Estate Planner Tips
Today changes must come fast; and we must adjust… We must assume that there is probably a better way to do almost everything.” This quote by Donald M. Nelson, sure describes second opinions when it comes to estate planning, wealth transfer and business succession (and other planning areas covered in this website).
More than half of the consultations we do, are done for a client who has had his/her estate plan done by another professional advisor, and the client comes to us for a second opinion. The System described throughout this website is the same for a second opinion as it is when we start from scratch.
The following quote from Irv Blackman’s book, “Passing Your Business on to Your Family” (published by Irwin Publishing Company), tells you how the second opinion concept was born.
I’ve Got To Get Something Off My Chest Before I Explode
It’s almost 100 percent guaranteed. What? There are still huge tax savings to be found when the following words are spoken to me by closely held business owners when they are talking about their business succession and estate plans:
- “Irv, someday, I’m going to…”
- “We’ve (me and my lawyer or accountant or both) been working for years…”
- “It’s all taken care of. My lawyer did…(that)” and “my accountant did…(this)” and “my insurance agent did…(whatever).”
The business owners in the first and second categories are easy tax-saving targets because they don’t have a succession/estate plan in place. So, of course, we can help ‘em. And we do.
But why do I want to explode when I talk to the business owners in the third category (usually readers — of one of my books or tax columns — calling me for a second tax opinion or just chatting with members of the audience from one of my tax seminars)? Because I have found that “done” does not necessarily mean “done right.” Rarely, very rarely, does it mean “done best.”
Can you guess the one common denominator that I find in the typical case when the business owner calls me for a second opinion?… Two (often all three) of the following professional advisors worked on and helped create the client’s plan: the accountant, the lawyer and the insurance consultant.
What else do I find? The accountant worked on the current tax liability. The lawyer drafted the death documents. The insurance consultant looked for the premium dollar (usually found it in the corporation). Most of the time all are caring, competent professionals.
But without a leader to take responsibility for coordinating all the professional efforts — dovetailing the lifetime tax plan with the estate plan, and buying or keeping the right type of insurance in the right way to dovetail with the life and death plans — the result is predictable. Yes, the plan is “done,” but many techniques — tax-saving and otherwise — were missed.
Simply put, the “done” plan was not done right.
Some Examples to Drive the Point Home
All the examples that follow are taken from our private-client-consulting files.
Joe’s estate plan was done. All he had to do was sign the documents. If Joe got hit by a bus the next day, his total estate would be $12.3 million. Then, the final combined taxes that would sock Joe and his family would total an incredible $6.1 million. ( (1) capital gains tax on the sale of his family corporation stock to his two sons, Matt and Mike, (2) income tax on his rollover IRA and (3) estate tax) Taxes lost forever to the IRS.
The family would get only $6.2 million. Outrageous!
Joe’s second opinion plan was built around three major strategies:
- An Intentionally Defective Trust to transfer Joes’s corporation to his sons.
- A SUBTRUST to buy $4.5 million of second-to-die life insurance on Joe and his wife Mary. The IRA was rolled back into the company profit-sharing plan.
- A Family Limited Partnership (FLIP) for his investment assets.
Now, let’s crunch the new numbers. If Joe and Mary got hit by the proverbial bus immediately after the above Second-Opinion Plan was implemented, their estate would rise to $16.8 million, which includes the $4.5 million insurance policy.
But watch this: The use of the three major strategies slashes the tax on the new estate total down to $5.1 million (from $6.1 million before). And finally the best news: The net amount to Joe’s and Mary’s family mushrooms from $6.2 million to $11.7 million ($16.8 million, less $5.1 million).
It should be noted that the longer that Joe and Mary live, the more the estate tax burden will be reduced (Because of a gift-giving program of the FLIP interests to younger family members).
The story of Lenny Little. Lenny’s business, Little Co., is worth about $550,000. His total net worth is $1.4 million. Lenny makes a comfortable living, but doesn’t think being worth $2 million someday — including a $200,000 life insurance policy — is possible. Lenny is 60 years old. So is his wife Mary. Lenny wants to sell his business to his daughter Liz and was advised to sell Little Co. to Liz on an installment sale basis. The sale would be hit with $102,000 in capital gains taxes. Lenny called us for a second opinion.
Here’s Lenny’s succession plan: Lenny does not sell Little Co. to Liz. Instead, he creates the following plan:
- Elects S corporation status.
- Gives one share of Little Co. stock to Liz
- Enters into a buy/sell agreement assuring Liz that only she (right of first refusal) can buy the business.
- Nothing more concerning the stock is done while Lenny is alive.
