Reducing Estate Value to minimize Estate tax

[Steelart99]

This is exactly how my parents did it / are doing it. Bought a second-to-die policy, transferred ownership of it into an ILIT, and then make annual gifts to the ILIT equal to the insurance premium.

For a while my sister (trustee of the ILIT) was sending out Crummey letters. We finally decided we didn't need to bother as we are all on board with the program.



Ah, OK. Thanks for the explanation. Since your Mom isn't going to be investing the cash anyway, then lending it out could make sense. But this doesn't really *reduce* your Mom's estate any (unless the AFR is less than what she's getting on her cash now, which it could be).

Have you thought about what happens if one of your siblings borrows $1M from your Mom and invests in the next Enron?

Enron ... funny. I'm trying to determine is any "loan" can be simply renewed if the term is reached before the Estate Tax issue needs to be addressed. Further, I'm also finding out if the "loan" can simply be forgiven by the executor of the will upon mom's death without triggering a taxable event. Sigh ..

Another reason to hire an expert.

 

[Steelart99]

I assume that the 40% only applies to the portion above the $11M, so it might not be as bad as you think overall. Can it be managed with a will to do charitable giving to the estate limit? Don't know at all, just throwing it out there.

As of right now, the 40% would not be that big an issue as it only applied to estate value above the exemption level. And, mom is just at the exception level.

However, if there is a political party change in the November election, indications are that there could be a drop back to the previous exemption level, which is $5M less that what it is now. Further, there is a real chance that the tax will be raised from 40% to 50-55%.

I'm trying to look ahead and minimize the damage.

 

[Montecfo]

Good thought but I don't think that's allowed. I could be wrong on this, but I think the exemption amount is set at the time of death.

I recall that the federal estate tax was actually repealed for just one year (2010), so that any estate from folks passing that year, no matter the size, didn't have to pay for estate tax. If there's a way to "lock in" the exemption amount that year by gifting away one's estate that year, probably a lot of people would have done it.

Lucky Dude

The estate tax and the gift taxes are companions. The law in effect at the time of transfer is what controls. You have a lifetime exclusion from estate and gift taxes. If you make a large gift in one tax year, for which you to claim a portion of the exclusion, a tax law change to reduce the exclusion in a subsequent year would not cause you to owe gift tax.

In 2010 when there was no estate tax the gift tax nonetheless remained in place. So you are correct that this would not have worked in that year.

As several have said, best advice is to consult a qualified estate and gift tax attorney.

 

[SecondCor521]

Enron ... funny. I'm trying to determine is any "loan" can be simply renewed if the term is reached before the Estate Tax issue needs to be addressed. Further, I'm also finding out if the "loan" can simply be forgiven by the executor of the will upon mom's death without triggering a taxable event. Sigh ..

Another reason to hire an expert.

I guess I was pointing out that doing $1M loans to someone in the family and have them lose it could cause family dynamics issues around the Thanksgiving table. It very well could in most families I know. Maybe not yours.

You can extend the terms of a loan. Just write up a new document. One issue may be Mom's competence to sign such a loan agreement at some point if her mental acuity drops, but since you have POA you could presumably handle a loan renewal on her behalf.

The executor could forgive a loan, but I'm fairly certain it would be treated as a gift to the borrower in the amount of the forgiven principal. If the principal was >$15K, then the estate would owe gift tax on the amount exceeding $15K. Although if the borrower were also an heir and the terms of the will permitted it, you could probably treat any forgiveness as a distribution of their portion of the inheritance, since mathematically it works out the same.

IANAL, YMMV, etc.

 

[Joylush]

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!

Do you have any updates on what you decided to do? I have this dilemma myself and am looking into similar options.

 

[Steelart99]

Well, I made sure to maximize gifting and further to do it as soon in this year as possible. We also gave to numerous charities and paid for some tuition for mom grandchildren.

I did end up consulting with two estate attorneys (different states have different laws). In the end the determination was to either leave the estate alone and pay the estate taxes (40% at this time) or move funds into trusts for my brother and I, which would be subject to capital gains tax (24%) when funds were used from the trusts.

After doing a bunch of analysis, I determined what amounts should stay in mom's accounts to insure a secure future for mom's expenses until she would/could reach 100 years old. I was conservative.

The remaining funds in her estate were then available to form Trusts for my brother and I and thus move funds out of her estate.

So the primary issues I was facing at the time was:
1. Would estate tax exemption level stay the same or be reduced (Republican - stay the same at $10.8M, Dem - possibly drop to $3.8M - $5M)
2. Would estate tax rate (40%) stay the same or go up (Rep - stay the same, Dem - possible go up to 50%)
3. Would the step-up in basis upon death remain or be taken away (Rep - stay the same, Dem - possibly but unlikely be removed

After my calculations I determined that it was likely a wash between setting up trust or doing nothing. I based this on me gut feeling that at the worst the Dems would take the presidency and hold on to the House of Representatives with Rep controlling Senate. I figure that would likely insure gridlock on some of these issues. Given that I set up and funded two trusts a low levels and hoped for the best.

You know how that went.

I'll have to see how things go this year to determine if I need to try to fund the trusts further.

