A Potpourri of Little-known Tax Miracles
It's easy to lose big dollars to the IRS … almost always unnecessarily. Following are some easy-to-do tax-saving and wealth-building strategies we have done hundreds of times, yet are little-known. Why? Because most professional advisors don't know how to implement them.
1. Retirement Plan Rescue (RPR). Qualified retirement plans, like a 401(k), IRA, profit-sharing plan and the like, are double-taxed: First, you get nailed for income tax (say 40% for State and Federal); then you get socked for estate tax (say 55% using 2011 rates). Result: The tax collectors get 73%, your family only 27%. So, if you have $1 million in an IRA, you'll lose $730,000 to taxes. Ouch!
RPR to the rescue. An RPR is a simple life insurance strategy -
either single life or second-to-die - that turns a tax tragedy into a tax victory. Two examples from my client files tell the story: (1) A column reader from Ohio turned $274,000 in an IRA into $2.6 million (a single life policy); (2) Another reader from Florida turned $342,000 in a 401(k) into $4.5 million (a second-to-die policy.)
2. Intentionally Defective Trust (IDT). Do you want to transfer/sell all or a part of your family business to your children, a family member or an employee? Then think IDT. Here's why: An IDT, because of really bad tax law (this time good for our side), allows you to transfer your business tax-free. That's tax-free to you and tax-free to the new owner. The amount of tax savings usually work out to be about $750,000 per $1 million of the fair market value of your business. Works all the time.
3. Deferred income. A darling of the investment world is "deferred annuities." Chances are if you own an annuity, you are an unhappy camper. My clients tell me, "Great taxwise, but a lousy investment." Here's an investment - life settlements (LS) - that beats the pants off of deferred annuities. LS, offered by a public company that sells on the NASDAQ, earns an average of 15.83 percent rate of return per year. And oh, yes, your LS income is deferred until you get back 100 percent of your investment and, at the same time, pocket all your earnings.
4. The 50/50 strategy (50/50). When you get hit by the final bus, your home (or homes if you own two or more) are included in your estate. No question about it, homes are an estate tax trap. The estate tax damage? 55 percent (using 2011 rates) of the fair market value of each home.
How do you get out of this tax trap? 50/50 is the answer. This strategy uses the A/B revocable trusts. Here's what you do: 50 percent of each home is owned by the husband's trust, the other 50 percent by the wife's trust. Now neither has control and according to the often silly American tax law, you are entitled to a minority discount. The discount is in the 30 percent range. So a $500,000 house is only worth $350,0000 for tax purposes. Neat!
5. Family Limited Partnership (FLIP). Now think of your investment type assets - stocks, bonds, real estate and the like. A FLIP can be used for many good purposes including asset protection and a minority discount (just like for 50/50). However, the FLIP discount is in the 35 percent range ($1 million in assets are worth only $650,000 for tax purposes). Or put it this way: You don't lose estate taxes to the IRS on $350,000 out of each $1 million of your investment type assets, transferred to the FLIP. As my grandkids say, "Cool!"
At www.taxsecretsofthewealthy.com you'll find more tax tips from Irv Blackman.
Irv Blackman and Brian Whitlock are CPAs with Blackman Kallick Bartelstein, LLP in Chicago. Also lawyers, they specialize in business succession and wealth transfer. Want to consult? Need a second opinion? Call Irv or Brian at 312-207-1040, e-mail email@example.com or visit www.estatetaxsecrets.com.