Destination: Conquer the Estate Tax...Legally

When it comes to the wealth-robbing estate tax, almost every reader of this column who calls me asks this or a similar question, “Irv, can you help me avoid (or beat/or kill/or finesse/and many more variations) the estate tax?” Often, an obscenity or two—concerning how the caller feels about the estate tax—is tossed into our conversation.

When it comes to the wealth-robbing estate tax, almost every reader of this column who calls me asks this or a similar question, “Irv, can you help me avoid (or beat/or kill/or finesse/and many more variations) the estate tax?” Often, an obscenity or two—concerning how the caller feels about the estate tax—is tossed into our conversation.

If you are worth about \$6 million (or less) the answer to the question is almost always ‘Yes’; worth more, usually, ‘No’. Let’s talk real numbers: Say Joe is worth \$10 million and Jack \$20 million. Both are married. Joe’s estate tax damage (using 2011 rates) would be about \$4 million; Jack’s, a tragic \$9.5 million.

The higher your wealth, the less your chance for killing the estate tax. Ah, but we can always—yes, always—entirely avoid the impact of the estate tax. For example, if you are worth \$8 million, we know how to get the full \$8 million (all taxes paid in full) to your family; worth \$80 million, the entire \$80 million to your family. Yes, it can always be done, whether you’re single or married, young or old, and even insurable or uninsurable.

Let’s play the game together. Substitute your own numbers into the little example that follows: Suppose you are worth \$12 million and married. (a) Subtract \$2 million (\$1 million if single), which leaves \$10 million; (b) then 50% times \$10 million gives you your bitter estate tax bite; (a) add 55% for your worth in excess of the \$10 million.

Now, here’s the secret for legally avoiding the estate tax: create tax-free wealth. There are two ways: charity and life insurance. Both, if you do it right, put you in a tax-free environment.

Here’s a real-life story of Joe (a 63-year old business owner from Nebraska and married to Mary, age 62). Joe and Mary are worth \$23 million. Using our little example above, the estate tax monster would eat \$11.05 million of their wealth.
We designed a comprehensive and coordinated succession plan and estate plan for Joe and Mary that included four significant strategies: (#1) an intentionally defective trust to transfer Joe’s business to his kids… tax-free; (#2) a family limited partnership for their investment assets (a stock and bond portfolio and real estate) and (#3 and #4) using two different life insurance strategies, which are described below.

A side note before continuing: Every case is different. Different people… businesses… situations… and facts. A big factor for Joe and Mary was their health: excellent for their age. So insurance… front and center.

Now, Strategy #3: Joe had \$.6 million in his company’s 401(k) and \$1.5 million in various IRAs, which we transferred into the 401(k)… a tax-free transfer. Then, we created a subtrust (for the 401(k)) that purchased \$6.5 million of second-to-die life insurance on Joe and Mary. Because of double taxation—first income tax and then estate tax—the \$2.1 million in the 401(k) (without the subtrust) would only net about \$.6 million to Joe’s heirs. Sorry, but the tax collector would get the rest: \$1.5 million.

The subtrust allows the entire \$6.5 million of life insurance to go to Joe’s and Mary’s heirs tax-free. In effect, we turned \$.6 million into \$6.5 million. Neat!

One more point: We showed Joe how to invest his \$2.1 million funds in his 401(k) in TIPs (transfer insurance policies, a form of senior settlements). TIPs earn in excess of 16% on average per year, without risk. Joe’s investments were averaging a 7% return with stocks, bonds and mutual funds.