TU Section4

Section 4 – Selecting The Right Strategies



Always?… No!

But the plain fact is you can always neutralize the estate tax. No matter what type of assets you own. No matter how large your estate. The larger your estate, the more difficult to totally eliminate the estate tax. But The System leads you down an easy-to-follow path — in those cases where the tax is not totally eliminated — that allows you to transfer ALL your wealth — intact — to your heirs. I mean ALL. And no matter how much you are worth.

For example, if you are worth $47 million — it can be any amount — the full $47 million will go to your heirs — all taxes, if any, paid in full. Sometimes (depending on the size of your wealth, The Strategies you select and other factors) you may not be able to eliminate all of the estate tax, but you will always succeed in reducing the tax’s impact to ZERO.

How do we do it?… How do you organize a subject as big as beating the estate tax? Transferring wealth? And using the tax law to create enough wealth to eliminate the impact of the law itself?… By getting the technical stuff right: knowing the tax law and applying it correctly. This means selecting The Strategies that are appropriate for the assets you own and your objectives.

The following seven-step schedule is a road-map of The Strategies we use most often with real clients in our consulting practice.

To explain all of the fine points and ramifications of the road-map requires a good-sized book. But such details — though eventually necessary — are not yet needed. Instead, the schedule gives you a panoramic view of how The System:

  1. Automatically helps you select The Right Strategies and
  2. Organizes The Strategies and brings them together to create your perfect comprehensive Plan.

Like a real road-map: you’ll know exactly how to get to your destination, but the details of your trip are not on the map.

NOTE: The names of Specific Strategies in the schedule are the bold-italicized words.


  1. Freeze the Value of The Assets You Currently Own (But… Only for Tax Purposes)
  2. Strategies that Reduce the Size of Your Estate
    1. QPRT (Qualified Personal Residence Trust) for residence
    2. GRAT (Grantor Retained Annuity Trust) — the super estate tax killer for your business
    3. IDT (Intentionally Defective Trust) — Sell your business or other income producing assets to your kids but pay no tax — income tax or capital gains tax — on your profit.
    4. FLIP (Family Limited Partnership) for investments and other income producing assets; often used in combination with another strategy.
  3. Strategies that Create Tax-Free Wealth
    1. Wealth Creation Trust
    2. The Subtrust turns double-taxed assets into tax-free wealth
    3. Education (for kids) / Retirement (for adults) Plan
  4. The First Tax-free Environment: Life Insurance as Required
    • How to double or triple your after-tax proceeds at no cost (Analyze Existing Insurance)
    • When should you use Premium Financing?
    • If available, always use a Subtrust
  5. The Second Tax-free Environment: Leveraged Charitable Giving
    1. Avoid capital gains on appreciated assets (Charitable Remainder Trust)
    2. Your family (and chosen charities) gets two to ten times more; the IRS less, often zero (Charitable Lead Trust)
  6. Transfer Your Business — Tax-free
    1. Sale of stock to family (No-No!)
    2. Voting v. nonvoting stock
    3. What is the value of your stock (for tax purposes)?
    4. Buy / sell agreements
  7. Use a network of professionals that covers all the bases… no single practitioner knows it all.

Are The Strategies Creative?

No! Creative tax planning is a myth. You want to use strategies that are routinely accepted by the IRS… Like The Strategies you are about to read. None are tricky. Or aggressive. Standing alone, each Strategy is capable of producing interesting tax savings. But used together The Strategies quickly and easily build the perfect Wealth Transfer Plan… for every possible real-life situation.

Of course, each Wealth Transfer Plan is different. But most Plans are built around three (four if you own a business) types of Core Strategies:

  1. Reduce the size of your estate
  2. Create additional wealth… tax-free
  3. Get you into a tax-free environment
  4. Business Transfer/Succession (usually tax-free)

You are now ready to learn how to select Specific Strategies for your Wealth Transfer Plan.

The best way to understand Each Strategy is by an example… a real-life example. Every example that follows was taken from our experience working with real clients (only the names have been changed). Almost no technical stuff. Basically just the facts. Followed by the results and benefits each client enjoys.

Let’s start with The Strategies (remember, there are 23 of them) that reduce the size of your estate.


A QPRT is an irrevocable trust (cannot be changed) and can only be used for your residence (but no more than two residences).


Joe (a client from Nebraska) transfers his residence — worth $400,000 — to a QPRT with a 10-year term. (The term can be more or less than 10 years). Joe’s children are the beneficiaries of the QPRT and will ultimately own the residence.

