Joe and Sam will save about $200,000 in taxes for each $1 million of Success Co.’s price (here about $1,040,000 in tax savings). Bless the IDT!
More tax and economic magic using an IDT
- Sam is married. One of Joe’s concerns: If Sam gets divorced, will his ex-daughter-in-law wind up with a piece of Success Co.? No! The IDT trustee is instructed to hold the stock in the trust for Sam’s benefit, taking the stock out of the divorce court’s jurisdiction.
- If Sam were to buy Success Co. from his dad, the obligation to pay the $5.7 million sales price would destroy Sam’s personal balance sheet. Using an IDT eliminates any personal liability to Sam, allowing his guarantee of a bank loan – when Success Co. wants to borrow – to be accepted by the lending bank. Sam applauded this strategy.
- Joe has two nonbusiness kids, who he wants to treat equally to Sam (receiving a $9.5 million business). But Joe doesn’t have enough other assets. Yes, a second-to-die life insurance policy (with Mary) is the answer, but the annual premium payments would be a drain. The IDT to the rescue. The trust would buy the policy, pay the premiums (so it would take longer to pay off the note) and the two nonbusiness kids would be the beneficiaries (via the IDT) of the policy’s death benefit. Joe called the concept, “Tax Magic.”
It is important to note that this article does not attempt to cover every possible transfer situation we see in practice. So, if you have a question or a unique succession problem that is not covered in this article contact Irv: by email email@example.com, phone (847) 674-5295 or fax (847) 674-5299.