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This is a true, sad, tax-war story. A reader of this column (let’s call him Joe), has just completed his estate plan, and his plan to transfer his business to his kids. He used competent lawyers, accountants, and insurance consultants, but Joe was not comfortable. He sent the plans to us to get a second opinion.

After examining the small mountain of documents and reviewing the plans, two things became clear: Each of the professionals had done a good job on their part of the plans, but the plans taken as a whole were a tax disaster. Impossible? No! Typical. Here’s the story.

Joe is 63 years old, his wife, Mary, is 60. Joe has five key goals:

1. Have a flow of income to maintain his lifestyle for as long as he (and Mary) lives.

2. Transfer the business, Success Co., to Sam, his son, who has run the business day- to-day operations for many years.

3. Treat his two other non- business children fairly.

4. Provide for Mary if he dies first.

5. Minimize death taxes.

Here is Joe’s fact pattern: He’s worth about $5.3 million and $3.5 million is the approximate value of Success Co. and $1.4 million in investment real estate and a stock portfolio and $.4 million (almost all non-income producing) in other assets.

Most are owned jointly with Mary. But get this: Joe is worth $7 million dead. Success Co., a tax-paying C corporation, owns and is the beneficiary of a $1.7 million insurance policy on Joe’s life.

Joe intends to slow down (work about 10 hours a week) when he reaches age 65, but draw a salary of $100,000 (plus almost $15,000 in fringe benefits), instead of the $175,000 (a reasonable salary when he was working full time) for as long as he lives and is able to work.

Stop! Don’t read any further for a few minutes. Jot down your own transfer/estate plan objectives and your fact pattern. Chances are that you and Joe have much in common. Okay, read on.

The wills were almost useless because of the joint tenancy. If Mary dies first, the two non- business kids share about $1 million, while Sam gets the rest of the estate.

Not “fairly” as Joe desired. Sure, Sam would own the business — but at a great tax cost. Success Co. would get hit with an alternative minimum tax of about $300,000 on the $1.7 million insurance proceeds. And what about the estate tax? There would be no tax when either Joe or Mary die, but the estate tax liability would skyrocket to about $2.7 million after the second death (assumes year 2011 or after).

The reasons for this tax mess are complex. But suffice it to say that, if done right, it is easy to eliminate both the alternative minimum tax and the estate tax.

What should Joe do? First, Joe would get the insurance out of the corporation and into an irrevocable life insurance trust. Then, get one half of the joint property titled into his name and the other half into Mary’s name.

Also, Joe should elect S corporation status. Then he would save about $8,000 a year in payroll taxes, and avoid an IRS attack for unreasonable compensation. S corporation dividends would provide him with a tax-advantaged flow of income.

In addition, an Intentionally Defective Trust (IDT) was used to transfer Success Co. to Sam, but Joe kept control by retaining all the voting stock (the nonvoting stock went to the IDT). A Family LImited Partnership (FLIP) was created to own the investments and transfer the nonvoting FLIP interests to the non-business kids.

What was Joe’s mistake? He took some advice from his accountant, some from his lawyer, and some from his insurance agent. No one person coordinated the entire plan. The results after our second opinion: (1) good wills, once the titles were changed; (2) good insurance, once ownership was changed to an irrevocable life insurance trust; (3) a good corporation, once S corporation status was elected, and the (4) IDT was in place.

Joe’s situation was easy to fix. We made all the necessary changes (the details are not in this article).

Now, the point of this article: If you don’t have a transfer/ succession plan and an estate plan, get them in place — now! If you have an estate plan in place, but are still faced with an estate tax liability, you owe it yourself and your family to get a second opinion.

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Irv Blackman is a certified public accountant who lives part- time on Marco Island and specializes in estate planning, business succession and asset protection. E-mail him at wealthy@blackmankallick.com or call 417-9732. His Web site is http://www.taxsecretsofthewealthy.com.