Section 3 - The Family Wealth Protection Fortress

How to Get the Results You Want

Pretend for a moment that you are in a one-on-one meeting with Irv Blackman. Our subject... your Wealth Transfer Plan.

Can you guess what the first item on the agenda might be?...

Your Objectives

Objectives — your specific objectives — are really the human side of the planning process.

Actually, the easiest part of The System is the technical part... knowing the law and how to legally beat up the IRS.

The tough part is to make you — and every member of your family, particularly your spouse — comfortable with your Wealth Transfer Plan.

Irv's job is to stand along side you and make sure you ask the right questions. Then, you can use the answers to set your objectives.

Irv asks each client (say it is "you") to walk with him into the future for 5 to 20 years (depending on your age and health). Then, he asks you to look back and tell him what you would like to have accomplished over that time frame. For yourself? For your family (spouse, children, grandchildren)? For your business? The answers help pinpoint your objectives.

NOTE: Most clients spell out their objectives based on three factors: the type of assets they own, their family situation and their age. Your objectives should never be set in stone; over time most factors — certainly age — change.

The System uses your specific objectives as the first step in a three-step process (really the three sides of your Family Wealth Protection Fortress) to create your comprehensive Wealth Transfer Plan.

Now, you are ready to learn how The System begins the process of giving you the results you want by...

BUILDING YOUR FAMILY WEALTH PROTECTION FORTRESS

You can build an impenetrable fortress — The Family Wealth Protection Fortress (FORTRESS). Once built, you and your family are inside. Your wealth — including your business — is inside too. Tax collectors are locked out. Others who are not welcome — for example, creditors, those who might want to sue you, and those who leave your immediate family because of divorce — are also locked out.

THE FORTRESS Is a Triangle

So, of course, THE FORTRESS has three sides:
1. Your specific objectives
2. Your specific assets
3. The specific strategies used to satisfy your objectives based on the assets you own.

You are the master of the FORTRESS. You have complete control of each and every asset inside the FORTRESS.

Think of the FORTRESS as having various rooms with the keys to those rooms (and the assets inside) only available to or controlled by the person with the keys. While you are alive, you alone possess the master key to the front gate of the FORTRESS and a separate key for each of the rooms inside. (Depending on the particular strategy being used, you will hold the key — means to have absolute control — as a general partner, trustee, own the voting stock or by other control means as required by The Strategy)

You will learn how and when to pass the keys to your FORTRESS to your kids or anyone else you want.

Remember, your FORTRESS will be different too. Specifically designed for you, your family and your business.

Let's take a closer look at the three sides of the FORTRESS.

SIDE ONE - Your Objectives

Specific objectives are set for you... your business... and for your family. These are the five most common objectives in almost every Plan.
1. "Don't interfere with my lifestyle (or my spouse's lifestyle after I'm gone)."
2. "I want to control my business and other assets for as long as I live."
3. "If possible, eliminate the estate tax."
4. "Treat the kids fairly" (or "equally").
5. "Transfer my business to the business kids tax-free."

The pleasant surprise is that all of these objectives (and more) are easily accomplished using The System.

SIDE TWO - The Four (or Five) Types of Assets

Each significant asset you own is reviewed. You determine its ultimate use (for example, keep it, sell it or gift it) for the rest of your life and if its final disposition meets your objectives. Then, each asset is categorized into one of the following logical types:
1. Residence
2. Business
3. Income in respect of a decedent (IRD) [typically funds in a qualified plan, like a profit-sharing plan, IRA or 401(k)]
4. All other assets — cash, securities, real estate, partnership interests, oil wells, etc.
5. If you (or your spouse) are insurable, you have a fifth asset.

SIDE THREE - The Strategies

The System contains 23 core strategies and even more supporting strategies. There are literally millions of possible combinations. The Strategies usually only four to seven per Wealth Transfer Plan — are selected to produce the desired results you want for each asset you own and to accomplish all your specific objectives.

Every strategy or combination of strategies, when properly done (that's the way we do 'em), are currently accepted by the IRS. View The Strategies like the bricks, mortar, lumber and other material used by a skilled architect to build a solid FORTRESS (actually, your Wealth Transfer Plan).

NOTE
Once you have your list of specific assets and goals, the selection of exactly the right strategies or combination of strategies to use in your Plan is easy. Actually, the System does it for you.

Who and What are Inside the FORTRESS?

The typical occupants of the FORTRESS are you, your spouse, your children and your grandchildren. You may allow other occupants in: your elders (parents, grandparents), other relatives, charities or anyone else with whom you want to share your wealth. All, or at least substantially all of your assets — including your business — are also inside the protective walls of the FORTRESS.

Each individual and each of your assets are protected from.
1. The IRS
2. Creditors
3. Lawsuits
4. Ex daughters-in-law and sons-in-law who divorce your children (or other individuals inside the FORTRESS).

Finally, no two FORTRESSES are ever alike. Similar, yes... because of The System. But the devil is in the details. The next step in the process shows you how to get the details right so The Strategies you select to complete the FORTRESS are perfect for the assets you own and to accomplish your objectives.

Section 4 - Selecting The Right Strategies

CAN YOU REALLY ELIMINATE YOUR ESTATE TAX?

Yes!

Always?... No!

But the plain fact is you can always neutralize the estate tax. No matter what type of assets you own. No matter how large your estate. The larger your estate, the more difficult to totally eliminate the estate tax. But The System leads you down an easy-to-follow path — in those cases where the tax is not totally eliminated — that allows you to transfer ALL your wealth — intact — to your heirs. I mean ALL. And no matter how much you are worth.

For example, if you are worth $47 million — it can be any amount — the full $47 million will go to your heirs — all taxes, if any, paid in full. Sometimes (depending on the size of your wealth, The Strategies you select and other factors) you may not be able to eliminate all of the estate tax, but you will always succeed in reducing the tax's impact to ZERO.

