Several months ago, a wonderful friend called out of concern for a client. Her estate is approaching $40 million – much of that in real estate – so she agreed to have a chat.
She is 76 years young and in tremendous health. I kidded her about living to age 100, and she gladly accepted the challenge (and from what I know, she is very likely to get there – and in style!)
Georgia Peach (as we will call her) wanted to know what could be done to reduce the massive death tax that her son, Bulldog (again, name changed), will owe on her largely illiquid estate.
Luckily, there are several things we can do to reduce, defer, and even eliminate estate taxes – and in some cases, also do something good for your community at the same time … Imagine That!™
Table of Contents
Why Now?
Congress temporarily increased the federal estate tax exemption as part of the 2017 TCJA (Tax Cuts and Jobs Act). It more than doubled from ~$5 million to over $12 million. And, in 2024, the exemption amount is $13.61M! Per person! Married couples get twice that amount. Strategy #1 below gets us another 30-40% additional savings. (Hang tight … we’ll get there!)
They take away the punchbowl on 12/31/2025 … meaning that the higher exemption amount sunsets/ends. And, the projected new estate tax exemption, while a guesstimate, will likely drop to something like $7 million per person (or $14M for couples.) So, every dollar over that exemption amount in 2026+ will have a death tax of 40%.
After all your years of paying income, capital gains, and other forms of taxes, they still come back and take another slice after you are gone! And they won’t accept anything other than cash or a cashier’s check! Double ouch!!
“I can’t pay with my classic comic book collection. Got it,” you might be thinking. “But if the estate tax exemption doesn’t sunset until the end of 2025, then I have plenty of time to get my planning in order. So leave me alone until then.”
Heavy sigh … I wish I could. But I need to let you in on some insider information with a short shelf life …
At WLGⓇ, we work as part of a team to ensure clients get the best ideas and implementation. Nobody has the corner on all the good ideas, after all. We work with the top estate planning attorneys all over the country.
Here’s what they’re telling me.
The best attorneys—the ones you want handling your affairs if you want to save your heirs migraines—are finding their schedules already nearly full to overflowing! If folks want to work with them and get an intelligent plan in place before the Lone Ranger and Tonto of tax savings ride off into the sunset, they better start by the end of August …THIS YEAR.
OK, but is the exemption really that big of a deal?
If you plan on leaving at most $7 million in your estate, then probably not. (Although some states have super low state death tax limits, like Oregon, which has a mere $1 million of exemption, and then, it slides from 10% to as much as 16% of assets above that $1 million.)
But what if you have a larger estate? Well, let’s dive into the case study of the lovely Georgia Peach we mentioned above and her son with her “sweet” $37 million estate. (You could also watch the video essay here.)
Georgia Peach Case Study
As stated above, the IRS only takes taxes in cash or cashiers’ checks. Estate taxes are due within nine months of death. We’ve seen families with incredible wealth in non-liquid assets, such as real estate, where the heirs had nothing left by the time they finished selling enough real estate to pay the taxes.
After all, do you get the best price for something when you’re in a hurry to sell it? Not usually.
With that in mind, let’s look at what someone could do. (This would be a good time to remind you that I am not an attorney – have not even played one on TV – and you should run any of these ideas by your legal and tax counsel!)
Case Facts:
- Georgia, age 76
- Bulldog, age 58, her son
- Her net worth is ~$37 million:
- $2 million personal residence
- $5 million in inherited stocks
- $30 million in real estate
- Has already used $1 million of her lifetime estate tax exemption
- Leaves a $12.61 million usable exemption (2024)
If Georgia died today (and we hope she doesn’t!), subtracting her remaining exemption of $12,610,000 from her $37M estate leaves $24,390,000 subject to the 40% tax. Bulldog would owe the IRS $9,756,000 in estate taxes within nine months. Now THAT’S a lot of peaches!
That would involve liquidating the entire equity portfolio and hoping to get a good price on the real estate if he can sell it fast enough—there’s no guarantee there.
But let’s look at Georgia’s projected lifespan.
If you are 76 today, according to the Uniform Lifetime Table, the median age when half are dead and half are still living is … wait for it … age 99.7! Seriously?
And if Georgia does ZERO planning now and lives to 100 years old.
