Eliminating Federal Estate Taxes: $15M Estate Structuring

Eliminating Federal Estate Taxes: $15M Estate Structuring

Executive Summary

A high-net-worth client with a $15 million estate faced a significant federal estate tax liability, potentially diminishing the inheritance intended for their children. Golden Door Asset partner Andrew Ferguson developed and executed a sophisticated estate plan incorporating strategic gifting, charitable trusts, and life insurance, effectively reducing the taxable estate below the federal exemption threshold. As a result, the client's estate entirely avoided federal estate taxes, preserving the full $15 million for their heirs. This case demonstrates the power of proactive and well-structured estate planning in maximizing wealth transfer.

The Challenge

Our client, a successful entrepreneur, had accumulated a $15 million estate consisting primarily of publicly traded stocks, real estate holdings, and interests in private businesses. Without proactive planning, the estate was projected to face a substantial federal estate tax burden.

In 2023, the federal estate tax exemption was $12.92 million per individual. This meant that without careful planning, approximately $2.08 million ($15 million - $12.92 million) of the estate would be subject to a 40% federal estate tax, resulting in a potential tax liability of $832,000. This significant tax obligation would have directly reduced the amount inherited by the client's two children, impacting their long-term financial security and the client's legacy.

Furthermore, the client expressed concerns about the future uncertainty surrounding estate tax laws. They worried about potential reductions in the exemption amount under future administrations, which could exacerbate the tax liability. The client desired a comprehensive and proactive solution that would not only address the current tax situation but also provide flexibility and adaptability in the face of evolving tax regulations. The challenge was not merely to reduce taxes but to do so in a way that aligned with the client’s philanthropic goals and family needs.

The client also wished to retain some level of control over their assets during their lifetime, making outright gifting of the entire amount less desirable. They sought a strategy that balanced tax minimization with continued income generation and management of their investments.

The Approach

Andrew Ferguson, leveraging Golden Door Asset's AI-powered planning tools, adopted a multi-faceted approach to address the client's estate tax challenge. The strategy was built upon three key pillars:

1. Strategic Gifting: Utilizing the annual gift tax exclusion, the client made annual gifts of $17,000 per individual (in 2023) to their two children and their spouses, totaling $68,000 per year. Over a 5-year period, this amounted to $340,000 of tax-free transfers. While seemingly small relative to the total estate size, consistent annual gifting began to chip away at the taxable amount and established a pattern of tax-advantageous wealth transfer. More significantly, given the client's comfort, the client used a portion of their lifetime gift tax exemption ($12.92 million in 2023) to transfer assets to irrevocable trusts for the benefit of their children. These transfers were strategically timed to coincide with periods of market volatility, allowing for the transfer of assets at temporarily depressed valuations, further maximizing the benefit.

2. Charitable Remainder Trust (CRT): A significant portion of the client's publicly traded stock portfolio was used to establish a Charitable Remainder Trust (CRT). This strategy served two purposes: reducing the taxable estate and supporting the client's philanthropic interests. The client received an immediate income tax deduction for the present value of the remainder interest to be donated to charity. The CRT sold the highly appreciated stock tax-free and reinvested the proceeds in a diversified portfolio that provided the client with an income stream for life. Upon the client's death, the remaining assets in the CRT will pass to the designated charities, further reducing the taxable estate.

3. Life Insurance Planning: A life insurance policy was purchased within an Irrevocable Life Insurance Trust (ILIT). The death benefit of the policy was designed to provide liquidity to the estate to cover any remaining estate taxes (although the goal was to eliminate them) and to provide additional funds for the client's heirs. Because the policy was owned by the ILIT, the death benefit was excluded from the client's taxable estate. The premiums for the policy were funded through annual gifts to the ILIT, utilizing the annual gift tax exclusion.

The overall approach prioritized a balanced and integrated strategy that aligned with the client's financial goals, philanthropic objectives, and desire for continued asset control. The approach was also designed to be flexible and adaptable, allowing for adjustments in response to changes in tax laws and market conditions.