How do we do it?... How do you organize a subject as big as beating the estate tax? Transferring wealth? And using the tax law to create enough wealth to eliminate the impact of the law itself?... By getting the technical stuff right: knowing the tax law and applying it correctly. This means selecting The Strategies that are appropriate for the assets you own and your objectives.

The following seven-step schedule is a road-map of The Strategies we use most often with real clients in our consulting practice.

To explain all of the fine points and ramifications of the road-map requires a good-sized book. But such details — though eventually necessary — are not yet needed. Instead, the schedule gives you a panoramic view of how The System:

1. Automatically helps you select The Right Strategies and
2. Organizes The Strategies and brings them together to create your perfect comprehensive Plan.

Like a real road-map: you'll know exactly how to get to your destination, but the details of your trip are not on the map.

NOTE: The names of Specific Strategies in the schedule are the bold-italicized words.

ROAD-MAP: TO SELECT STRATEGIES FOR YOUR WEALTH TRANSFER and WEALTH CREATION PLANS

1. Freeze the Value of The Assets You Currently Own (But... Only for Tax Purposes)
2. Strategies that Reduce the Size of Your Estate
   1. QPRT (Qualified Personal Residence Trust) for residence
   2. GRAT (Grantor Retained Annuity Trust) — the super estate tax killer for your business
   3. IDT (Intentionally Defective Trust) — Sell your business or other income producing assets to your kids but pay no tax — income tax or capital gains tax — on your profit.
   4. FLIP (Family Limited Partnership) for investments and other income producing assets; often used in combination with another strategy.
3. Strategies that Create Tax-Free Wealth
   1. Wealth Creation Trust
   2. The Subtrust turns double-taxed assets into tax-free wealth
   3. Education (for kids) / Retirement (for adults) Plan
4. The First Tax-free Environment: Life Insurance as Required
   • How to double or triple your after-tax proceeds at no cost (Analyze Existing Insurance)
   • When should you use Premium Financing?
   • If available, always use a Subtrust
5. The Second Tax-free Environment: Leveraged Charitable Giving
   1. Avoid capital gains on appreciated assets (Charitable Remainder Trust)
   2. Your family (and chosen charities) gets two to ten times more; the IRS less, often zero (Charitable Lead Trust)
6. Transfer Your Business — Tax-free
   1. Sale of stock to family (No-No!)
   2. Voting v. nonvoting stock
   3. What is the value of your stock (for tax purposes)?
   4. Buy / sell agreements
7. Use a network of professionals that covers all the bases... no single practitioner knows it all.

Are The Strategies Creative?

No! Creative tax planning is a myth. You want to use strategies that are routinely accepted by the IRS... Like The Strategies you are about to read. None are tricky. Or aggressive. Standing alone, each Strategy is capable of producing interesting tax savings. But used together The Strategies quickly and easily build the perfect Wealth Transfer Plan... for every possible real-life situation.

Of course, each Wealth Transfer Plan is different. But most Plans are built around three (four if you own a business) types of Core Strategies:

1. Reduce the size of your estate
2. Create additional wealth… tax-free
3. Get you into a tax-free environment
4. Business Transfer/Succession (usually tax-free)

You are now ready to learn how to select Specific Strategies for your Wealth Transfer Plan.

The best way to understand Each Strategy is by an example... a real-life example. Every example that follows was taken from our experience working with real clients (only the names have been changed). Almost no technical stuff. Basically just the facts. Followed by the results and benefits each client enjoys.

Let's start with The Strategies (remember, there are 23 of them) that reduce the size of your estate.

QUALIFIED PERSONAL RESIDENCE TRUST (QPRT) (Strategy #5)

A QPRT is an irrevocable trust (cannot be changed) and can only be used for your residence (but no more than two residences).

EXAMPLE OF A QPRT

Joe (a client from Nebraska) transfers his residence — worth $400,000 — to a QPRT with a 10-year term. (The term can be more or less than 10 years). Joe's children are the beneficiaries of the QPRT and will ultimately own the residence.

Results / Benefits

• The entire $400,000 residence (even if it's value triples... or more) is out of Joe's estate
• Joe uses only $150,000 (according to the IRS tables) of his lifetime freebie ($1 million).
• During the 10-year period, nothing changes. Joe still uses the house when and if he wants. He can even deduct expenses: real estate taxes (and mortgage interest, if any).
• After the 10-year period, Joe can rent the house from the trustee (typically Joe is the trustee).

THE GRANTOR RETAINED ANNUITY TRUST (GRAT)(Strategy #6)

Like a QPRT, a GRAT is an irrevocable trust.

Type of Property

It can be used to transfer almost any income-producing property and has the potential to save huge amounts of estate taxes. The typical GRAT is used to transfer a family corporation to the owner’s children.

EXAMPLE OF HOW A GRAT WORKS

Ben (a healthy age 64 and a client from the St. Louis area) is ready to retire (but still needs income to maintain his lifestyle). Ben wants to transfer his entire interest in Success Co., which is worth $2.1 million to his daughter Dot. Ben estimates the company should grow at a rate of about 20 percent a year, which means the business will be worth over $14 million at the end of 15 years. If Ben retains the entire business interest, his tax liability for Success Co. would grow to about $7.7 million over this 15-year period.

Instead, Ben creates a 15-year GRAT that will pay him an annuity of $220,000 ($2 million times 11%) each year. Before creating the GRAT, Ben recapitalizes Success Co., (an S corporation), by creating voting stock (worth $100,000) and nonvoting stock (worth $2 million). This taxable gift, according to IRS tables is $250,000. Ben retains all of the voting stock, which Dot will inherit at Ben's death. Only the remainder interest (the nonvoting stock to be distributed to Dot by the GRAT after the 15-year annuity period) is considered a current taxable gift.

Results / Benefits

• Ben freezes the value of Success Co. for estate tax purposes by transferring over 99 percent of the future growth (via the nonvoting stock) to Dot.
• Ben has absolute control of Success Co. (owns 100% of the voting stock)
• The annual annuity payments ($220,000) gives Ben the income he needs to maintain his lifestyle.
• Ben reduces his estate tax liability by an estimated $7.7 million.
• Ben uses only $250,000 (the value of the taxable gift) of his lifetime freebie to get the results/benefits listed.

