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Reducing Estate Value to minimize Estate tax
Old 09-15-2020, 07:45 PM   #1
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Reducing Estate Value to minimize Estate tax

I have durable power of attorney for my mother and have an issue that has come up regarding estate taxes on her estate.

She is currently running up against the Estate Tax Exemption level and I anticipate that she will easily exceed it. Further, depending on how the November election goes, the Exemption could be reduced significantly and the tax rate increased.

I'm trying to find ways to reduce her estate value which in turn reduces the eventual estate tax we'll have to pay. She has a fair sized amount of her estate in cash, so I have that to work with.

I'm looking for any ideas in addition to what I've already researched i.e.:

1. Gifting to the $15K level to family members and friends
2. Paying for education costs (she must pay the institution directly) for her grandchildren and great-grandchildren
3. Charitable giving of appreciated assets - reduces estate at Fair Market Value of the assets
4. Charitable Remainder Trust - I'm still researching this
5. Loans to family members to move investment earnings out of the estate
6. Dynasty Trust - A more long term goal

I'd appreciate any additional ideas!
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Old 09-15-2020, 07:55 PM   #2
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Just want to provide some food for thought, one traditional way to bypass estate taxes was to spend money to buy life insurance. Name your intended heirs as beneficiaries and the payout is not subject to taxes.

Others will confirm or correct me I’m sure.
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Old 09-15-2020, 08:03 PM   #3
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Just want to provide some food for thought, one traditional way to bypass estate taxes was to spend money to buy life insurance. Name your intended heirs as beneficiaries and the payout is not subject to taxes.

Others will confirm or correct me Iím sure.
I'll check into that. My guess is that the insurance would be pricey ... but not as pricey as a 40%+ Estate tax.

Thank you.
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Old 09-15-2020, 08:11 PM   #4
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If mom has over $11m I would hire a highly experienced, and focused, estate planning attorney to talk about gifting options. Cash is good and bad. Doesn't allow for aggressive discounting as other assets.

Charitable Remainder Trusts are used when a person has a huge capital gain they want to avoid. Not so much of a gifting program.

Qualified Personal Residence Trusts (QPRT) are a nice way to trade estate tax for some capital gains tax.

Gifting, as you describe, should be maximized. Make sure gifts are made before the end of this calendar year and then have mom start the gifting in January for the new year to get the appreciation out for each subsequent year. GIFT, GIFT, GIFT!

Gifting, to pay life insurance premiums, as someone above mentioned is a great option to look into. Whole life with a high level company like Northwestern Mutual, New York Life, Etc.... Look for AAA rated companies.
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Old 09-15-2020, 08:43 PM   #5
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Qualified charitable distributions of IRA money would allow tax-feee dstributions of up to $100k a year... she can use that money to do some good.
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Old 09-15-2020, 08:45 PM   #6
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Originally Posted by RetireBy90 View Post
Just want to provide some food for thought, one traditional way to bypass estate taxes was to spend money to buy life insurance. Name your intended heirs as beneficiaries and the payout is not subject to taxes.

Others will confirm or correct me I’m sure.
Yes, DW and I just set one up.

We got a term life insurance policy, which is payable upon our deaths to an irrevocable trust that we set up for the purpose. Our kids are beneficiaries of the trust (and not the policy). With this set up, proceeds from the life insurance are not subject to estate tax.

The beneficiaries of the policy must be the irrevocable trust and not the heirs; otherwise, proceeds from the policy will be counted as part of the estate. That trust basically serves a third-party to break the link between the policy owner and the heirs.

Note that with an irrevocable trust, the person who buys the police cannot be the trustee and thus has no control (this is why IRS doesn't consider the trust part of the estate). Therefore another person has to be the trustee; that person can be one or more of the beneficiaries of the trust.

You can also put money into that same trust aside from the insurance proceeds, but any money you put in above and beyond the annual gift exemption amount will still be counted against the life time exemption amount.
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Old 09-15-2020, 08:54 PM   #7
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Yes, DW and I just set one up.

We got a term life insurance policy, which is payable upon our deaths to an irrevocable trust that we set up for the purpose. Our kids are beneficiaries of the trust (and not the policy). With this set up, proceeds from the life insurance are not subject to estate tax.

The beneficiaries of the policy must be the irrevocable trust and not the heirs; otherwise, proceeds from the policy will be counted as part of the estate. That trust basically serves a third-party to break the link between the policy owner and the heirs.

Note that with an irrevocable trust, the person who buys the police cannot be the trustee and thus has no control (this is why IRS doesn't consider the trust part of the estate). Therefore another person has to be the trustee; that person can be one or more of the beneficiaries of the trust.

