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A Potpourri of Little-Known Tax Miracles

July 1, 2008

It’s easy to lose big dollars to the IRS, almost als unnecessarily. Following are simple tax-saving and wealth-building strategies that we have implemented hundreds of times, yet are little-known.

Retirement Plan Rescue (RPR)—Qualified retirement plans such as a 401(k), IRA, profit-sharing plan and the like are double-taxed: First, you get nailed for income tax (say 40 percent for state and federal); then estate tax, (say 55 percent using 2011 rates). The tax collectors get 73 percent, your family 27 percent. So, if you have $1 million in an IRA, you’ll lose $730,000 to taxes.

Now, stop reading for a moment and do the math for the funds in your qualified plans. 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 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.)

Intentionally defective trust (IDT)—Do you want to transfer/sell all or part of your family business to your children or other family member? Think IDT.

An IDT, because of really bad tax law, allows you to transfer your business tax-free. That’s tax-free to you—tax-free to the new owner. The amount of tax savings usually works out to be about $750,000 per $1 million of the fair market value of your business.

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, earn an average of 15.83 percent rate of return per year. And your LS income is deferred until you get back 100 percent of your investment and, at the same time, you pocket all of your earnings.

The 50/50 strategy (50/50)—When you die, your home or homes are included in your estate. No question about it, homes are an estate-tax trap. The estate-tax damage is 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 most readers already have. Here’s what you do: Fifty 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 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.

Family Limited Partnership (FLIP)—Think of your investments—stocks, bonds, real estate and similar assets. A FLIP can be used for many good purposes including asset protection and a minority discount (just like a 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: You don’t lose estate taxes to the IRS on $350,000 out of each $1 million of your investment assets transferred to the FLIP.

This is just the tip of the tax-saving, wealth-creation iceberg. For more, visit Or call Irv at 847/674-5295. MF

Industry-Related Terms: Die, Transfer
View Glossary of Metalforming Terms

Technologies: Management


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