FAMILY LIMITED PARTNERSHIP (FLIP) (Strategy #8)

You still own various assets — including real estate, liquid investments, and a business (a C corporation) — after using the other strategies in The System. You transfer these assets to a FLIP (a tax-free transaction) and give your children nonvoting limited partnership interests.

The general partner (you) has all the voting rights, allowing you to maintain absolute control over all the assets in the FLIP.

A TYPICAL FLIP EXAMPLE

Herb, age 61, and his wife Jane, age 62, — clients from Montana — own various investment assets (real estate, publicly traded stocks and municipal bonds) worth $3.4 million. They transfer the assets to a FLIP in exchange for 1 percent of the general partnership interests and 99 percent of the limited partnership interests. A professional appraiser values the 99 percent limited FLIP interests at $2.356 million (after 30% in discounts). Herb and Jane immediately start a program to gift $22,000 per year of limited partnership interests to each of their 3 children and 6 grandchildren (or a total of $198,000 per year based on the discounted value).

Herb continues to manage the partnership investments.

Results / Benefits

• Immediately after the creation of the FLIP the $3.4 million of assets are only worth $2.38 million (after the 30 percent discount) for tax purposes... tax savings of $550,000 just for signing the FLIP documents.
• The value of future appreciation (of the gifted limited partnership interests) is out of Herb's estate.
• As general partner, Herb controls not only the assets in the FLIP, but all distributions to the partners.
• Assets in the FLIP are protected from the claims of future creditors and divorcing spouses (of Herb's married kids and grandchildren).
• The combination of discounts and gifts to the kids and grandchildren over the next 10 years will reduce the potential estate tax liability of Herb and Jane by over $1.5 million.

THE MAGNIFICENT INTENTIONALLY DEFECTIVE TRUST (IDT) (Strategy #7)

An alternative to a GRAT is an IDT. In the typical scenario you own income-producing assets (stocks, real estate, a limited partnership interest) or other investments that are likely to appreciate in value, and you want to transfer some or all of these assets to your children and/or grandchildren. Often the asset is the closely held family business.

An IDT is an irrevocable trust with two separate personalities: one for income tax purposes, the other for estate tax purposes. For income tax purposes, the trust is intentionally deflective (under the Internal Revenue Code), and as a result is not recognized. This means any income that would normally be taxable to the IDT is not taxable to the trust but instead is taxable to the grantor (Joe who created the trust).

For gift and estate tax purposes the IDT, like any other properly created irrevocable trust, is recognized as a valid trust.

EXAMPLE

Joe — a client from Florida — transfers $1 million worth of securities to an IDT for the benefit of his children. The transfer (really a gift) is covered by Joe’s $1 million unified credit, so no gift tax is due.

The trust earns $62,000 of taxable income during the year. All of the income is left in the trust to compound for the benefit of Joe’s children.

Joe can — in fact, must — pay the income tax (using his own funds) on the entire $62,000. But a pleasant surprise: Joe is not treated as though he made a gift to his children for the amount of the income tax he paid (on the $62,000) for the trust.

The Control Issue. Joe wants to retain control over the property gifted to the IDT. So, instead of gifting a direct interest in the property to an IDT, Joe first transfers the property to a FLIP and then gifts the limited partnership interests of the FLIP to the IDT.

The transfer to the FLIP also captures a discount for the lack of marketability. The point: In most cases you’ll want to use a combination of a FLIP and an IDT for two reasons (1) to maintain control and (2) discount the value of the property for tax purposes.

Alternatives. Joe could have sold the property to the IDT (instead of gifting it as above) taking an installment note in payment as described below. Or transferred the property to a FLIP and then sold the limited partnership interests of the FLIP to the IDT.

Installment sale to an IDT (a great way to transfer your business to your kids.) Joe also wants to transfer his business to his son (Sam) and get it out of his estate, but he has the usual problem… Joe wants to control the business for as long as he lives. An IDT (let’s call it IDT #2) solves his problem. Here’s how:

1. Joe recapitalizes (a tax-free transaction) his company — Success Co., a C corporation — exchanging his common stock (he owns 100 percent of Success Co.) for voting stock (100 shares) and nonvoting stock (10,000 shares).
2. Joe elects S corporation status for Success Co.
3. Joe sells the nonvoting stock at its fair market value ($2.4 million) to IDT #2. Sam is the beneficiary of the trust. The IDT pays Joe with an installment note for $2.4 million. Joe’s cost for the nonvoting stock is $.4 million, giving him a $2 million profit on the sale. The note bears interest at 5 percent annum.

NOTE
The IDT will get the funds to pay Joe the principal of the note, plus interest, via distributions (really tax-free, S-Corporation dividends) from Success Co. Because the IDT is a grantor trust, Joe will not be taxed on the profit — the $2 million capital gains and interest income — he receives from the trust.

Great deal! Joe sells his company. Receives $2.4 million principal, plus interest. All tax-free. And he stays in control.

A SUMMARY OF THE TRANSACTION

Donald Russ, Jr., a practicing attorney in Chicago, summarized the above IDT transaction in a letter to our common client (Joe) as follows:

“The sale to the intentionally defective trust essentially freezes the value of the nonvoting stock at its discounted value at the time the stock is sold to the trust. The trust provides for your son (Sam, who now manages the company) who is the beneficiary of the trust for gift and estate tax purposes. Following your death, the trust will distribute the shares to Sam. The trust will be structured such that upon your death, no portion of the trust will be included in your estate for federal estate tax purposes.

“During your life, because you retained all of the voting stock, you will have control of the company. At your death, the voting stock, which has an insignificant value for tax purposes, will be left to Sam.”