You can also put money into that same trust aside from the insurance proceeds, but any money you put in above and beyond the annual gift exemption amount will still be counted against the life time exemption amount.
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Term insurance is not usually used to fund an ILIT. Typically it's traditional whole life or some version of whole life. The reason is people are funding an ILIT for a time way in the future. Term is cheap when young but unaffordable when old. Whole life is an even premium. It's much more expensive than term but it stays the same. Also, ILITs are often funded with a second to die policy that doesn't pay until the second death. That's cheaper than a single life policy. Just food for thought.
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Old 09-15-2020, 08:57 PM   #8
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I may have trouble getting insurance ... Mom is 87

Still researching it.
Thanks all
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Old 09-15-2020, 09:53 PM   #9
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7. Funding 529's. You can give five years worth of gifting to each beneficiary's 529 and the money is no longer in the estate. So that's $75K for each kid / grandkid / greatgrandkid. Ten offspring and that's $750K out of the estate in a single year.

Note that this method advances the gifting from the next five years into the current year, so if she does this in 2020, she won't be able to do the same maneuver until 2025.

She might also get a state income tax deduction or credit of some kind for the contributions, although any tax benefit is probably capped at a much lower level.

I believe these 529 contributions can be in addition to the direct payments to universities (item #2 on your original list), but double check me on that.

...

I'm not sure I understand #5 on your list. If she loans money to family members instead of invests it, I think the loan balance would still be an estate asset, so she'll owe estate taxes on the principal in either case. If the loan is at, say 5% interest and she's making 10% on investments, then, yeah, it slows the rate of increase in her estate value, but she and her heirs end up with less money collectively than they would by just keeping it invested and paying the 40% on the increase. This is even more the case in that the 10% investment return is coming into the family collectively, whereas the 5% interest, if it's paid by an heir back to your Mom, is just recirculating money inside the family.

If you're thinking that Mom could forgive interest or principal, then yes, she could do that, but any forgiveness is treated as a gift which would cut into the $15K she could give the borrower heirs. It'd be simpler and easier for her just to do the gifting straight up.

If the loan is because some family members need loans and some don't, and this preserves fairness of the overall distribution after Mom passes, that makes sense to me but isn't really an estate tax reduction strategy per se.

Maybe I'm missing something on this one.

...

A few other notes for after Mom passes away:

1. With the Secure Act, IRA's need to be drained by the end of the year which contains the 10th anniversary of death. If Mom passes away early in the year, you actually have 11 tax years to deplete the IRAs. As a rough cut, I'm aiming for 1/11 the first year, 1/10 the second year, etc.

2. If Mom owns stocks, there is the alternative date of valuation for estate tax purposes. I think it's 6 months after death. If stocks decline at that six month mark, you could save on taxes that way. I'm fairly certain that the alternative date of valuation is an all-or-nothing thing - you can't pick and choose. But it still could save you if the estate drops in value during that six months.
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Old 09-15-2020, 10:00 PM   #10
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RE: "Loan" ... the only advantage is to lend cash from the estate that is not now earning anything and loaning it to a family member who might invest it for a reasonable return. The increase is not added to the estate, but goes to the family member.

For the "Loan", the interest is based on the Applicable Federal Rates (AFR). For a Sep 2020 loan at 3-years, the rate is 0.14%. Not a bad loan rate. So for a $1M loan, the interest payment is $1400 per year.
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Old 09-15-2020, 10:15 PM   #11
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Nice problem to have.

She could take stock tips from me to lower her assets

She could marry someone, as then the limit is doubled to 22.8 Million, Could then give away 11.4 Million, and divorce the fellow.

As you can tell, this is not something I have experience with
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Old 09-15-2020, 11:32 PM   #12
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Originally Posted by CaliKid View Post
Term insurance is not usually used to fund an ILIT. Typically it's traditional whole life or some version of whole life. The reason is people are funding an ILIT for a time way in the future. Term is cheap when young but unaffordable when old. Whole life is an even premium. It's much more expensive than term but it stays the same. Also, ILITs are often funded with a second to die policy that doesn't pay until the second death. That's cheaper than a single life policy. Just food for thought.
Calikid, thanks for the info.

To be exact, we have what's called a "permanent life" policy which combines features of whole and term policies. Basically the policy guarantees a payout amount for the first 30 years; after that, payout amount will reflect the actual cash value (based on investment returns) of the policy. So it's not purely a term life policy (and I should stop calling it that). The policy will only pay out upon the demise of both DW and I.

