- Success Co.: We created 100 shares of voting stock (51 for Joe and 49 for Sue) and 20,000 shares of non-voting stock (10,200 shares each for Joe and 9,800 for Sue). We then created two intentionally defective trusts (IDT) (one for Joe, the other for Sue), to buy their nonvoting stock: $19 million for Sam and $18 million (rounded) for Sue. Sam is the beneficiary of both IDTs and will own all of the nonvoting stock when the $37 million is paid using the cash flow of Success Co. The entire IDT transaction is tax free to Joe, Sue and Sam — no income tax, no capital gains tax and no estate tax. Joe bought Sue's voting stock for $100,000 and will continue to control Success Co. for life.
- Business real estate: We created a charitable lead trust (CLT) and transferred this real estate to the CLT, which will receive $1.2 million annual rent from Success Co. The CLT was set up to last for 16 years and pay 7% per year (or $700,000) to charity. The Joe Family Foundation will receive the $700,000, a portion of which will pay the premium on a second-to-die life insurance policy on Joe and Mary for $10 million (and will ultimately go to Joe's alma mater). The real estate is now out of Joe's estate for tax purposes. After 16 years, the balance in the CLT will go to the non-business kids, all tax-free.
- Residences: We transferred a 50% interest in each of the two residences to Joe's trust (from his existing estate plan). The other 50% went to Mary's trust. This strategy provides a minority discount, lowering the value of the residences to $2.8 million for estate tax purposes.
- Rollover IRA: We used a strategy called Retirement Plan Rescue to purchase $15 million of second-to-die life insurance, using the IRA funds to pay the premiums. The entire $15 million will go to the kids tax free. The $10 million term policy was allowed to lapse.
- Stock Portfolio: We transferred the portfolio to a family limited partnership, lowering its value for tax purposes to $6 million (because of discounts allowed by the tax law).
Finally, we amended the current estate plan trusts with the appropriate language to make sure the various assets, including the insurance, would treat the nonbusiness kids fairly.
After four months the plan was done. When Joe signed the documents, he declared, "I'm finally a happy camper." Not only did Joe's lifetime plan accomplish all of his goals, but he got a huge dollar bonus: The plan gets all $44 million of his wealth to his kids, all taxes paid in full.
What's the planning lesson to be learned from Joe's story? It's smart lifetime planning, plus your old traditional estate plan, that prevents loss of your wealth to the IRS. And YES, lifetime planning wins ever time, quickly and easily.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP and Chairmand Emeritus of the New Century Bank. Want to consult? Need a second opinion? Visit Irv's website at www.taxsecretesofthewealthy.com.