 

[Finance Dave]

Well, I made sure to maximize gifting and further to do it as soon in this year as possible. We also gave to numerous charities and paid for some tuition for mom grandchildren.

I did end up consulting with two estate attorneys (different states have different laws). In the end the determination was to either leave the estate alone and pay the estate taxes (40% at this time) or move funds into trusts for my brother and I, which would be subject to capital gains tax (24%) when funds were used from the trusts.

After doing a bunch of analysis, I determined what amounts should stay in mom's accounts to insure a secure future for mom's expenses until she would/could reach 100 years old. I was conservative.

The remaining funds in her estate were then available to form Trusts for my brother and I and thus move funds out of her estate.

So the primary issues I was facing at the time was:
1. Would estate tax exemption level stay the same or be reduced (Republican - stay the same at $10.8M, Dem - possibly drop to $3.8M - $5M)
2. Would estate tax rate (40%) stay the same or go up (Rep - stay the same, Dem - possible go up to 50%)
3. Would the step-up in basis upon death remain or be taken away (Rep - stay the same, Dem - possibly but unlikely be removed

After my calculations I determined that it was likely a wash between setting up trust or doing nothing. I based this on me gut feeling that at the worst the Dems would take the presidency and hold on to the House of Representatives with Rep controlling Senate. I figure that would likely insure gridlock on some of these issues. Given that I set up and funded two trusts a low levels and hoped for the best.

You know how that went.

I'll have to see how things go this year to determine if I need to try to fund the trusts further.

Why can you not gift more than the $15k? That's not a limit, just means that tax forms have to be filed above that, right?

 

[scopestuff2]

The remaining funds in her estate were then available to form Trusts for my brother and I and thus move funds out of her estate.

This is an interesting discussion as I'm finding myself in a similar situation.

Two questions if you would be kind enough to reply:

1) I'm curious how you were able to move funds out of your mothers estate into trusts for yourself and brother and have the dollar amount not accumulate toward the lifetime estate transfer limit. Perhaps it does count toward the current lifetime cap and you are doing this to lock in the current approx $11 million vs risking the changes that a Dem president and both houses of congress might bring ?

2) Any suggestions on how to find a reasonably priced, honest, responsive, and knowledable estate attorney ?

Thank you for starting this thread, and continuing with how you progressed. Its very helpful to those of us with similar situations.

 

[SecondCor521]

This is an interesting discussion as I'm finding myself in a similar situation.

Two questions if you would be kind enough to reply:

1) I'm curious how you were able to move funds out of your mothers estate into trusts for yourself and brother and have the dollar amount not accumulate toward the lifetime estate transfer limit. Perhaps it does count toward the current lifetime cap and you are doing this to lock in the current approx $11 million vs risking the changes that a Dem president and both houses of congress might bring ?

2) Any suggestions on how to find a reasonably priced, honest, responsive, and knowledable estate attorney ?

Thank you for starting this thread, and continuing with how you progressed. Its very helpful to those of us with similar situations.

You might like this thread that I had on a similar topic:

https://www.early-retirement.org/fo...about-estate-tax-exemption-amount-107461.html

1) I don't think you can based on the answers to my thread above.

2) I'm working with a CPA who is a partner at a local, well-respected tax firm. They've done my Dad's taxes for several decades. I'd reach out to friends with similar NWs and ask around.

 

[Steelart99]

Why can you not gift more than the $15k? That's not a limit, just means that tax forms have to be filed above that, right?

That is correct, but anything over $15K is deducted from the the Estate tax exemption. In fact gifting was in excess of the $15K in many cases. A lot of situational issues to address.

 

[Finance Dave]

Ah ok...thanks for clarifying.

 

[Steelart99]

This is an interesting discussion as I'm finding myself in a similar situation.

Two questions if you would be kind enough to reply:

1) I'm curious how you were able to move funds out of your mothers estate into trusts for yourself and brother and have the dollar amount not accumulate toward the lifetime estate transfer limit. Perhaps it does count toward the current lifetime cap and you are doing this to lock in the current approx $11 million vs risking the changes that a Dem president and both houses of congress might bring ?

2) Any suggestions on how to find a reasonably priced, honest, responsive, and knowledable estate attorney ?

Thank you for starting this thread, and continuing with how you progressed. Its very helpful to those of us with similar situations.

1) The trusts do in fact go against the lifetime estate transfer limit and any investments transferred to the funds carry my mother's cost basis with it. So, in the future should I opt to sell any investments in the trust, I would have to use my mom's cost basis for the calculation of the capital gains taxes. This is true no matter when I opted to sell. Had those same investments been passed to me upon my mother's death, then the cost basis would have been stepped up ... and there would be far less capital gains.

The funds I transferred to the trusts were taken from mom's cash balance in her investments, therefore there is no cost basis and therefore no capital gains anytime in the future.

I started this entire endeavor to utilize as much of the current $11M exemption. But once I went through a bunch of calculations, I determined that for this specific case it would almost be a wash even if the exemption was reduced to $5M by the Democratic administration. So, I decided to stand pat for last year. Might not have been the best decision ... time will tell.
2) My brother knew several attorneys who recommended the estate attorney we used as the person he'd go to. To me, word of mouth is better than guessing. - shrug -