How To Beat The Estate Tax

Can a commercial airline guarantee that you will get from New York to San Francisco safely? Well, almost.

With years of experience, a long list of precautions and thousands of worldwide flights every day, it’s extremely rare that all passengers do not arrive safely. So flying is safe, but not guaranteed.

When it comes to beating the estate tax, here’s the definition we’ve given clients since 1976: “All of your wealth—every dollar of it—to your heirs, with all taxes (if any) paid in full.” For example, if you are worth $300,000, then the entire $300,000 goes to your family; if $3 million, then 100% of the $3 million goes to your family. Stop for a moment and substitute your own amount of wealth.

Over the years, and for hundreds of clients, we have always successfully met the definition. Yet, we would not be so bold as to say we “guarantee” it.

Just like the airlines, we have years of experience, a long-list of precautions and follow two sets of pre-tested rules: 1) the Internal Revenue Code (including rulings, case law and regulations) and 2) a System of our own rules, applied on a case-by-case basis for each client.

Let me give you an example. Joe and Mary (age 69 and 67, respectively) are retired. They still own 100% of the family business (Success Co.; a C corporation) which has been run by their son Sam, age 42, for the last five years. Their two other kids are not in the business. There are seven grandchildren.

Success Co. is worth $16 million (Joe’s best “guesstimate”). Joe and Mary are worth an additional $25 million (rental real estate worth $6 million, 2 residences valued at $2.6 million, a stock and bond portfolio at a current value of $11 million, $3.4 million in a 401(k) and various IRAs and $2 million in other assets. Surprisingly, Joe and Mary—although healthy—have no life insurance.

Joe and Mary have a typical estate plan (a will and A/B trust) drawn by the “best” estate planning lawyer in their county. Joe and Mary have significant charitable intent both during the remainder of their lives and at death. After two years, their lawyer is still working on a charitable giving plan. He figured the estate tax bill (before any gifts that might go to charity) would be about $21 million. He is right. Of course, gifts to charity (yet to be set up) would reduce the estate tax bite by $550,000 (using 2011 rates) for each $1 million gifted.

Joe called me asking for a second opinion. We discussed how our System would get his entire $41 million of wealth to his three kids and seven grandchildren (all taxes paid in full) and get about $20 million to charity.

Sorry, no guarantee, but Joe relished our history of 100% success in “beating the estate tax” using the System.

How does a plan using the System differ from a typical estate plan, which is really a death plan (nothing happens until you die)? A System plan is two separate plans: 1) a lifetime plan starting from the day the plan begins and continuing until you get hit by the final bus, which dovetails with 2) your death plan (really your will and trust).

Our team of professionals began working on Joe and Mary’s plan immediately: the lawyer on the necessary documents and the insurance consultant on the life insurance, while I created the plan and coordinated the efforts of all the professionals (including Joe and Mary’s lawyer).

In order to accomplish all the goals Joe and Mary have (including “beating the estate tax”), we employed the following tax strategies:

• A family limited partnership to transfer a portion of the rental real estate and a portion of the stock and bond portfolio
• An intentionally defective trust to transfer Success Co. to Sam, tax-free to both Joe and Sam
• What we call a “50/50 play” to reduce the value of the two residences to $1.8 million for tax purposes
• A “Retirement Plan Rescue” to avoid the double tax (income and estate) on the 401(k) and IRA funds and purchase $6 million of second-to-die life insurance with the tax-savings
• A charitable lead trust using the other portions of the rental real estate and stock and bond portfolio, to accomplish Joe and Mary’s charitable goals, and finally
• Using the government’s money, in effect, to purchase large amounts of life insurance with funds in the charitable lead trust and intentionally defective trust.

With the exception of the insurance aspects, the entire plan was completed, with all documents signed, 3½ months after the planning process started.

Two weeks later, we finally got the proposals from the insurance company. Then it took just 30 days to complete the entire plan—insurance policies issued and related documents signed. Previously drawn up documents (will and trusts) were not changed.

Clients often want to know how we do a comprehensive and complete plan so quickly, while other professionals work on estate plans for years, yet are never done. Here’s the secret: We have done plans like Joe’s and Mary’s (and endless variations) hundreds of times over the years. As a result, about 90% of their plan was routine, while only a small portion (the most time-consuming part) required attention to numerous details to give Joe and Mary the perfect plan that fulfilled all of their goals.

What was the final result in dollars? Mary and Joe’s children and grandchildren will wind up with an estimated $43 million (with all taxes paid in full) and various charities will receive an estimated $24 million.

Two more points: 1) Joe continues to have absolute control of all of his assets—including Success Co. —for as long as he lives, and 2) the maintenance of the plan will be handled locally by the couple’s estate lawyer and CPA.