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Case Study: The Zero Estate Tax Strategy

Posted by Larry Jones on Oct 21, 2021 9:30:00 AM
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Death and Taxes

Everyone knows that death and taxes are unavoidable. For many, the two go together! If you have been able to accumulate considerable assets in the course of your life, you are probably more aware of this than most. Depending on how much your estate is worth, it's possible that your obligation to the government after you are gone could be quite substantial. 

Stories of celebrity estate taxation are legendary. Some of America's most famous have seen their net-worth reduced by 40-70% because of the federal estate tax. Walt Disney died with a $23 million estate, but paid almost $7 million in taxes. John D. Rockefeller was worth $27 million but ended up paying more than $17 million - a 64% reduction! 

Yet, it doesn't have to end up this way.

A well crafted and properly implemented estate plan can enable you to cut the IRS completely out of your estate.

Meet Ed and Jessica

Ed and Jessica Liner live in Vero Beach, Florida. Ed made his fortune with fast-food franchises, opening them all over the southeast, and his estate is worth more than $14 million. They have two children. Today the estate tax is levied on anyone with assets over $5,490,000. Since the law says that the exemption can be passed to a spouse, that means Ed and Jessica together can pass $10.98 million to their children tax-free. That means the children would still be responsible for paying taxes on $4 million, or nearly $1.6 million to the government!

One solution is to give away $4 million before the death of the second spouse. After all, isn't $11 million enough to leave the children? Yes, that's a nice hefty figure, but after all, who made that money? Most would prefer that all of the estate would go to the kids. Here's what Ed and Jessica could do:

1. Set up an irrevocable life insurance trust for the benefit of the kids. 

2. Next the trust will purchase a $1.6 million life insurance policy on the Liners. By making the trust the owner of this policy it prevents the value of the eventual payout from being included in the estate. The Liners will fund this policy by gifting $28,000 a year, tax-free, into the trust. This should be a last-to-die policy, payable at the death of the second spouse.

3. When Ed and Jessica die...

the kids will receive (at least) $1.6 million tax-free from the insurance policy, which they can then use to pay the estate taxes.


A Matter of Trust

 There are many different types of trust solutions available to high net-worth people, and the above is a very simple one. More advanced techniques can, of course, be utilized. For example, certain types of "dynasty" trusts can allow benefactors to greatly enhance the amounts paid to future heirs, and many years into the future. These trusts have the benefits of shielding money from creditors, making sure the money stays in the family, and avoiding having all of your financial life in the public record.

The point is that, when it comes to estate taxes, there are two kinds of people: those who pay them and those who don't. The only difference between the two is education.

Until next time,


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Topics: Case Studies

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