Results / Benefits

  • The entire $400,000 residence (even if it’s value triples… or more) is out of Joe’s estate
  • Joe uses only $150,000 (according to the IRS tables) of his lifetime freebie ($1 million).
  • During the 10-year period, nothing changes. Joe still uses the house when and if he wants. He can even deduct expenses: real estate taxes (and mortgage interest, if any).
  • After the 10-year period, Joe can rent the house from the trustee (typically Joe is the trustee).


Like a QPRT, a GRAT is an irrevocable trust.

Type of Property

It can be used to transfer almost any income-producing property and has the potential to save huge amounts of estate taxes. The typical GRAT is used to transfer a family corporation to the owner’s children.



Ben (a healthy age 64 and a client from the St. Louis area) is ready to retire (but still needs income to maintain his lifestyle). Ben wants to transfer his entire interest in Success Co., which is worth $2.1 million to his daughter Dot. Ben estimates the company should grow at a rate of about 20 percent a year, which means the business will be worth over $14 million at the end of 15 years. If Ben retains the entire business interest, his tax liability for Success Co. would grow to about $7.7 million over this 15-year period.

Instead, Ben creates a 15-year GRAT that will pay him an annuity of $220,000 ($2 million times 11%) each year. Before creating the GRAT, Ben recapitalizes Success Co., (an S corporation), by creating voting stock (worth $100,000) and nonvoting stock (worth $2 million). This taxable gift, according to IRS tables is $250,000. Ben retains all of the voting stock, which Dot will inherit at Ben’s death. Only the remainder interest (the nonvoting stock to be distributed to Dot by the GRAT after the 15-year annuity period) is considered a current taxable gift.

Results / Benefits

  • Ben freezes the value of Success Co. for estate tax purposes by transferring over 99 percent of the future growth (via the nonvoting stock) to Dot.
  • Ben has absolute control of Success Co. (owns 100% of the voting stock)
  • The annual annuity payments ($220,000) gives Ben the income he needs to maintain his lifestyle.
  • Ben reduces his estate tax liability by an estimated $7.7 million.
  • Ben uses only $250,000 (the value of the taxable gift) of his lifetime freebie to get the results/benefits listed.


You still own various assets — including real estate, liquid investments, and a business (a C corporation) — after using the other strategies in The System. You transfer these assets to a FLIP (a tax-free transaction) and give your children nonvoting limited partnership interests.

The general partner (you) has all the voting rights, allowing you to maintain absolute control over all the assets in the FLIP.


Herb, age 61, and his wife Jane, age 62, — clients from Montana — own various investment assets (real estate, publicly traded stocks and municipal bonds) worth $3.4 million. They transfer the assets to a FLIP in exchange for 1 percent of the general partnership interests and 99 percent of the limited partnership interests. A professional appraiser values the 99 percent limited FLIP interests at $2.356 million (after 30% in discounts). Herb and Jane immediately start a program to gift $22,000 per year of limited partnership interests to each of their 3 children and 6 grandchildren (or a total of $198,000 per year based on the discounted value).

Herb continues to manage the partnership investments.

Results / Benefits

  • Immediately after the creation of the FLIP the $3.4 million of assets are only worth $2.38 million (after the 30 percent discount) for tax purposes… tax savings of $550,000 just for signing the FLIP documents.
  • The value of future appreciation (of the gifted limited partnership interests) is out of Herb’s estate.
  • As general partner, Herb controls not only the assets in the FLIP, but all distributions to the partners.
  • Assets in the FLIP are protected from the claims of future creditors and divorcing spouses (of Herb’s married kids and grandchildren).
  • The combination of discounts and gifts to the kids and grandchildren over the next 10 years will reduce the potential estate tax liability of Herb and Jane by over $1.5 million.


An alternative to a GRAT is an IDT. In the typical scenario you own income-producing assets (stocks, real estate, a limited partnership interest) or other investments that are likely to appreciate in value, and you want to transfer some or all of these assets to your children and/or grandchildren. Often the asset is the closely held family business.

An IDT is an irrevocable trust with two separate personalities: one for income tax purposes, the other for estate tax purposes. For income tax purposes, the trust is intentionally deflective (under the Internal Revenue Code), and as a result is not recognized. This means any income that would normally be taxable to the IDT is not taxable to the trust but instead is taxable to the grantor (Joe who created the trust).

For gift and estate tax purposes the IDT, like any other properly created irrevocable trust, is recognized as a valid trust.


Joe — a client from Florida — transfers $1 million worth of securities to an IDT for the benefit of his children. The transfer (really a gift) is covered by Joe’s $1 million unified credit, so no gift tax is due.