Technical Implementation

The implementation of the estate plan involved several sophisticated financial instruments and calculations:

• Gifting Strategy Calculations: Golden Door Asset's tax planning software was used to model the impact of annual gifting and lifetime gifting on the taxable estate. We calculated the optimal amount to gift each year, considering the client's cash flow needs and the potential appreciation of the gifted assets. Sensitivity analysis was performed to account for different growth rates and market scenarios. Calculations adhered to IRS guidelines for gift tax valuation and reporting.

• Charitable Remainder Trust (CRT) Structuring: The CRT was structured as a unitrust, providing the client with a fixed percentage of the trust's assets each year. The payout rate was carefully selected to balance the client's income needs with the need to maintain the trust's principal. Actuarial calculations were performed to determine the present value of the remainder interest, which was used to calculate the income tax deduction. The selection of the charity and the drafting of the trust documents were done in consultation with the client's attorney and accountant.

• Irrevocable Life Insurance Trust (ILIT) Design: The ILIT was carefully drafted to ensure that the life insurance proceeds would be excluded from the client's taxable estate. The trust was structured as a "grantor trust," allowing the client to pay the income taxes on the trust's income without the payments being considered additional gifts. The policy itself was a survivorship policy, which covered both the client and their spouse and paid out upon the death of the surviving spouse. This provided the greatest leverage for estate tax purposes.

• Qualified Personal Residence Trust (QPRT): Although not ultimately used in the final plan due to the client's desire to maintain flexibility regarding selling the residence, initial planning included evaluating the potential for a Qualified Personal Residence Trust (QPRT). This would have involved transferring ownership of the client's primary residence to a trust for a set term. At the end of the term, the residence would pass to the client's children. The value of the gift would be discounted based on the term of the trust and the applicable IRS interest rate.

Throughout the process, Golden Door Asset's AI-powered tools provided real-time analysis of the estate plan's effectiveness, allowing for adjustments and refinements as needed. The platform also facilitated seamless collaboration between the client, their attorney, their accountant, and other advisors.

Results & ROI

The implemented estate plan successfully eliminated all federal estate taxes on the client's $15 million estate. The results were quantified as follows:

• Baseline Estate Tax Liability (Without Planning): $832,000 (40% of the $2.08 million over the exemption)
• Estate Tax Liability After Planning: $0
• Total Estate Tax Savings: $832,000
• Increase in Inheritance for Heirs: $832,000
• Projected Charitable Donations (from CRT): Estimated at $2 million (based on current asset values and projected growth)
• Annual Tax Savings from CRT Income Tax Deduction: Estimated at $20,000 (based on a 37% federal income tax bracket and the present value of the remainder interest)
• Life Insurance Benefit to Heirs (Tax-Free): $1 million (policy death benefit)
• Time Horizon: The plan was implemented over a 5-year period, with ongoing monitoring and adjustments.

The ROI of the estate planning engagement was substantial, not only in terms of tax savings but also in terms of the peace of mind and financial security provided to the client and their family. The client was able to achieve their goals of minimizing taxes, supporting their favorite charities, and ensuring that their children would receive the full benefit of their life's work.

Key Takeaways

1. Proactive Planning is Essential: Waiting until late in life to address estate planning can significantly limit available options and result in higher taxes. Early and proactive planning allows for the implementation of more sophisticated strategies that can minimize taxes and maximize wealth transfer.
2. A Multi-Faceted Approach is Often Necessary: Complex estates require a comprehensive approach that integrates gifting, trusts, and life insurance planning. No single strategy is likely to be sufficient to address all of the challenges and opportunities.
3. Leverage Technology for Optimal Results: AI-powered planning tools can provide real-time analysis, modeling, and sensitivity analysis to optimize estate planning strategies. These tools can also facilitate collaboration between advisors and clients, ensuring that everyone is on the same page.
4. Consider Philanthropic Goals: Incorporating charitable giving into the estate plan can provide significant tax benefits while also supporting causes that are important to the client. Charitable Remainder Trusts are a particularly effective tool for achieving both of these goals.
5. Stay Flexible and Adaptable: Estate tax laws and market conditions are constantly changing. It is important to work with an advisor who can monitor the estate plan and make adjustments as needed to ensure that it remains effective.

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