It should be noted that the S Corporation income from Success Co. for the nonvoting stock owned by the IDT is taxable to Joe (not the IDT). Remember, it is defective for income tax purposes. Joe happily pays this tax. It further reduces his estate without one penny of gift tax being due.

Now let's look at The Strategies that create wealth.

WEALTH CREATION TRUST (WEALTH CREATION T) (Strategy #1)

A WEALTH CREATION T is an irrevocable trust that owns life insurance and is the beneficiary of the policies it owns. At death, the trustee collects the policy proceeds, which are tax-free... No income tax. No estate tax.

EXAMPLE OF A WEALTH CREATION T:

Peter (age 60 and a client from North Dakota) creates a WEALTH CREATION T to buy $2 million of 15-pay, second-to-die life insurance (with Patty, his wife, also age 60). The annual premiums are $24,000 payable for 15 years (a maximum of $360,000 in premiums). Then the policy will self-carry (no more premiums).

Results / Benefits

USE YOUR QUALIFIED PLAN TO ENRICH YOUR FAMILY INSTEAD OF THE IRS — (SUBTRUST) (Strategy #11)

The Problem

Suppose Jack (substitute your own name and amount) has $1 million in a qualified plan (typically a profit-sharing plan, 401(k) or rollover IRA). Jack takes out $1. In a 40 percent tax bracket, the IRS gets 40 cents. Jack has 60 cents left, which he saves and dies with it. The IRS now gets another 55 percent (33 cents), leaving Jack's heirs with only 27 cents. And, oh yes, your home State usually takes a whack at your plan funds, further reducing your family's share.

If Jack dies with a balance still in the plan, the balance suffers the same double taxes. So dead or alive, the IRS combined with your local tax collectors will get about 75 cents (usually more) of every dollar in your qualified plans. Your family gets only 25 cents. A true tax disaster!

To summarize: Jack's $1 million in his qualified plan is worth only $250,000 (probably less) to his family.

The Solution — a SUBTRUST

Create a SUBTRUST of your qualified plan to purchase life insurance.

EXAMPLE

Paul and Saul — San Diego area clients — each own 50 percent of Success Co. Except for a two-year age difference (Paul at age 58, Saul 56), they are like identical twins. Both are married and have one child in the business. Each is worth about $9 million, but neither has any significant cash or liquid-type investments. Both have a similar medical problem and although insurable, their high rating makes insurance on their lives expensive.

Many visits to professional advisors still left each of them with about a $3.5 million potential estate tax liability. Part of the problem is the $1.8 million each has in the company profit-sharing plan.

The easy solution: a SUBTRUST. A special trustee of the SUBTRUST bought a $4 million second-to-die insurance policy on Paul and his wife and did the same for Saul and his wife (a total of $8 million). The wives — both age 54 — are healthy and allowed the purchase of second-to-die life insurance at reasonable premiums.

Results / Benefits

1. Income tax savings. The $8 million insurance proceeds will be received income tax-free by the heirs of Paul and Saul.
2. Estate/Gift tax savings. The life insurance proceeds (the entire $8 million) should be received estate tax-free. Paul and Saul actually created $8 million in tax-free wealth.

TAX-FREE EDUCATION / RETIREMENT PLAN (TAX-FREE E/R PLN) (Strategy #9)

Are you still in that phase of your lifetime financial planning when you — or other family members — are trying to accumulate wealth (for retirement or other purposes), as opposed to disgorging wealth for estate tax purposes? You must check out a TAX-FREE E/R PLN.

Typical Scenarios:

1. Kids. You want to set up an education, (wedding, buy-a-house, retirement, start-a-business) fund for your children or grandchildren.
2. Adults. You want to set up a retirement fund for yourself.

SOMETHING YOU SHOULD KNOW

Give someone in a group a penny. Then, immediately exchange the penny for 2 cents; the 2 cents for 4 cents on the next (second) day; and so on, doubling the number of pennies each day for a month. Finally, ask the group how much money they would have after 30 days? Rarely, does anyone know the answer. Would you believe over $10 million? Try it.

You now know why compounding money over time in a tax-free environment is the king of wealth building.

WHAT MAKES A TAX-FREE E/R PLAN WORK?

The keys to a TAX-FREE E/R PLN are the three special income tax advantages provided by the tax-free environment of life insurance:

1. The cash surrender value (CSV) growth is income tax-free.
2. Your policy loans (borrowed against the CSV), which you can use for personal expenditures such as education and retirement, are income tax-free.
3. At your death, the plan is self-completing, because the policy proceeds pay off your loans and the balance goes to your family, all income tax-free.

EXAMPLE OF A TAX-FREE E/R PLN FOR AN ADULT

Carl, age 40, and a successful entrepreneur (a client from Wyoming) set up the following TAX-FREE E/R PLN:

Starting at age 40, Carl will contribute $45,000 per year (actually premium payments for a high CSV life insurance policy) for 20 years. For the next five years, no contributions will be made.

Retirement payments of $150,000 per year will start at age 60, and will continue to age 95, unless Carl dies sooner. Payments stop when Carl dies, and his heirs receive a death benefit based on his age at the time of death.

Results / Benefits

Assume Carl dies at age 80. The estimated results of his Plan (remember, his total contributions were only $900,000) are breathtaking:

Wow!

EXAMPLE OF A TAX-FREE E/R PLN FOR A MINOR CHILD:

Tom (a client from Indiana) creates a TAX-FREE E/R PLN — using a trust — for the benefit of Billie, his 5-year old grandson.

Here's the Plan. Tom makes contributions of $10,000 to Billie's trust, starting at age 5 and continuing for 9 years (until Billie reaches age 14). Total contributions: $90,000 ($10,000 x 9). Benefits will be distributed at various ages as shown below. As the kids would say about the results/benefits, “Awesome!”

Results / Benefits

Assuming Billie lives to age 95, here are the amazing numbers:

Lifetime Benefits

COMMENT
The example of 5-year old Billie shows the power of compounding in a tax-free environment over an extended period of time. Got young kids in your family? Think about Billie’s awesome numbers: $90,00 to almost $13 million.

