Here's a technique that will let you pass your estate on to your family without any outlay for estate taxes.

* Create an irrevocable trust to own your life insurance. Then you can transfer current policies -- or have the trust buy new ones -- equal to the amount of your estimated estate-tax liability.

* When you die, the trust gets 100% of the proceeds -- the money does not become part of your estate, subject to taxes.

* The trust can lend the policy proceeds to your executor to pay the estate taxes due.

* The executor, after liquidating enough estate assets, pays the loan back to the trust.

* The trust assets and the income are used to take care of the surviving spouse. Upon his or her death, the trust assets are ultimately distributed to the family.

Now here's the real tax magic of using an irrevocable life insurance trust. In the end, not one cent of estate tax is paid by either spouse on the insurance proceeds. A word of caution: check with a professional, since all of the rules, exceptions, and traps are not covered in this item.


By forming a family partnership, you can create a tax shelter and take money out of your company. The corporation is not one that will operate a business, but a passive partnership that will own some type of property, and its purpose is to funnel profits to low-bracket family members and losses to high-bracket family members.

Let's say Joe Sr.'s company needs a piece of equipment that costs $100,000. He creates a family partnership that buys the equipment -- $20,000 down and 84 equal monthly payments at 12% interest a year -- and leases it to the corporation. Assume that because of the depreciation and interest, the partnership will lose money for the first four or five years. During the loss years, the partnership might be 100% owned by Joe Sr. alone, or with his wife, since the losses can offset other passive income. When the partnership begins to earn a profit, they can given portions of it to low-bracket family members.

Or say that Joe Sr. is looking for a way to help pay for his 19-year-old son's college tuition and to build up funds for his 8-year-old daughter's education. At the same time, his company wants to buy some land and build a warehouse on it. Joe Sr., who owns 100% of the company, forms a partnership with Joe Jr. and with the irrevocable trust he had set up for his daughter Mary. He makes a cash gift of $14,000 to Joe Jr. and $4,000 to the trust. This cash, together with $2,000 of his own money, is deposited in the partnership, giving Joe Jr. 70% ownership, the trust 20%, and Joe Sr. 10%. The partnership immediately uses the $20,000 as a down payment on a $100,000 lot, financing the $80,000 balance. The land is leased to Joe Sr.'s company at a fair rental for 22 years. Assume the partnership makes a $10,000 profit each year. Joe Jr. would receive his share, $7,000 a year, which would be taxable income to him and could be used immediately toward his college education. The trust set up for Mary would accumulate $2,000 of low-tax income a year. And Joe Sr. would get $1,000.

Assume the corporation builds a warehouse on the land. It arranges its own financing and takes 100% of the depreciation. After 22 years, the partnership will own the warehouse and land free and clear. And the tax to the partners and the corporation at that time is zero.

A word to the wise: these are not do-it-yourself transactions.

IRS interest rates

on unpaid taxes


Jan. 1, 1983 - June 30, 1983 16%

July 1, 1983 - Dec. 31, 1984 11

Jan. 1, 1985 - June 30, 1985 13

July 1, 1985 - Dec. 31, 1985 11

Jan. 1, 1986 - June 30, 1986 10

July 1, 1986 - Sept. 30, 1987 9

Oct. 1, 1987 - Dec. 31, 1987 10

Jan. 1, 1988 - Mar. 31, 1988 11

Interest is compounded daily.


Most tax examinations begin with a voice on the other end of the phone identifying itself as an IRS agent, wanting to examine your business tax return. What do you do? The first rule is, don't panic. Next, decide if you want to let your tax adviser handle the matter or if you want to take charge yourself. I'd recommend the former, but if you decide on the latter, your primary goal is to minimize any opportunities for misinterpretation.

* Ask the agent to list everything he wants to look at. Give him only what he requests and nothing more.

* If the agent requires any additional documents, ask him to give you another list. Then, again, give him what's on the list and nothing more.

* Let the agent know you will be happy to answer his questions, but that you would like to save his time and your own. State in the beginning that you will answer his questions only after he has listed them in writing and has completed his examination of all the records he had requested. Do not give the agent an opportunity to ask questions at random.

* If the going gets too tough, call for professional advice.


Don't overlook the earned income credit for employees with income less than $15,432. Those who maintain a home for at least one child can receive what is in effect a reverse income tax.

All your employees have to do is fill out Form W-5 and give it to you. You can then pay the credit to each employee in advance; otherwise they have to wait until they file their Form 1040s. This way they get a small increase in each paycheck, which makes you look good. And it costs you nothing -- the amount of the credit is used to offset your payroll tax liability.

The refundable credit was liberalized by the Tax Reform Act of 1986. For 1988, the credit is 14% of earned income up to $5,714, or a maximum of $800.