Archive » June 14, 2006
By Gary A. Bartick
THE ZERO ESTATE TAX STRATEGY
Once, I joined a meeting between my client and my client’s CPA. My client had a $100 million estate. The CPA was sounding the alarm bell about the fed¬eral estate tax and proposing that the client purchase tons of life insurance. The client shut down the conversation, briskly stating that he wasn't concerned about the estate tax. His kids would inherit millions, and he didn't want to buy more life insurance.
I stepped in to shift the focus of the conversation with two questions: How do you want to be remem¬bered? And what, besides money, do you want your children to have from you?
Many professionals get so caught up in calculating their clients' potential estate taxes that they lose sight of the people affected by the estate plan. They fail to ask the other important ques¬tions not related solely to the estate tax.
I'm not downplaying the estate tax, just trying to lessen its power on how we practice financial planning. Right now, anyone can enjoy a $2-million estate tax ex¬emption per person – $4 million per mar¬ried couple – for the next three years. That amount currently is projected to be $3.5 million per person in 2009. But the estate tax exemption is a moving target, having been repealed and reinstated seven times.
The strategy I'm about to share will work for high-net-worth clients at any exemption level and any tax rate. The tech¬nique will even work if there is no tax at all.
Let's use the following scenario:
• Husband, 76, and wife, 74
• Three children, two of them married; six grandchildren
• Estate value = $20 million
• No formal plan for passing along the hus¬band and wife’s wealth
Without going through numerous cal¬culations, we can assume that there is roughly an $8.2-million estate tax liability. So, if both parents are deceased, the chil¬dren would share in about $11.8 million, or roughly $3.9 million per family member. Now, let's look at this scenario from an estate planning (rather than an estate tax planning) perspective. For this example, we will assume zero growth on the estate.
Per a standard analysis of current and future financial needs, we identify highly ap¬preciated but low income pro¬ducing assets that aren't needed to meet current or future needs. In this hypothetical scenario, the parents transfer $5 million into a charitable re¬mainder trust, or CRT, which will likely re¬sult in a significant income tax deduction. The CRT produces income at 7% or $350,000 per year.
The parents then establish a family foundation, which will come into play upon their deaths. They use part of the $350,000 income generated from the CRT to purchase a $12-million survivorship life policy held by an irrevocable life insurance trust, or ILIT. They use their annual exclu¬sion gifts, which could be as much as $264,000.
At the death of each spouse, their credit shelter trusts are funded; at today's exemp¬tion amount, that would total $4 million. The remainder of the estate (again, assum¬ing zero growth) of $11 million goes into the family foundation.
The children and/or grandchildren are made di¬rectors of the foundation and may draw salaries. The parents can even stipulate how often the family must get together each year to take care of their founda¬tion duties. The remainder of the CRT (again, assum¬ing 7% growth and 7% payout) is $5 million and the beneficiary is the fami¬ly foundation.
Now, the family foun¬dation has $16 million. Remember that, by char¬ter, the family needs to do¬nate at least 5% to charity each year, which in this example sends $800,000 into the community.
The ILIT distributes equally to the chil¬dren $4 million each, in¬come and estate tax free. This is roughly what they were go¬ing to get under the "no plan" scenario. Adding in the $4 million in credit shelter trusts brings the total going to fam¬ily members to $16 million. Summary:
• Original estate: $20 million
• Family foundation receives: $16 million
• Family members receive: $16 million
• The government gets what's left: zero
As any student of estate planning knows, one can implement other strategies. But most clients want a plan that's simple, straightforward and easy to understand.
The key question in all of this is: Have you been asked by your financial team, “What do you want to accomplish with your estate planning?”
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