Section 5 - A Tax-Free Environment - Good for Your Tax Health and Your Economic Health

THE ULTIMATE SECRET

The easiest way to keep your current wealth and create tax-free wealth is to get into a TAX-FREE ENVIRONMENT... As soon as you can. And stay there... for as long as you live, at death, and beyond.

How do you get into a tax-free environment?... The answer lies in the proper use of:

1. Life Insurance Strategies
   and
2. Charitable Strategies

The System shows you how to get into a tax-free environment — quickly and easily — and how to stay there. It starts the first day your Wealth Transfer Plan is implemented... continues for life... and survives death.

A common sport at our office is a bull session with the specific goal of creating new ways to beat up the IRS... But always legally. The conversation invariably turns to an all-important question: How can we get our clients into a tax-free environment? The right answer yields huge tax benefits.

So, let's start answering the question by looking at...

THE FIRST TAX-FREE ENVIRONMENT:
THE TAX MAGIC OF LIFE INSURANCE (Strategy #3A)

The fact is... the life insurance company doesn't want your money if it doesn't think you are going to live. Look at it this way: The insurance company is betting you will live to or past your life expectancy. You are betting you will die before your life expectancy.

Why then do the wealthy buy so much life insurance?...

For tax reasons... And to create tax-free wealth.

Here's something most people don't know: the tax tricks The Strategies allow you to do in the tax-free environment of life insurance.

1. During your life
   1. The earnings on the cash surrender value (CSV) of an insurance policy accumulate tax-free.
   2. If you borrow a portion of the CSV, the loans are tax-free and, in effect (with the right kind of policy), give you a tax-free flow of income.
2. At death
   1. The excess of the policy proceeds received by your heirs over the amount of premiums paid (clearly an economic profit) is income tax-free.
   2. Policy proceeds used to repay loans are also income tax-free.
   3. The estate tax (if you use a WEALTH CREATION T, SUBTRUST or other appropriate Strategies) on the policy proceeds is zero (tax-free).

WARNING
Yes, life insurance is the only tax-advantaged product we know of that can deliver lifetime tax-free (income tax) benefits and also deliver tax-free (both income tax and estate tax) benefits at death. But to receive the benefits, you must do Each Specific Strategy (as explained in The System) exactly right.

Do it wrong, and the tax law will crush you.

As a practical matter, if you are wealthy (and trying to transfer your wealth), life insurance is, when done right, a tax-favored wealth-building investment.

EXAMPLE

A premium of $17,500 per year for 15 years (for Warren, a 50-year-old client from Florida) or $263,000 bought Warren a $1 million policy. If Warren lives for 15 years or more, the profit will be $737,000; if he lives for less than 15 years, the profit will be larger.

Almost the same for a married couple: The annual premium for a $1 million second-to-die policy (a husband-and-wife client from the Boston area, both 60 years old) is $15,900 for 15 years (a total of only $239,000).

Both of the above policies are owned by WEALTH CREATION Ts.

Results/Benefits

Both clients are in a tax-free environment for life and will stay there at death. The Florida client created $737,000 of tax-free wealth ($1 million less the $263,000 policy premiums), which will ultimately go to his nonbusiness daughter (his son got the family business).

The Boston couple created $761,000 of tax-free wealth. They had no business and bought the policy as an investment.

ANALYZE EXISTING INSURANCE POLICIES (Strategy #3B)

The key question. Always ask this question about each existing policy on your life: What is the tax cost — income and estate — when I die? The answer should be ZERO. If not, and your decision is to keep the policy in force, do what is necessary to make the answer ZERO. This usually means:

1. All policies (that you keep) out of your corporation.
2. All policies into a WEALTH CREATION T.

Important: Make a decision separately for each policy (the same as if you were examining a stock portfolio or any other group of investments).

Then, ask this question: Based on what is available in the marketplace today, should I keep this policy? Get (from your insurance advisor) a current policy run to age 95 or older. Dump and replace as necessary. Never drop an existing policy until the replacement policy is in place.

EXAMPLE

A client (Josh, age 59) from Alabama had a $5 million (death benefit) portfolio of insurance: $3 million second-to-die (with Joy, his wife, age 60) owned by Josh and $1 million on Josh's life owned by his S corporation (Success Co.). Josh also owned a $1 million policy on his life. The CSV of all of the policies totaled $358,396 and the annual premiums were $25,594 (so low because some of the older policies self-carried — required no more premium payments).

Josh had $768,000 in the Success Co. profit-sharing plan, which created a SUBTRUST that purchased $5 million of second-to-die insurance on Josh and Joy.

Results / Benefits

• Josh and Success Co. pocketed the entire $358,396 of CSV (tax-free).
• All future premiums will be paid by the SUBTRUST, so Josh and Success Co. save $25,594 in premiums each year.
• The $5 million of insurance proceeds will go to Joy's and Josh's heirs free of all taxes. Tax Savings: about $2.8 million.

WEALTH-PRODUCING BREAKTHROUGH: PREMIUM FINANCING (PREM FIN) (STRATEGY #3C)

PREM FIN is a new way to buy life insurance for a high-net-worth individual who needs or wants a substantial amount of life insurance.

The typical objectives are:

1. Purchase the insurance for a minimum out-of-pocket dollar outlay.
2. Leverage your wealth by paying the premiums without liquidating any of your investments or otherwise changing your normal cash flow.
3. The insurance proceeds must be estate tax-free.
4. Reduce or eliminate the gift-tax consequences (do not eat up your annual gift tax exclusions and unified credit) of premium payments to make the proceeds estate tax-free.
5. Create additional tax-free wealth.