The trust earns $62,000 of taxable income during the year. All of the income is left in the trust to compound for the benefit of Joe’s children.

Joe can — in fact, must — pay the income tax (using his own funds) on the entire $62,000. But a pleasant surprise: Joe is not treated as though he made a gift to his children for the amount of the income tax he paid (on the $62,000) for the trust.

The Control Issue. Joe wants to retain control over the property gifted to the IDT. So, instead of gifting a direct interest in the property to an IDT, Joe first transfers the property to a FLIP and then gifts the limited partnership interests of the FLIP to the IDT.

The transfer to the FLIP also captures a discount for the lack of marketability. The point: In most cases you’ll want to use a combination of a FLIP and an IDT for two reasons (1) to maintain control and (2) discount the value of the property for tax purposes.

Alternatives. Joe could have sold the property to the IDT (instead of gifting it as above) taking an installment note in payment as described below. Or transferred the property to a FLIP and then sold the limited partnership interests of the FLIP to the IDT.

Installment sale to an IDT (a great way to transfer your business to your kids.) Joe also wants to transfer his business to his son (Sam) and get it out of his estate, but he has the usual problem… Joe wants to control the business for as long as he lives. An IDT (let’s call it IDT #2) solves his problem. Here’s how:

  1. Joe recapitalizes (a tax-free transaction) his company — Success Co., a C corporation — exchanging his common stock (he owns 100 percent of Success Co.) for voting stock (100 shares) and nonvoting stock (10,000 shares).
  2. Joe elects S corporation status for Success Co.
  3. Joe sells the nonvoting stock at its fair market value ($2.4 million) to IDT #2. Sam is the beneficiary of the trust. The IDT pays Joe with an installment note for $2.4 million. Joe’s cost for the nonvoting stock is $.4 million, giving him a $2 million profit on the sale. The note bears interest at 5 percent annum.


The IDT will get the funds to pay Joe the principal of the note, plus interest, via distributions (really tax-free, S-Corporation dividends) from Success Co. Because the IDT is a grantor trust, Joe will not be taxed on the profit — the $2 million capital gains and interest income — he receives from the trust.

Great deal! Joe sells his company. Receives $2.4 million principal, plus interest. All tax-free. And he stays in control.


Donald Russ, Jr., a practicing attorney in Chicago, summarized the above IDT transaction in a letter to our common client (Joe) as follows:

“The sale to the intentionally defective trust essentially freezes the value of the nonvoting stock at its discounted value at the time the stock is sold to the trust. The trust provides for your son (Sam, who now manages the company) who is the beneficiary of the trust for gift and estate tax purposes. Following your death, the trust will distribute the shares to Sam. The trust will be structured such that upon your death, no portion of the trust will be included in your estate for federal estate tax purposes.

“During your life, because you retained all of the voting stock, you will have control of the company. At your death, the voting stock, which has an insignificant value for tax purposes, will be left to Sam.”

It should be noted that the S Corporation income from Success Co. for the nonvoting stock owned by the IDT is taxable to Joe (not the IDT). Remember, it is defective for income tax purposes. Joe happily pays this tax. It further reduces his estate without one penny of gift tax being due.

Now let’s look at The Strategies that create wealth.


A WEALTH CREATION T is an irrevocable trust that owns life insurance and is the beneficiary of the policies it owns. At death, the trustee collects the policy proceeds, which are tax-free… No income tax. No estate tax.


Peter (age 60 and a client from North Dakota) creates a WEALTH CREATION T to buy $2 million of 15-pay, second-to-die life insurance (with Patty, his wife, also age 60). The annual premiums are $24,000 payable for 15 years (a maximum of $360,000 in premiums). Then the policy will self-carry (no more premiums).


Results / Benefits

Insurance proceeds $ 2,000,000 $ 2,000,000
Less – Estate tax (55%) 1,100,000 0
After-Tax Wealth $ 900,000 $ 2,000,000*
* Less premiums paid to carry the policy. But remember, since the premium dollar are no longer in your estate, the IRS paid 55 percent of each premium.


The Problem

Suppose Jack (substitute your own name and amount) has $1 million in a qualified plan (typically a profit-sharing plan, 401(k) or rollover IRA). Jack takes out $1. In a 40 percent tax bracket, the IRS gets 40 cents. Jack has 60 cents left, which he saves and dies with it. The IRS now gets another 55 percent (33 cents), leaving Jack’s heirs with only 27 cents. And, oh yes, your home State usually takes a whack at your plan funds, further reducing your family’s share.

