How to transfer your wealth to your family tax-free

If you are typical, you accumulated your wealth little by little. It should belong to you and your family. Right? But it doesn’t. Like it or not, you have a partner: the IRS.

Let’s personalize this article by asking how much you are worth. Better yet, how much do you think you might be worth on the day you go to the big business in the sky — $5 million dollars, $15 million, $25 million or more? That number — when you go to heaven — is the only amount that counts.

Traditional estate planning

Of the thousands of estate plans I have reviewed over my 46-plus years of practice, almost all of them — even the well drawn plans — fall into the trap of traditional estate planning. These plans typically use only two basic strategies:

1. A revocable trust (more often called a living trust), which avoids probate. It can never save you one cent of taxes. Still, you should use it — we do — not as a tax-saver, but as a convenient way for your heirs to deal with your assets after you are gone.

2. A two-trust arrangement (usually called “Trust A” and “Trust B,” or “a Marital Trust” and “Family Trust,” or something similar) is used to get the first $11 million (using 2017 numbers) of a married couple’s wealth to their heirs free of the estate tax, thanks to the marital deduction.      

That’s it. Two strategies that all have something in common: the tax benefits only kick in when you die. Yes, traditional estate planning is a good start, but it simply is not capable of doing the complete job. Why? Traditional estate planning, at best, can only create a “death plan.” Then your documents just sit in the drawer until you die. Sorry, it’s too late to implement the many tax-killing strategies that are available to you during your life.

A new and unique tax-saving system

This article introduces a highly organized system that is not designed to beat the estate tax. Instead, The System is designed to finesse this tax.    

So what’s new and unique? The answer lies in the wealth-saving results produced by The System when used to tailor your wealth transfer plan.

How does a wealth transfer plan differ from an estate plan? Simply, a wealth transfer plan concentrates on the specific assets that make up your wealth, rather than the estate tax caused by the total value of the assets.

For example, if your assets total $25 million (it could be more or less), and the potential death taxes are $5.6 million, you are worth only $5 million (after taxes). A wealth transfer plan, instead of trying to lower the $5.6 million in taxes, causes 100 percent of the $25 million to be transferred to your family (all taxes, if any, paid in full).           

The System teaches you how to create the perfect wealth transfer plan for you, your business and your family to:

1. Keep your wealth — every dollar of it — in the family, instead of losing it to the IRS.

2. Keep absolute control of ALL your wealth — including your business — for as long as you live.

The key to your success is to also do lifetime planning as opposed to only death planning. What happens if you don’t plan? Or don’t do lifetime planning? Or you have a typical plan (only a will and trust)? About 40 percent of your wealth can be lost to the IRS.          

Can these gut-wrenching results be avoided? Yes! Simply learn to use the right strategies. The following examines the specific strategies that you can use to protect the four types of assets you might own.

Asset No. 1: Your business. Never (and I mean never) sell your business to younger members (assume your kids) of your family. You and your kids will get socked for three unnecessary taxes. For example, say you (Joe) want to sell your business to your son (Sam) for $1 million. In most states Sam must earn $1,666,000 and pay $666,000 in income tax (the first tax) to have $1million left to pay Joe. Typically, Joe suffers a capital gains tax (the second tax). When Joe goes to the big business in the sky, the estate tax (the third tax) robs another 40 precent (or more). That’s nuts! There must be a better way. Try this easy two-strategy process.

Strategy No. 1: Recapitalization. Create voting stock (say 100 shares) and non-voting stock (say 10,000 shares). A tax-free transaction. Transfer the non-voting stock to the business kids(s) — here Sam via Strategy No. 2 (intentionally defective trust).           

These two strategies combine to accomplish these welcome results: 1.) Joe’s business is out of his estate; 2.) Joe controls the business (via the voting stock) for as long as he lives; 3.) No capital gains tax for Joe; 4.) No estate tax for Joe’s family; and 5.) No income tax for Sam.

Asset No. 2: Residence. Use a neat little strategy (qualified personal residence trust) to get your residence out of your estate, yet you and your spouse can live in it to the day you die.

Asset No. 3: Funds in a pension plan, profit-sharing plan, 401(k), IRA or similar qualified plan. Because these assets are subject to a double tax (income tax and estate tax), your family typically gets only 30 cents out of every dollar. The IRS confiscates 70 cents. A tax tragedy!

The most common strategy (a retirement plan rescue) turns the tables on the IRS. One of our clients used an RPR to turn $1.2 million in his qualified plan (his family would have received only $324,000) into $6.5 million of tax-free dollars. Our private client files are bursting with similar RPR examples.

Asset No. 4: All other assets. We are talking about everything else you own (like real estate, stocks, bonds, oil wells, etc.). These assets should be transferred to a family limited partnership (FLIP). A FLIP keeps you in total control: it locks out creditors, reduces your estate tax, and gives you total flexibility. Almost every client/reader with an estate tax problem winds up using a FLIP.           

Of course, this article does not attempt to cover every strategy available to win the estate tax game. You must work with a knowledgeable and experienced professional.            

One final point: How do you know your wealth transfer plan is done right? Make the final test by asking these two questions: 1.) Will my family wind up with all my wealth? For example, if you are worth $20 million (or whatever), your family winds up with the entire $20 million or whatever, all tax — if any — paid in full). 2.) Also, are your assets protected from lawsuits and creditors? If the answer is not an unequivocal “Yes” to both questions, you know you better get a second opinion.           

Want to learn more about this fascinating subject to save your wealth for your family? Browse my website: www.taxsecretsofthewealthy.com. There’s a ton of free information. Also, you can call me, Irv, at 847-767-5296 or email me at [email protected].