Your poor planning could make Uncle Sam your biggest heir

Did you know that without proper planning, a $15-million estate can lose about $7.5 million to estate taxes, leaving the heirs to split the other $7.5 million? Instead, why not give your entire estate away twice – first to a charity, then to your heirs.

What is wealth management all about if not efficiently transferring the most you can to your heirs? What we described above uses a little-known strategy of obtaining a tax-deductible $15 million life insurance policy by donating the premium to your own charitable foundation. The tax savings of approximately 50 percent are gifted to your heirs or an irrevocable trust to purchase a $7.5 million last-todie or individual policy for your heirs. After your death your beneficiaries receive $7.5 million from the estate after taxes and $7.5 million tax-free from the proceeds of the life insurance policy.

If you’re a high net-worth individual who believes a living trust is all you need, here are some tax-saving techniques you might want to contemplate. But, keep in mind if you’re net worth is under $5 million, this stuff isn’t for you.

  • Avoiding a fire sale on your business: If you don’t want your heirs to have to liquidate a business or sell assets to pay estate taxes, consider a wealth replacement trust.A business woman with a $22-million company, a $3-million retirement plan and a $2-million home could lose well over 50 percent of her net worth to estate taxes and income taxes. A large chunk of those taxes are due soon after death. If the beneficiaries wanted to hold onto the business and the home, they would need to come up with well over $13 million to pay the taxes. Without a wealth replacement trust to pay those taxes, they may be forced to give up the business through a fire sale.
  • Avoiding capital gains taxes on appreciated assets: Would you like to sell a highly appreciated asset, such as a stock or real estate, and avoid capital gains taxes, receive a tax deduction, and get an income for life?We had a client who received at a startup’s stock for 17 cents per share. Within three years, the stock was worth $71 per share after splits. When it was time to retire, her wealth was concentrated in that stock, which paid no income.

    We set her up in a charitable remainder trust and gifted her stock to the trust. The trust, in turn, sold the stock and, as a charity, avoided capital gains taxes. She is now receiving a guaranteed income for as long as there is money in the trust.

    By gifting the stock to the charitable trust, her estate was reduced by the value of the stock thus reducing future estate taxes. And, gifting the stock to a charity gave her a deduction on her income taxes. The con to a charitable remainder trust was convincing the heirs to go along with the concept because assets gifted to the trust will go to charity upon her death. Our client got around this by establishing a wealth replacement trust to replace the gifted assets to the heirs tax-free.

  • Taxes on large IRAs: If your estate is worth more than $5 million, your maximum estate tax is 47 percent. Upon your death your retirement accounts, 401K accounts, IRAs or other accounts, will need to be distributed to your heirs and will be taxed at their income tax bracket. If the heirs are employed, they could lose another 40 percent or more of these dollars due to income taxes. In the end, you could lose 70 percent of your retirement account assets to Uncle Sam. Through proper beneficiary designations as well as charitable gifting strategies, this problem can be tackled.
  • Additional tax saving techniques: Supporting organizations, limited family partnerships and institutional guarantee installment sales are just a few other techniques that can help you accomplish your goals related to philanthropy, tax deferral, estate tax reduction, creditor protection or spousal protection, and much more.

The bottom line is taxes and tax strategies are complex. Too many wealthy individuals and business owners think they are well protected because they set up a living trust 10 years ago with their attorney.

Well, if you’re worth more than $5 million, it’s probably time for you to go beyond the living trust.

Christopher G. Snyder and Haitham “Hutch” E. Ashoo are principals of Pillar Financial Services in Walnut Creek. Contact them at 925-356-6780.

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