This article is the story of the typical owner (Joe) of a family business who decides it is time to get his estate plan done. Joe (age 63) organized a meeting with his long-time friend and CPA (Chuck) and lawyer (Lenny) who specializes in estate planning.

To start, all agreed Chuck should compute Joe’s estate tax liability based on his current wealth. Chuck prepared a worksheet showing all the assets (and their values) owned by Joe, the potential estate tax liability ($4,080,000),the liquid assets available to pay the tax ($807,300) and the short-fall ($3,272,700). Chuck and Lenny, at a second meeting, recommended and Joe bought a $3.5 million term policy on his wife Mary, age 57, (with Joe as the owner) to pay the potential estate tax. Lenny presented his plan: a typical traditional estate plan, pour-over-wills and A/B trusts.

Joe was not comfortable. He called me for a second opinion.

I want to zero in on the most common errors I see closely held business owners, like Joe, make in their estate planning… errors (really, missed opportunities to save estate taxes) that cause the Joe’s of the world to lose millions of dollars of their wealth to the IRS. Sadly, the missed opportunities are almost always a lack of knowhow by the professionals.

Let’s start by taking a closer look at Joe’s personal wealth. His net worth is $21.1 million: $10.4 million in various investments (mostly real estate); Success Co. (business owned 100% by Joe) worth $6.6 million and nets about $1.2 million per year after a $290,000 salary to Joe, plus many fringe benefits; $1.8 million in a 401(k); $.8 million in miscellaneous assets, and finally, a $1.5 million old life insurance policy on Joe (owned by him).


The Loophole in the Tax Law

There is a huge loophole in the tax law concerning the value of certain assets: These assets retain their real fair market (intrinsic) value, but enjoy a lower discounted value for tax purposes.

Following is a chart showing you the asset class, the strategy used and that tax-friendly loophole discount.


AssetClass Strategy Discount
Business Nonvoting stock 40%
Investments Family limited partnership 35%
Residence Split-ownership* 30%
*Typically, 50% of residence owned by husband’s A/B trust and 50% by his wife’s trust


We used all three of the above strategies for Joe. The discounts totaled $6.52 million, bringing the taxable estate down to about $14.6 million (actually $12.6 million without the $1.5 million insurance policy, which we will deal with later).

Get Your Major Assets Out of Your Estate

We created a family limited partnership (FLIP) to hold Joe’s investments. Here, gifts (to Joe’s three kids) are the weapon of choice. We used the annual exclusions of $14,000 per donee ($28,000 for Joe and Mary combined), followed by using a portion of the lifetime credit (in 2015) of $5.43 million ($10.86 million for both).

An intentionally defective trust (IDT) was used to transfer the non-voting stock of Success Co. to Joe’s kids…. tax-free for Joe and the kids.

Important: Even though the assets were out of Joe’s estate, he continued to control them. How?… He kept voting control: the voting units of the FLIP and the voting stock of Success  Co.


When It Fits, Insurance Is the Go-To Strategy

This takes knowledge. You must (1) know the tax law, (2) understand the life insurance products available in the marketplace, (3) keep the policy proceeds out of the insured’s estate and (4) minimize premium cost. Sadly, few professionals know how to get the job done.

Let’s deal with Joe’s two policies one at a time.

            The $1.5 million policy on Joe’s life: The annual premiums were $19,501 with a cash surrender value (CSV) of $64,000. A second-to-die policy for the same amount on Joe and Mary (really what they need because no estate tax is due until both have gone to heaven) has a lower premium of $16,023. The decision was easy… Drop the old policy. Joe pocketed the $64,000 CSV. A new second-to-die policy for $1.5 million was purchased by an irrevocable life insurance trust to keep the death benefit out of their estate.

            The $2.5 million policy on Mary’s life: First, a fact… The policy was no longer needed to pay estate taxes, which were eliminated by the above planning. But when, I told Joe that the premiums could be paid by the IDT, he decided to have the IDT buy another second-to-die policy for $2.5 million (for the benefit of their kids) and, of course, it was structured to be estate tax free.

Some help with your life insurance planning: Can you guess what is the most messed up area in estate planning?… Yes!  Life insurance. Wrong type of policy. Overpay premiums. Proceeds subject to estate tax. Either over insured or under insured. Actually, I could write a book.

But the following should help you determine if you are in insurance hot water and should get a second opinion:

  1. You are married, have single life insurance (typically on the husband), but logic tells you second-to-die will give you more bang for your premium buck.



  1. Your policy is paid up… you no longer pay out-of-pocket premiums. Guaranteed to enrich the insurance company, instead of your family. Simply use a tax-free exchange to significantly increase the death benefit, and still pay no premiums.
  2. In general, if you have: (a) more than $350,000 in CSV, (b) $3 million in coverage or (c) the policy is more than 10 years old, review the policies once a year, (d) get a second opinion before you buy. Typical result—significantly more death benefits for the same premiums dollar.

Want to learn  more?… Browse my website: In a hurry… call Irv (847-674-5295) or email me ( with your questions or concerns.

Free special report:

How to transfer your business (to your kids), yet keep control


When closely help with business owners call me for help with their business successions plan they typically have two goals:

- Get their business out their estate (particularly when it is growing in value) in a tax effective manner

- keep control for long as they live

it is a rare that the business owner finds an advisor who knows how to accomplish both goals.

this special report shows you how to keep absolute control of your business while transferring it to your successors.

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Free Special Report:

How to legally eliminate your state tax liability


When people of means contact me to help do their estate plans (or review their existing plans), they typically have two goals concerning their estate tax:

- Reduce their potential estate tax liability

- Make sure there is enough liquidity to pay the potential estate tax liability

Well, my goal and the goal of this special report is to show you how to eliminate your potential estate tax liability whether you are young or old , married or single, insurable or uninsurable.

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