EXAMPLE

Mac and Joy (clients from Fort Worth Texas) are worth $40 million and need $20 million of second-to-die insurance. The premium cost is $225,000 a year. Sure, Mac and Joy can afford the premiums, but they would have to sell some assets to pay the premiums. Capital gains taxes would be incurred. Mac says, “No” to that idea. Nor does he look kindly at the large gift tax that would be incurred as the premium costs are gifted to an irrevocable life insurance trust (ILIT) each year. The ILIT is the owner and beneficiary of the policy. Mac’s and Joy’s children are the beneficiaries of the ILIT.

Mac and Joy decide to use PREM FIN to pay the annual premiums. Following is a summary of the PREM FIN process:

1. The ILIT buys the policy and will pay the premiums.
2. Instead of paying the premiums with cash, the premiums are paid by loans, which are borrowed by the ILIT.
3. The interest due on the loans may be deferred (and paid at death out of policy proceeds) or the interest is paid in cash.
4. The lender requires collateral to secure its loans. The policy itself is pledged as collateral. The cash surrender value (CSV) during life and the death benefit of the policy are the primary collateral.
5. Any additional collateral required (almost always required in the early years after the policy is issued) must be supplied by Mac and Joy. So, Mac and Joy supply the additional collateral: a stock and bond portfolio they already own. (In most cases, Mac and Joy would go to their local bank and use their collateral to back up a letter of credit from the bank. Then, the letter of credit would be used as the additional collateral.)
6. Each year as the CSV grows, typically, the amount of required additional collateral is reduced.
7. When the CSV has grown large enough to adequately secure the loan, Mac and Joy can take back their additional collateral. (If a letter of credit was involved, it would be cancelled.)
8. When the second of Mack and Joy dies, all loans (including any unpaid interest) are paid out of the policy proceeds.

NOTE
Since Mac and Joy need $20 million of insurance coverage, the amount of the policy must be greater than $20 million (say $24 million). PREM FIN requires two death benefit amounts: (1) gross death benefit, $24 million in this case and (2) net death benefit, $20 million. The difference, $4 million, will be used to pay off the loans and any unpaid interest. The $20 million net death benefit will be paid to the ILIT, which will use the funds for the benefit of its beneficiaries (Joe’s and Mary’s children and grandchildren).

Results / Benefits

• Mac and Joy created $20 million of additional wealth without paying any premiums in cash. The insured — here Mac and Joy — may incur modest transaction fees to the lender, usually a bank).
• Not one cent of the $20 million at death or the premium payments (paid by loans) during life is subject to gift tax, income tax or estate tax.

THE SECOND TAX-FREE ENVIRONMENT:
LEVERAGED CHARITABLE GIVING

CHARITABLE REMAINDER TRUST (CHAR RMNDR T)(Strategy #12)

EXAMPLE OF A CHAR RMNDR T:

Chad (a client from the Pittsburgh area) gifts property worth $1.2 million, with a tax basis of $200,000 to a CHAR RMNDR T. An annuity of 6% (of the $1.2 million), or $72,000 will be paid to Chad and Cindy (Chad's wife) each year for as long as either Chad or Cindy is alive.

Results / Benefits

Without getting technical, these are the tax pleasures a CHAR RMNDR T delivers:

• Capital gains tax. When the CHAR RMNDR T sells the appreciated property (resulting in an $1 million profit), the profit is tax-free to Chad and the trust. Immediate tax savings: $150,000 in capital gains taxes.
• Income tax deduction. Chad gets a charitable deduction of $320,000 (according to IRS tables). As a result, instead of Chad paying $150,000 in capital gains tax, Chad is awarded $112,000 ($320,000 x 35%) in cash by the IRS (because of reduced income taxes, state and Federal combined).
• Estate tax. There is none.
• Actually create after-tax wealth. By now you probably know the next step. Chad causes a WEALTH CREATION T to buy an insurance policy (second-to-die with Cindy) for $1.2 million to replace the value of the property put into the CHAR RMNDR T. If Chad and Cindy had died still owning the $1.2 million in property, the IRS would have taken 55 percent, or $660,000. The WEALTH CREATION T preserves the full $1.2 million for the family.

CHARITABLE LEAD TRUST (CHAR LEAD T)

A CHAR LEAD T is often the last straw (Strategy) used to break the back of the IRS and allow wealthy clients to finish the job of passing ALL of their wealth — intact — to their heirs.

AN EXAMPLE OF A CHAR LEAD T

In 1999, David (a client in the Chicago area) presented us with an interesting problem. He had an investment worth $1 million with a tax basis of about $900,000. The investment earned just a tad over 10 percent a year. David was torn: He wanted to save this investment to give to his son, Sam (46-year old college professor) as a retirement present on Sam's 60th birthday. But David also wanted to make a substantial gift to his Favorite College's building fund drive.

Here's what we did: David transferred the $1 million investment to a CHAR LEAD T that will pay $50,000 (5 percent of $1 million) to Favorite College for 14-years. Then the property will go to Sam (when he is 60 years old).

Results / Benefits

1. Amount (FMV) of gift $1,000,000
   Less — Gift Tax Deduction (value of 14-year charitable income interest) 426,975
   Taxable gift (to Sam) $ 573,025*
2. Payment to charity (14 years x $50,000) $ 700,000
3. Estimated tax-free distribution to Sam at end of 14 years $1,960,000**

*Not subject to a gift tax in cash because this was the first taxable gift David made in his life (Remember, in 1999 the first $650,000 in taxable gifts was tax-free.)

**David will get almost $2 million out of his estate (and to his son tax-free). The taxable gift ($573,025) will be included in David's estate at his death.

TRANSFERRING YOUR BUSINESS — MUST STRATEGIES

The subject, transferring your business, deserves a book. As a matter of fact in 1988, Irv Blackman wrote a 443-page book titled, Transferring the Privately Held Business. The System includes many of The Strategies and techniques taken from his old book (now out of print). The goal in this part of the tutorial is not to cover the entire transfer / succession subject, but rather to cover those areas that most professional advisors miss or do wrong.

