An easy way to create tax-free wealth.

A reader of this column (as usual, we'll call him Joe) called me for a second tax opinion. Joe had just finished - after almost two years of endless meetings - his estate plan. All documents - wills and trusts for Joe and his wife, Mary - had been completed and executed. Joe used an experienced and knowledgeable estate-planning lawyer. Yet, he was not a happy camper because of the projected $1.2 million in estate taxes the lawyer said Joe would have to pay.

I asked Joe some questions. based on his answers, Joe's family would indeed lose over $1.2 million in estate taxes to the IRS. So, I agreed to take a second look. At my request, Joe sent some specific information - stuff like tax returns, financial statements and, of course, the new documents.

If you are a successful business owner with a potential estate tax liability, pay attention. Joe's corporation (Success Co., an S corporation) had accumulated $1.4 million cash over a 25-year period while operating as a C (taxpaying) corporation. Only $.3 million was needed to operate the business. The only way for Joe to get all or a portion of this extra money in his pocket was via a dividend, with a tax cost of over 40 percent. Unacceptable!

In a nutshell, following is the plan we hatched to use the corporation's excess cash to create wealth. Success Co. entered into a split-dollar plan (a way to pay for life insurance) for a $3 million second-to-die life insurance policy (on the lives of Joe and his wife) to be owned by an irrevocable life insurance trust (ILIT). Until the second death of Joe and Mary, Success Co. will pay all (about $42,000) of the annual premiums.

As part of the plan, Joe transferred sufficient stock to Mary so each owned (through a revocable trust) a 50 percent interest in Success Co. The plan was set up so the stock owned by the spouse who died First would pass to a trust for the benefit of the surviving spouse, so that the survivor would control the corporation.

Now, let's skip all of the technical jargon and take a look at the amazing tax results: (1) The premium payments made by Success Co. are tax-free to Joe and Mary; (2) After the second death (when the $3 million in insurance proceeds are collected), Success Co. will be repaid every dollar it advanced during the years (also tax-free); and (3) The balance of the proceeds (probably $2.4 million or more) will be paid to the ILIT (free of income and estate tax). This amount will more than pay for the $1.2 million in projected estate tax liability. The balance (over $1 million) would go tax-free to Joe and Mary's children and grandchildren.

In a nutshell, this is what Joe and Mary's split-dollar plan accomplishes:

The cash in Success Co. is used to create $2.4 million in wealth with zero tax cost to Success Co., Joe or Mary, or their heirs.

Flexibility: The split-dollar arrangement works just as well for a C corporation or a family limited partnership (used when you have cash outside your corporation). Your corporation - C or S - or partnership does not need a pool of money; premiums can be paid out of future earnings. The insurance does not have to be second-to-die; it can be on a single life (usually the stockholder/owner).

In the hands of an expert, the concepts presented in this article can be used to help successful business owners legally beat the estate tax and even create wealth.

Caution: This article does not give you all of the variations, rules and tax traps. You must dot all of the I's and cross all of the T's. Only use experienced professionals lawyers, insurance people and CPAs - who have been there before.

Want to learn more about how to beat the estate tax and create wealth? Send for these tax-destroying Special Reports: (1) Pay Zero Estate Tax... The Super Trust Way; (2) The Secret of How the Rich Create Wealth and Income Without Risk... The Junk Money Concept; or (3) How You Can Beat the Estate Tax... Legally ($27 each, $47 for any two, $63 for all three).

Send to Book Division, Blackman Kallick Bartelstein, LLP, 300 South Riverside Plaza, Chicago, Illinois 60606.