If Jack dies with a balance still in the plan, the balance suffers the same double taxes. So dead or alive, the IRS combined with your local tax collectors will get about 75 cents (usually more) of every dollar in your qualified plans. Your family gets only 25 cents. A true tax disaster!

To summarize: Jack’s $1 million in his qualified plan is worth only $250,000 (probably less) to his family.

The Solution — a SUBTRUST

Create a SUBTRUST of your qualified plan to purchase life insurance.


Paul and Saul — San Diego area clients — each own 50 percent of Success Co. Except for a two-year age difference (Paul at age 58, Saul 56), they are like identical twins. Both are married and have one child in the business. Each is worth about $9 million, but neither has any significant cash or liquid-type investments. Both have a similar medical problem and although insurable, their high rating makes insurance on their lives expensive.

Many visits to professional advisors still left each of them with about a $3.5 million potential estate tax liability. Part of the problem is the $1.8 million each has in the company profit-sharing plan.

The easy solution: a SUBTRUST. A special trustee of the SUBTRUST bought a $4 million second-to-die insurance policy on Paul and his wife and did the same for Saul and his wife (a total of $8 million). The wives — both age 54 — are healthy and allowed the purchase of second-to-die life insurance at reasonable premiums.

Results / Benefits

  1. Income tax savings. The $8 million insurance proceeds will be received income tax-free by the heirs of Paul and Saul.
  2. Estate/Gift tax savings. The life insurance proceeds (the entire $8 million) should be received estate tax-free. Paul and Saul actually created $8 million in tax-free wealth.


Are you still in that phase of your lifetime financial planning when you — or other family members — are trying to accumulate wealth (for retirement or other purposes), as opposed to disgorging wealth for estate tax purposes? You must check out a TAX-FREE E/R PLN.

Typical Scenarios:

  1. Kids. You want to set up an education, (wedding, buy-a-house, retirement, start-a-business) fund for your children or grandchildren.
  2. Adults. You want to set up a retirement fund for yourself.


Give someone in a group a penny. Then, immediately exchange the penny for 2 cents; the 2 cents for 4 cents on the next (second) day; and so on, doubling the number of pennies each day for a month. Finally, ask the group how much money they would have after 30 days? Rarely, does anyone know the answer. Would you believe over $10 million? Try it.

You now know why compounding money over time in a tax-free environment is the king of wealth building.


The keys to a TAX-FREE E/R PLN are the three special income tax advantages provided by the tax-free environment of life insurance:

  1. The cash surrender value (CSV) growth is income tax-free.
  2. Your policy loans (borrowed against the CSV), which you can use for personal expenditures such as education and retirement, are income tax-free.
  3. At your death, the plan is self-completing, because the policy proceeds pay off your loans and the balance goes to your family, all income tax-free.


Carl, age 40, and a successful entrepreneur (a client from Wyoming) set up the following TAX-FREE E/R PLN:

Starting at age 40, Carl will contribute $45,000 per year (actually premium payments for a high CSV life insurance policy) for 20 years. For the next five years, no contributions will be made.

Retirement payments of $150,000 per year will start at age 60, and will continue to age 95, unless Carl dies sooner. Payments stop when Carl dies, and his heirs receive a death benefit based on his age at the time of death.

Results / Benefits

Assume Carl dies at age 80. The estimated results of his Plan (remember, his total contributions were only $900,000) are breathtaking:

Retirement payments $ 3,150,000
Death benefit to heirs 1,908,507
Total benefits $ 5,058,507



Tom (a client from Indiana) creates a TAX-FREE E/R PLN — using a trust — for the benefit of Billie, his 5-year old grandson.

Here’s the Plan. Tom makes contributions of $10,000 to Billie’s trust, starting at age 5 and continuing for 9 years (until Billie reaches age 14). Total contributions: $90,000 ($10,000 x 9). Benefits will be distributed at various ages as shown below. As the kids would say about the results/benefits, “Awesome!”

Results / Benefits

Assuming Billie lives to age 95, here are the amazing numbers:


Lifetime Benefits

1. College education ($17,000 per year, ages 18-21) $ 68,000
2. Down payment on house (age 32) 60,000
3. Retirement payments ($150,000 per year for 36 years starting at age 60) to age 95 5,400,000
Total Lifetime Benefits 5,528,000
4. Death benefit at age 95 (to Billie’s heirs) 7,439,777
Total Projected Benefits $ 12,967,777


The example of 5-year old Billie shows the power of compounding in a tax-free environment over an extended period of time. Got young kids in your family? Think about Billie’s awesome numbers: $90,00 to almost $13 million.

Want to learn more? read more here…