SALE OF STOCK TO FAMILY — A TAX NO-NO (Strategy #20)

You want to sell your business to your son (Stan). Each $1 million of the price is subject to three taxes:

1. Stan must earn $1.666 million; at 40 percent the income tax is $666,000... only $1 million left.
2. Stan pays you $1 million for your stock (assume zero tax basis). Your capital gains tax is $150,000... now only $850,000 left.
3. At your death, the IRS gets another $467,500 for estate tax. It's nuts! Stan must earn $1.666 million for the family to keep only $382,500 ($850,000 less $467,500).

NOTE
The tax rates may change, but the concept—a wealth killer—illustrated above will never change.

NONVOTING STOCK - THE ROAD TO CONTROL (Strategy #21)

Almost all closely held business owners would like to control their businesses to the day they die without paying the tax price for keeping control.

HOW IT'S DONE

Here's a strategy we use dozens of times every year:

Ian owns 100 percent of Success Co. He turns all of his stock (common) into the corporation and takes back two types of common stock in exchange — voting common (say 1,000 shares) and nonvoting common (say 100,000 shares). This transaction, called a "recapitalization," is tax-free. It works for both C corporations and S corporations. Ian then gives (typically via a GRAT or an IDT, when an S corporation and a FLIP when a C corporation) the nonvoting stock to his kids. Ian can own as little as 1 percent of all the stock (1,000 shares of voting stock in this example) and still retain 100 percent of the voting control. Just what he wanted — low value for his stock, total control of the corporation. Perfect!

FINISHING THE TRANSFER / SUCCESSION JOB

Now that you know what not to do (never sell your business to your kids) and what to do (create voting / nonvoting stock followed by a GRAT, IDT, or FLIP), here's how to accomplish the rest of your transfer/succession goals.

The Strategies and The System show you how to:

1. Use a Buy/Sell agreement (Strategy #22C) to keep the stock of Success Co. in your family when one (or more) of your children (who owns Success Co. stock) gets divorced.
2. Value your stock for tax purposes (Strategy #22B) so you get the three discounts allowed by the IRS:
   • discount for general lack of marketability
   • minority discount
   • discount for nonvoting stock
   • All the discounts when combined, allow you to reduce the value of your business (for tax purposes) by about 48 percent. Think about it: You can transfer $1 million (it can be any amount) worth of stock using a fair market value of only $520,000 (52 percent of $1 million) for tax purposes to transfer your business to your family.
3. Transfer your business to the business children (Strategy #22D) and treat the non-business children fairly (Strategy #22E)... every time.
4. Handle a sale of your business to employees or other non-family members to minimize (or easily eliminate) the tax cost.

The ultimate success of any Wealth Transfer Plan that you create is only as good as the final steps you take to implement and complete the Plan.

Section 6 — The Final Test: Does Your Plan Pass All Your Wealth — Intact — To Your Family?

One of the problems with traditional estate planning is that there is no way to know that your Plan is done and more importantly, done right.

On the other hand, your Wealth Transfer Plan can be proved to be done — and right — because you can compare the final results to these apple-to-apple standards: After your Plan is done, you must be able to answer — 'Yes' to all of the following questions:

1. Does the Plan accomplish all of your goals?
2. Is the Plan flexible, so you can change it if circumstances change?
3. During your life do you have total control of all the assets you want to control?
4. During your life and after your death are your assets protected from creditors, potential plaintiffs and ex-spouses who divorce a family member?
5. After your death, does your Plan get all of your wealth — every dime of it — to your family?... Or even better, does your Plan actually increase the wealth your family will receive... tax-free?

IS YOUR ESTATE PLAN ALREADY DONE?... Ask and answer the same five questions. If you don't get a 'Yes' to all of them, your Estate Plan is not giving you the full results the law allows you to enjoy. For your family's sake: Get a second opinion.

One More Thing You Should Know — Never Do Piecemeal Planning

Maybe there is a second secret to getting your Wealth Transfer Plan done right:

Never, but never do piecemeal planning.

Stated positively you should do all of your planning at one time:

1. Planning For You. Typically you should have three lifetime Plans: (1) a Wealth Transfer Plan, (2) a Business Transfer Plan, and (3) a Retirement Plan. These three plans must dovetail with your Estate Plan (death plan). All Plans must be implemented at the same time.
2. Planning For Your Family. Plans required for your Mom and Dad, children, grandchildren (or other family members) should be dovetailed with your other Plans.

Piecemeal planning enriches the IRS.

... AND FINALLY

Even when properly done, Wealth Transfer Planning — because you and your family keep getting older and circumstances change — is never quite done. It is an ongoing process, a process that should start today and continue — especially for larger estates — until you draw your last breath.

A FINAL EXAMPLE — YOUR WEALTH TRANSFER PLAN CAN ACTUALLY CREATE MORE WEALTH

Harry Rich, a 60-year old business owner (a client from Dallas) and his 58-year old wife Nancy are worth $9 million.

Their estate plan had just been completed by the "best" lawyer in the county who assured them that there was no way to reduce their estate tax burden below $3 million.

Simply put, Harry and Nancy were worth only $6 million, after taxes. On the advice of his accountant, Harry called us for a second opinion. A week later, we received a mound of financial information and documents. We reviewed them.

Here are The Strategies we used to upgrade a typical traditional estate plan to a Wealth Transfer Plan:

1. A IDT — using nonvoting stock — to transfer Harry's business to his two business kids.
2. A SUBTRUST to buy $3 million of second-to-die life insurance.
3. A FLIP — coupled with an annual gifting program of the limited partnership interests to all the grandchildren and the one non-business child for the other assets.

Harry will keep control of all of his assets for as long as he lives.

Now the dollar results: The total wealth Harry and Nancy will transfer to their family will exceed $11 million. The Plan does more than transfer ALL of their wealth ($9 million) — intact. It creates an additional $ 2 million of tax-free wealth.

As far as we know, no other single advisor, or single professional office or group gives you the wealth transfer results produced by The System. This tutorial is a good start toward teaching you how you too can easily achieve the same results so many others have achieved.