- Lenny’s Will leaves all of the Little Co. stock to Liz (in effect, ignoring the buy/sell agreement).
- Lenny, cuts his salary as he slows down in his later years. This saves payroll taxes. A big deal. Remember, payroll taxes run in the 16 percent to 20 percent range. For example, a $50,000 salary kicks up about $9,000 in payroll taxes.
Results of plan. The profits of Little Co. (an S corporation) are available to Lenny instead of salary. Every time Lenny takes $1 less in salary there is $1 more in profits for Little Co. Remember this: S corporation dividends give you more spendable dollars (no payroll taxes) that salary.
The plan allows Lenny and Mary to maintain their lifestyle.
When Lenny dies, Liz owns Little Co. She didn’t pay one penny for it. Best of all, Lenny and Mary will have more spendable dollars during their lives than a sale of Little Co. to Liz would have produced.
Now, the story of Ben Big. Ben’s business, Big Co., is worth about $10 million and he wants to sell it to his son Sam. Ben’s total net worth is $18 million.
Ben’s succession plan. No sale — as Ben was advised by his CPA and Lawyer — of Big Co. to Sam. Here’s the second-opinion plan Ben created:
- Big Co., already an S corporation, was recapitalized (10 shares of voting stock and 10,000 shares of nonvoting stock). A recapitalization is tax-free.
- A professional appraiser valued the nonvoting stock at $6.3 million (after discounts.)
- The nonvoting stock was sold to an Intentionally Defective Trust (IDT) for $6.3 million. The IDT paid Ben with a $6.3 million note. Sam is the beneficiary of the IDT and will get all of the nonvoting stock when the note is paid in full.
- Ben leaves the voting stock to Sam in his will.
Results of plan. The note will be paid off as the IDT receives its share of Big Co.’s S corporation profits. Ben will receive the entire $6.3 million note payments, plus interest, free of any capital gains tax or income tax.
Sam will ultimately (when Ben dies and leaves the voting stock to him) own all of Big Co. without paying one cent to acquire the stock. Of course, Ben controls Big Co. (via the voting stock) until he draws his last breath.
What can you do to make sure you don’t get caught in this same professional tax trap (and keep me from exploding)?… Make sure your professional advisors work together. Critique each other’s work. Share ideas. And most important: Select the most knowledgeable and experienced advisor as the leader to be responsible for dovetailing everyone’s work.
Finally, if you are not totally comfortable, get a second opinion.
The second opinion is a simple acknowledgement that the complexity of the law has stripped away even a remote possibility that one person can know it all. Fact is, it is difficult to imagine even one professional office that would know it all. (We have never even heard of such an office.) Just the basic skills require an in-depth knowledge of accounting, law, insurance and business valuation. (Most Wealth Transfer Plans require a business or partnership valuation.) And it doesn’t hurt to know a bit about business operations, investments and economics. Computer skills help too. Like we said, one person cannot know it all.
Let’s Sum It Up
We often end a second-opinion consulting meeting with a client with this summary: “Remember one simple fact: a well-conceived Estate Plan should enrich your heirs and should eliminate the IRS (at worst, transfer your estate tax liability to an insurance carrier). Also, your Estate Plan should include a Lifetime Plan that encompasses a Business Succession Plan and a Retirement Plan that will maintain or increase your after-tax cash flow so you can continue to enjoy your current lifestyle. A second opinion just makes sure you touch all of the right bases.”
And a final point. Now suppose your second opinion plan is done (or if you still have only your original plan). What should your mindset be? You should be the plan’s toughest critic. And on a regular basis (usually every other year or immediately if there is a change in your circumstances or the law) you and your professionals should be restless and relentless, urging yourselves to reexamine your plan and how to do it even better — if possible — the next time.
How to get a free second opinion from Irv (only available to members — Crusaders — of this website):
Please send the following information (send copies, not original documents):
- For your business. Your last year-end financial statement.
- Personal. A current personal financial statement for you and your spouse.
- A family tree. Your name, age and birthday. Same for your spouse, kids and grandchildren.
- Other documents or information. You think would be helpful
That’s our plan to help you upgrade your current plan. Let’s hear from you. Okay, Crusaders, start the planning process. Today!
A Final Note
Yes, the second opinion is really free (for members of this website.)
But, are we really giving anything away?… No! Because 95 percent of the time we find ways to change — sometimes just little things, sometimes breathtaking discoveries that save millions of dollars — your existing Plan. Our experience is that telling the persons asking for the second opinion how to change their existing Plan to legally eliminate the estate tax usually results in our office being hired to redo the Plan.
Want to become a Crusader/member?…
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.
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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