- 24 years: $37,000,000 in assets = $75,213,382! (assumes assets growing at 3% per year)
- Estimated tax exemption may be $10,891,156 (estimate)
- Less $1,000,000 exemption used prior
In that case, Bulldog will owe $25,692,891 in federal estate tax (assuming a 40% death tax rate).
The poor guy will need BOTH some blood pressure medication and smelling salts when that bill shows up!
Unless … there are some things we can do today to keep Bulldog’s stress level down.
Strategy 1
First, we recommended moving $17M of the real estate into an LLC and then removing that LLC from the estate proper.
First … why that amount?
We want to remove as much of the estate value as possible from the taxable estate. We can use a “compression sleeve” strategy to “Houdini” that $17M down to $11.9 on paper. This doesn’t affect the worth of the real estate in any way (except in the IRS’ eyes) but allows us to slide under the exemption amount and not have to pay any gift taxes in doing so.
If we then “situs” the LLC (make its home state) in what I like to call the “Switzerland of the United States,” then we can get an infinite number of years for the LLC to exist. Another less expensive option is almost as good with a 365-year “lifespan.” That can cover many generations of grandkids!
The LLC provides income and can grow separately from the estate. For more detailed information, watch the video below.
Strategy 2
Next, we suggested creating a “Private Philanthropic Trust” for another $18M of assets.
This lets Georgia use the trust to generate income for herself, which would then pass on to Bulldog. After Bulldogs dies, the remainder of the assets in the trust will go to the charities that Georgia selected upon creation. We also have the flexibility of changing charitable beneficiaries to other charities over time. Nothing, however, can go to the pool guy (unless he sets up a legitimate charity of his own!)
In other cases, this trust can provide income for as many generations as are currently living. We set up a PPT for another family where the couple’s great-grandson (at just six months old) will receive income for the rest of his life … and then the money remaining goes to the family charity to continue their good work in the community.
Strategy 3
Finally, the LLC will remain in trust for the family, potentially into eternity. The PPT, on the other hand, will not. It could be 100+ years but at some point, the assets and growth will go to charitable good work, and the income stops to the family.
To replace the value of assets as well as make sure there is enough tax-free cash to pay other “clean-up costs,” we proposed purchasing $20M of life insurance. At her age, it came out to $446K a year in premium for 10 years. As high a premium as that might sound initially, she actually ends up having more after-tax income than before her planning began.
The insurance is placed in a special kind of trust that keeps the survivor benefit from being subject to its own estate tax. So, we create non-taxable dollars to both replace the value of assets going to charity and pick up any miscellaneous taxes that may poke up their ugly heads! Life insurance creates a lifeboat, keeping the heirs afloat against any taxes, loss of income, or other nasty surprises!
How Does the Tax Math Work With All This Planning?
Planning ahead, as your mother likely told you, is always a good idea! (Or perhaps your mother took a scarier approach with the adage, “Failing to plan is planning to fail.”)
What do the assets, taxes, income, and philanthropic contributions look like for the Peach family with and without planning if Georgia were to die tomorrow?
OK, planning seems to work for this year. What about Georgia’s likely projected lifespan?
And, just for you spreadsheet lovers out there, here’s the chart of how we arrived at the numbers.
If you’re looking closely, you might notice we went waaaaaaay past year 24, but you never know where medical science will be in a decade!
Yikes ... Better Start Planning
Good choice! If you don’t have a plan … or haven’t reviewed your estate plan in a while … add it to your to-do list for this evening.
Or, since the above is highly unlikely to happen after a long day of work, picking up dinner, helping with the kids’ homework, etc., we’re offering a 20-minute complimentary consultation to talk through your unique situation. Even if you don’t have a net estate of $27M+, there are human factors to plan for. There has not been a single estate over my 35+ years of planning in which we have not improved the estate outcome … and often, it’s not just in reducing taxes. Email us at info@wealthlegacygroup.com if you’d like to get on our schedule to brainstorm your situation.
Bonus: you can join me in “unpacking” the Georgia Peach case in bite-sized chunks (or “play all” if you’re a glutton for punishment) on YouTube: $0 in Estate Taxes on a $37 Million Estate.
Zero tax … $39+ million to family … and $18 million to making the world a better place … and it only gets better the longer she lives! Imagine That!™
Imagine That!™ is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.
R. J. Kelly, Wealth Legacy Group®, Inc. – May / June 2024
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