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Guess what? All those beautiful dollars in qualified plans (profit-sharing, 401(k), IRA and the like) may only be worth 10 cents to 30 cents each after taxes. That's because the IRS hits you with the three taxes: income (up to 40 percent), estate (up to 55 percent) and excise tax (always 15 percent when it applies). Then, of course, your city, county or state gets a piece of the action.

Job One is to figure how much of your plan money goes to taxes. Suppose you have $1 million in all your plans and the estimated tax burden is $800,000. Ouch!

Can anything be done about it? Yes! Here are the two most common ways: The junk money strategy and the subtrust strategy.

Both strategies use a common denominator: the tax-emaciated dollars (called "junk money") buy a life insurance product (usually second-to-die) The eventual proceeds of the life insurance (say $1 million) go to your family tax free. Simply put, you have turned $200,000 of after-tax value into $1 million tax-free. There's usually plenty of money still in the plan. For example, currently the cost for a second-to-die policy for a husband and wife (both age 65) is about $15,000 per year.

The junk money strategy starts by using your plan dollars to buy an annuity. A portion of the annuity is used to fund the life insurance premium.

The subtrust is created as part of your qualified plan (actually the current plan is amended or a new plan created). Then your plan trustee gives the necessary premium dollars to the trustee of your subtrust to pay the policy cost.

Not An S Corporation?As far as I know, there is nothing better in the tax law than these two strategies.

Sometimes An S Corporation Is The Best Way To Buy Or Transfer A Business

Here's the story: Joe was about to buy the stock of a C corporation for $1.2 million payable over eight years plus interest at prime, all evidenced by a note. In addition, another $0.6 million was to be paid by the C corporation to be divided between a covenant-not-to- compete and a consulting contract to the seller for three years. The idea was to make the $0.6 million deductible as paid. Joe intended to get the money to pay the principal and interest on the $1.2 million note by taking a bonus twice a year when the note payments became due.

Without getting too detailed, here is a list of the most obvious tax blunders that would have befallen Joe and his C corporation.

1. The bonuses to Joe would almost certainly have been attacked by the IRS as unreasonable compensation.
2. The interest to be paid by Joe is considered investment interest, which is only deductible to offset investment income (Joe had none).
3. Only if the seller actually worked and got compensation, would it be deductible. be deductible.

The amount of the covenant is not deductible over the three-year payment and not-to-compete period; instead, it can only be written off over 15 years.

Here's how to get the transaction done:

1. Joe will elect S corporation status. Now Joe can take (tax-free) S corporation dividends to pay the note. The interest is now deductible on Joe's personal tax return as a business expense. No unreasonable compensation.
2. The interest rate would be raised two points over prime and reduce t covenant amount dollar for dollar. consulting contract would run for only the period of time the seller actually consults. After the consulting period, the covenant-not-to-compete kicks compete kicks in.