. 

Please note the “do not” items listed above are mistakes you should avoid. The “do” items that follow show you how to create wealth or not lose your hard-earned money to the IRS.

5. Do use a Retirement Plan Rescue (RPR) if you have over $300,000 in a qualified plan (See No. 2 above). A RPR has the power to increase your after-tax dollars by a multiple of 10 or more. In a recent case, we used a RPR to increase a client’s after-tax amount in a rollover IRA [transferred from the client's 401(k)] from $606,000 to $5 million. And yes, every dollar of the $5 million will be tax-free. Wow!
    
6. Do create an IDT (intentionally defective trust) if you want to make a tax-free transfer of your family-owned business to your kids, yet want to keep absolute legal control of the business for as long as you live. An IDT will save you and the children (to whom you want to transfer the business) an amazing $190,000 (more or less depending on the income tax rate of your state of residence) in income tax and capital gains tax per $1 million of your business value. For example, if your business is worth $4 million, you and your kids will save about $760,000. Check it out. Better yet, call me or email me if you are thinking of transferring your business to your kids (or an employee) and I’ll walk you through how an IDT would work for you.
    
7. Do create a Family Limited Partnership (FLIP) for all of your investment assets — typically cash, CDs, income producing real estate, vacant land and your stock/bond portfolio – not dealt with by the other tax-planning strategies listed here. A FLIP will reduce the value of these assets by 35% for estate tax purposes … guaranteed to save you from losing estate taxes to the IRS. For example, if your transfer $3 million of assets to your FLIP, the value would be discounted by about $1 million, saving you $400,000 in estate tax.
    
8. Do make sure, as a final test, that all your wealth — every dollar of it, whether you are worth $6 million (if single), or $40 million (single or married), or more — passes intact to your family. Just reducing your estate tax is not enough. If your current estate plan does not pass the “Final Test,” always, but always get a second opinion.
    
9. Do make sure that your advisor uses strategies that protect you from creditors and potential lawsuits. Asset protection is just as important as IRS protection.
    
10. Do make sure you have two separate plans: 1.) An estate plan that transfers your wealth in the most tax-effective way; and 2.) A lifetime plan that maintains your lifestyle (and your spouse’s) for as long as you live and dovetails with your estate plan.

If you want more information on any of the 10 items above, please call me (847/674-5295) or email ([email protected]) me your name, area of interest, tax problem or concern; also your address and all phone numbers (business, home and cell). If you prefer, please fax (847-674-5299) your information on your business letterhead.

Irv Blackman, CPA and lawyer, is a retired partner of Blackman Kallick 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.taxsecretsofthewealthy.com.