You're right that this policy is cheaper than a traditional whole life policy.

We're both in our early 50s and family history doesn't bode well for long life (unfortunately) for us even though we're both quite healthy, so we figure the chances of both of us going in the next 30 years are pretty high. If we make it past that point and the kids get less money out of it, well, good for us and tough for the kids

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Old 09-15-2020, 11:49 PM   #13
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If mom has over $11m I would hire a highly experienced, and focused, estate planning attorney to talk about gifting options. Cash is good and bad. Doesn't allow for aggressive discounting as other assets.

Charitable Remainder Trusts are used when a person has a huge capital gain they want to avoid. Not so much of a gifting program.

Qualified Personal Residence Trusts (QPRT) are a nice way to trade estate tax for some capital gains tax.

Gifting, as you describe, should be maximized. Make sure gifts are made before the end of this calendar year and then have mom start the gifting in January for the new year to get the appreciation out for each subsequent year. GIFT, GIFT, GIFT!

Gifting, to pay life insurance premiums, as someone above mentioned is a great option to look into. Whole life with a high level company like Northwestern Mutual, New York Life, Etc.... Look for AAA rated companies.
Definitely hire a good estate planning attorney for a such a large estate.

OP should also make sure that proper estate planning is being (has been) done for the estate. Things such as a living trust, durable power of attorney, advanced healthcare directive, pourover will, etc. are all critically important, especially for a large sized estate and if large number of heirs are involved.

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Old 09-16-2020, 06:36 AM   #14
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OP here.
Mom has a will, DPOA, advanced directives, etc in place and we thought we were in "good" shape for the future. But then, a significant portion of mom's investments doubled in value over the last year ... and the Estate Tax Exemption limit became an issue. So, now I'm trying to catch up to minimize the taxation issue, especially if the administration changes parties in November.

I know ... tough problem to have.

I will be working towards engaging a dedicated estate planning attorney.
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Old 09-16-2020, 08:57 AM   #15
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Originally Posted by RetireBy90 View Post
Just want to provide some food for thought, one traditional way to bypass estate taxes was to spend money to buy life insurance. Name your intended heirs as beneficiaries and the payout is not subject to taxes.

Others will confirm or correct me Iím sure.
This suggestion is not entirely accurate. Life insurance is included in the gross estate unless the policy is owned by someone other than the insured. The beneficiary is irrelevant, it's the ownership of the policy that counts.
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Old 09-16-2020, 09:16 AM   #16
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^^^ So if the owner(s) were not the insured (for example her kids/heirs), the insured is the OP's mom and the beneficiaries are the owner or the heirs then it isn't include in the estate?

Sort of makes sense, the owner(s) have an insurable interest in the OP's mom to make up for the estate taxes that will be paid by the estate when she dies so it is outside the estate.

I presume that it is ok if the OP's Mom/insured pays the premiums or would her payment of the premiums represent af gift to the owner(s) of the policy?
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Old 09-16-2020, 09:45 AM   #17
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^^^ So if the owner(s) were not the insured (for example her kids/heirs), the insured is the OP's mom and the beneficiaries are the owner or the heirs then it isn't include in the estate?

Sort of makes sense, the owner(s) have an insurable interest in the OP's mom to make up for the estate taxes that will be paid by the estate when she dies so it is outside the estate.

I presume that it is ok if the OP's Mom/insured pays the premiums or would her payment of the premiums represent af gift to the owner(s) of the policy?
Correct. If the insured doesn't own the policy it is not included in the estate. Also, yes, the insured could pay the premiums and the payments would be gifts to the owner of the policy.
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Old 09-16-2020, 10:17 AM   #18
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If mom has over $11m I would hire a highly experienced, and focused, estate planning attorney ...
This. You cannot make yourself an expert at this, even by consulting SGOTI. And you are talking about a lot of money. I would look for attorney referrals and/or CPA referrals. This is not a new problem; many people have had to solve it and by consulting experts you can take advantage of the resulting wisdom.

That is not to say that you shouldn't try to learn as much as possible. A knowledgeable client can help the professionals come up with the best strategy. But don't try to be Superman and execute a home-made strategy. It is almost guaranteed to be sub-optimal.

And, hey, the fees will reduce the estate value!
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Old 09-16-2020, 10:33 AM   #19
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As a partial solution, maybe do the 11 million gift immediately (to avoid any future changes in the law).
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Old 09-16-2020, 10:49 AM   #20
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As a partial solution, maybe do the 11 million gift immediately (to avoid any future changes in the law).
It is an interesting point. Since estate is mostly case lack of basis stepup to heirs not a major issue.
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