Monday, November 23, 2015

Tax planning ideas for singles

Sorry, but singles — especially business owners — struggle with special tax problems; all bad when compared to their married friends. During life: No joint return; only a $14,000 gift exclusion per year per donee (instead of $28,000 when married). At death: No marital deduction to stop the estate tax cold when the first spouse dies; only $5.43 million estate tax-free (instead of $10.86 million free if you are married).
Well, here comes a true-tax tale of a single business owner (Joe).
Joe (a vigorous 68 years young and single) operates his business (a C Corp., Success Co.) with his only son Sam. He has three daughters — none in the business. Aside from Success Co., Joe's taxable estate includes these significant assets — land and building, (worth $1.2 million) which he leases to Success Co., a $3.4 stock and bond portfolio and two life insurance policies — one for $. 5 million owned by and payable to Success Co., and one for $1.6 million owned by Joe and payable to his kids equally.
We divided Joe's tax plan into two parts — lifetime planning and death planning. Following are the significant points of each plan.
The lifetime plan:
1. Immediately transfer the real estate and the investment portfolio to a family limited partnership (FLIP). Now the property is only worth $2.99 million for estate tax purposes because of the wonderful FLIP discount rule. Good move! Joe's taxable estate is reduced by $1.61 million.
We also created a long-term lease for the real estate between Joe and Success Co. The terms include giving Sam an option to buy the property after Joe dies.
2. Immediately give voting control of Success Co. (after a tax-free recapitalization of voting and nonvoting stock) to Sam. Joe is comfortable with this action, and it greatly reduces (about 40 percent) the value of Success Co. for estate tax purposes. That 40 percent is a big deal if you own all or a portion of a family business. For example, Joe's business with a real value of $3 million is worth only $1.8 million for tax purposes. A $1.2 million discount … yielding estate tax savings of about $480,000. Wow!
3. Every year gift $14,000 of Success Co. nonvoting stock to Sam and an equal $14,000 to each daughter of limited partnership interests in the FLIP.
4. Transfer the $. 5 million life insurance policy from Success Co. to Joe.
5. Next, gift both insurance policies to his daughters. This gets $2.1 million ($.5 million plus $1.6) out of Joe's estate.
6. Elect S Corp. status, so Joe can take tax-free dividends (also escapes payroll taxes) from Success Co. in addition to his salary, which will decrease as he continues to slow down.
The death plan: Not much to do. Just a simple will and trust leaving Joe's estate equally to the four kids. But appropriate adjustments must be made for the gifts completed during his life — the stock and the insurance — so that each of his kids is treated equally (to Joe that means "fairly").
What's the final result of Joe's tax plan? It will reduce his income tax and payroll taxes during every year of Joe's life and will reduce his potential estate tax liability from over $1.7 million to zero. The most important part of this tax story is that the plans outlined above work no matter how large your estate might be. Whether you are single or married. Whether you are insurable or not. If you are single, your estate planning is much more challenging than for a married couple.