Second Opinion Nearly Doubles Family Wealth

Your estate plan is not finished unless you pass the "test." To do so, you must answer yes to two questions: 1) Does my estate plan transfer ALL of my wealth to my heirs, with all taxes, if any, paid in full? 2) Can I control all of my assets for as long as I live? If you don't get a clear "yes" to both questions, you need a second opinion.

Joe and his business are the perfect owner/family business example to show how to keep your wealth in your family instead of losing it to the IRS. Joe's estate plan was finished. The key was a sale for $2.5 million of 49 percent of Joe's stock in Success Co., a corporation, to his two business children, Matt and Mike. Joe would retain 51 percent of the stock to keep control.

Joe's estate was worth $8.5 million. Joe and his wife, Mary, have two non-business children whom they want to treat the same as Matt and Mike. Joe owned $3 million in life insurance and $800,000 in a rollover IRA.

So, if Joe got hit by a bus, his total estate would be $12.3 million. The final combined estimated tax (capital gains tax on the sale of stock to Matt and Mike, income tax on the rollover IRA and estate tax) would be $6.1 million, lost forever to the IRS.

We tailored a three-step plan for Joe:

1. Success Co.: S corporation status was elected. We created voting/nonvoting stock. Joe keeps all of the voting stock (1 percent of the total) to maintain control. The balance of the stock—99 percent, all the nonvoting stock—was sold to a defective trust (Matt and Mike are the beneficiaries) for $6.2 million. All of these are tax-free transactions.

2. Rollover IRA: These funds were used to create a subtrust to purchase $4.5 million of second-to-die life insurance, which will be free of income tax and estate tax. We dropped the $3 million of insurance on Joe's life and Joe pocketed the policy's $400,000 cash surrender value (tax-free).

3. We created a family limited partnership (FLIP). The nonvoting units will be gifted to Joe and Mary's four kids and six grandchildren at the rate of $22,000 each per year. All of Joe's other assets (real estate, stocks and bonds), except his $500,000 residence, were transferred, tax-free, to the FLIP.

If Joe and Mary died immediately after this plan was implemented, their estate would equal $14.2 million (Success Co. at $5.1 million, the other assets of $3.4 million plus the IRA at $800,000 is $9.3 million. Add the $4 million of CSV (transferred to the FLIP) and the new second-to-die policy of $4.5 million to get the new $14.2 million total).

But, the use of the FLIP, the subtrust and the elimination of the capital gains tax slashes the tax on the estate down from $6.1 million to $4.5 million. So, the net amount to Joe and Mary's family mushrooms from $6.2 million to $10.1 million.

More tax-saving features include the following:

1. Before electing S corporation status, Success Co. paid a one-time, long-term care (LTC) premium for Joe, Matt, Mike and their wives. The company deducted 100 percent of the premiums. Now, all six members of the family will have LTC benefits with no additional cost for the rest of their lives. The LTC tax law allows the family to not only get LTC free, but to actually make a profit.

2. Joe, Matt and Mike will save a total of about $15,000 per year in payroll taxes.

3. A buy-sell agreement makes sure none of the stock goes to the kids' spouses if they get divorced.

4. We put in a plan to pay for the education of Joe and Mary's six grandchildren and provide for their retirement. The benefits for each grandchild will exceed $4 million. The average cost per grandchild will be only $220,000 (paid over 10 years).

Now you know Joe's story. You are invited to take the test. Please contact me if you would like more information.