Would you like to learn more about how to accomplish ALL the wealth transfer results you want... for you, your family and your business?

Continuing Your Education — The Road to Tax Heaven Is Paved with Knowledge

Irv Blackman has written a Special Report — titled, "Insider Secrets of How to Win the Estate Tax/Business Succession Game…Every Time" — to supplement what you have learned in this tutorial. The Report continues your education.

But first, we must admit that The System and the Special Report are not for everyone. If you can't envision being caught in the estate tax trap (your wealth does not now or will never exceed $2 million), you don't need The System or the Report. Yet, the larger your estate, the greater your need to preserve and protect your wealth for your family.

Also, you'll have to make a commitment of time:

1. To accumulate and copy specific financial data and documents.
2. To set your goals for yourself, your family and your business.
3. To use The System to create and implement your Wealth Transfer Plan.

How much time must you commit?… Based on years of experience, from a low of 4 hours to a high of 12 hours — most in 15-minute to 1-hour sessions on the phone — spread over 2 to 5 months. Remember, The System is not designed to do piecemeal planning. So, you've got to jump into the pool; dipping your toe into the water is only a waste.

Our bet is you'll look forward to each and every step of the process. Why?... Because The System is easy to use and follow. Once you get started and see the immediate progress, your initial trepidation will turn into a fun and very profitable experience. .

Best of all, the entire process causes you to focus on your special and unique wealth transfer problems. Solve them. And remove — forever — the uncertainty you have had about wealth transfer.

So make the time commitment — to keep the IRS out of your wealth, protect your family and business, and protect your assets from others.

If you're ready to learn more — here's our risk-free offer:

Purchase the Special Report, ""Insider Secrets of How to Win the Estate Tax/Business Succession Game…Every Time" for just $29.77. You'll learn how The System is used in real life to do a Wealth Transfer Plan... From start... To finish.

The Report will probably answer all of the questions, you wanted to ask while reading this tutorial.

You’ll see how a Wealth Transfer Plan—using The System—was created for a real-life wealthy business owner. The Plan actually creates more after-tax wealth than the client had to start with. You’ll be amazed how easily the client’s every goal was accomplished. And quickly too.

If the Report does not answer every question you have, you'll find Irv Blackman's private phone number in the Report. Just call Irv. He'll be glad to answer your questions.

As soon as you order the Special Report you can immediately download two Bonuses that are perfect companions to accompany the Report.

Bonus #1...
Is titled, “YES, The Size of Your Wealth Counts -- An Insider’s Wealth Transfer Checklist.” It is the same checklist we use in our practice for every consulting client. It was designed to make sure high-net worth individuals (or their professionals) don’t miss any opportunity to save tax dollars.

And Bonus #2...
An often-asked question is, “Irv, does The System work for the little guy?” “Absolutely,” is the answer.

The core Strategies used in the little-guy case studies are the basics for all taxpayers, no matter how wealthy they may be. These basics are the bedrock of every Wealth Transfer Plan, whether you are worth $2 million or $100 million.

Bonus #2 is titled, “Yes, The System Works for the Little Guy.” How is the term “little guy” defined?… any single individual who is worth $1 million (or less) or $2 million (or less) if married.

You will relish the examples that show you exactly what to do and not to do whether or not you own a business.

• “Like a surgeon, Irv Blackman cuts away all that could hurt you in the tax law. Then, he sews together the good stuff that’s left into a strong tax-saving and wealth-preserving fabric.”
  Bruce Hersh, A Buffalo Grove, Illinois Consultant

Most clients ask, "How much estate tax will The System save me?"

Obviously, the answer depends on the amount of your wealth. The following chart gives you an idea in dollars of what The System and the Report is designed to save you and your family:

*Using The System Column (1) shows the amount of wealth your family will receive, all taxes... if any, paid in full.

Column (2) is the amount of taxes you could lose to the IRS, if you don't use The System, producing the sad after-tax result in Column (3).

Stop for a moment! Write down the dollar amount of your wealth that could be lost to the IRS? The System and Report show you how to design a Plan to keep "Your Wealth" — all of it — where it belongs: in your family's pockets.

You'll learn how to pinpoint your objectives and to select The Right Strategies.

To start building your very own Family Wealth Protection Fortress, complete the order form right now (click Here). Then, you can immediately download the Report.

Within the next few minutes you could be reading and starting your own Wealth-Saving and Wealth-Creation Plans.

My marketing consultant reviewed the Report and the two Bonuses and asked me, “Why such a low price for such valuable information?” Two reasons: (1) The cost-saving advantages of downloading and (2) of greater importance, we want to make sure it's a "no brainer" decision for everyone who has a wealth transfer problem.

Finally, since you may still be skeptical that The System, the Report and the two Bonuses can do everything we've told you they will do, it is only fair that we assume the entire risk by giving you...

An iron-clad 90-Day Guarantee! Read, study and use the Report and Bonuses. If you aren't fully convinced they do everything we've described here, just let us know, and we'll immediately refund your full $29.77. No questions asked.

Worst case. You'll get a real education of how other wealthy individuals are doing their Wealth Transfer Plans. Chances are, you'll learn how to legally keep millions of dollars out of the tax collector's pocket and in your family's pockets.

Don't wait. Take a minute now to complete the order form. (Click Here). Get started on creating your Wealth Transfer Plan that will keep every penny you worked so hard to earn in your family's pocket, instead of losing it to the IRS.

Untaxingly yours,

Irving L. Blackman
President, ILB Enterprises, Inc.

P.S. You've spent a lifetime accumulating your wealth. Don't let the IRS prevent your family from enjoying it... all of it. Instead, join the growing number of wealthy individuals who have learned how to build a Wealth Transfer Plan that preserves and protects their wealth.

The System, the Report and the Bonuses show you how.

We guarantee it.

If you are not totally delighted with the results (you are the sole judge), just let us know within 90 days. Your $29.77 will be refunded immediately. But you must act quickly. We can only guarantee to hold the $29.77 price for the next 24 hours.

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