Possibly the Most Important Article You’ll Read for the Rest of Your Life
If your net worth is above the $11.5 million (single) or $23 million (couple with a living trust), it may be time to start thinking about how you can avoid paying as much of the federal estate tax as possible. Or, if you’ve been well beyond $11.5/$23 million for a while and have been putting this off, now is the time act if you want to prevent a third or more of your estate from going to the government.
Also, if you happen to live in one of the states that also charges an estate tax, you are already past their exemption, as the highest state exemptions currently stand between $5-6 million.
Strategies For Families Worth $25 Million To $500 Million
The Art of Protecting Ultra-High Net Worth Portfolios and Estates
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
In a moment, we’re going to show high net worth and ultra-high net worth families like you ten strategies you can put in place to avoid the estate tax. But first, let’s clarify what the estate tax is and how it works.
Table of Contents
- How Does the Estate Tax Work?
- 10 Ways to Avoid or Minimize the Estate Tax
- 1. Buy Life Insurance Now and Use the Benefit to Pay the Tax
- 2. Move to a State without Estate Taxes
- 3. Give Money to People While You Still Can
- 4. Set Up an Irrevocable Life Insurance Trust (ILIT)
- 5. Set Up a Charitable Trust
- 6. Set Up a Donor Advised Fund
- 7. Set Up a Family Limited Partnership or a Foundation
- 8. Invest in a Business Such that Your Heirs Become Part-Owners
- 9. Just Spend It or Give It Away
- 10. Married Couples – Double Your Exemption Amount
How Does the Estate Tax Work?
If the total value of your estate adds up to more than the exemption limit, you will pay estate taxes on everything above that limit.
As of 2020, the federal exemption limit sits at $11.58 million per estate, and it will climb with inflation until 2025. If Congress does nothing before then (and that is their specialty, right?), the exemption will revert to its previous level, down around $3.5 million.
Since you don’t know when you will die, you need to start planning now if you want to minimize or avoid the federal estate tax.
The calculations for how much tax you will owe begin by adding up the value of your estate, and then subtracting your debts. Your estate’s value includes all your assets, not just your cash, investments, and retirement accounts. It also includes your home, business properties, boats, art, and other non-cash assets.
And this is where the problem begins. Suppose your estate is valued at $20 million, but $18 million of that is tied up in real estate and a business, six cars, and some art. That leaves only $3 million in liquid assets to pay estate tax with.
Thus, your heirs will possibly be forced to QUICKLY (meaning at a discount) sell assets, may be even the business or some real estate, just to pay the estate tax, after all uncle Sam doesn’t like to wait past the deadline to collect their money. Not an enjoyable chore for your beneficiaries.
Where does that $3 million number come from?
The estate tax kicks in after $11.58 million has been exempted. The tax begins at 18%, but it climbs fast, and reaches 40% for all assets $1 million or more beyond the exemption. In other words, any amounts over $12.58 million will be taxed at 40% by the federal government.
If you have a $20 million estate upon your death, your estate will owe $345,800 for your assets between $11.58 million and $12.58 million. $7.42 million remains after that (20 – 12.58), and that amount will be taxed at 40%, which comes to $2.968 million. Add the $345k to that, and you get $3.3138 million in estate tax owed.
For more details on these calculations and federal estate tax rates, see this Nerdwallet article, which also shows the tax rates and exemptions for each state that levies an estate tax.
And if you’d like to talk to someone more knowledgeable about estate taxes, specifically as they apply to ultra-high net worth investors, contact Hutch Ashoo, Co-Founder of Pillar Wealth Management at the phone number or email address below. Hutch can give you the direction you need.
10 Ways to Avoid or Minimize the Estate Tax
Hopefully you now appreciate the urgency of this situation. If you’re an ultra-high net worth family, meaning you have over $30 million in assets, your estate will pay dearly upon your death, unless you implement some of the strategies we’re about to share.
So pay attention – what you’re about to read can save you tens of millions of dollars. This may be the most important article you’ll ever read.
1. Buy Life Insurance Now and Use the Benefit to Pay the Tax
In case you are wondering, no we don’t sell life insurance.
This strategy doesn’t work if you’re nearing the end of your life. The time to put this strategy in place is yesterday. The idea is simple: Buy life insurance now, and secure a death benefit number that will cover a good-sized portion of the estate tax you expect to owe.
This allows your heirs to pay the tax without having to deplete their inheritance. You will pay much less for the life insurance than you would have paid in taxes. And again, the idea here is to give your heirs the cash they will need to pay the tax.
But this strategy doesn’t really avoid the estate tax. It just makes it easier to deal with. Keep reading…
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2. Move to a State without Estate Taxes
Remember – you have federal AND state estate taxes if you live in one of the states that charges one. Again, see this article for a list of all the states that charge estate taxes. [same link as above]
If you do live in one of these states, the simplest way to avoid paying the state estate tax is to move.
Now, if you own multiple properties in that state, be careful. Your residency status can be up for debate and might land you in court if you try to avoid the state tax. Many have done so, and lost. Learn how to determine residency to avoid double taxation.
3. Give Money to People While You Still Can
Would you rather give your money to your loved ones, causes near and dear to your heart or to the government? You can start giving money to your heirs now, and it will reduce the value of your estate. If you can give enough away to stay below certain limits, you can reduce your estate taxes owed.
For example, suppose your estate is worth $15 million right now, and you don’t expect it to change much because you’re spending at an enjoyably high level, but also still earn good investment and other income to make up for it.
Start gifting money to family and friends – up to $15,000 per person per year, or $30,000 if married – and if you can get your estate value down below the exemption, you can avoid paying estate taxes later. Just keep in mind that these gifts count against your $11.58 million exemption.
If you have an ultra-high net worth estate that is valued far above the exemption limits, this strategy has limited effectiveness.
If you’d like to talk to someone more knowledgeable about gifting and its impact on estate taxes, specifically as it applies to ultra-high net worth investors, contact Hutch Ashoo, Co-Founder of Pillar Wealth Management at the phone number or email address below. Hutch can give you the advice you need.
4. Set Up an Irrevocable Life Insurance Trust (ILIT)
This type of trust ensures that after one spouse dies, the surviving spouse doesn’t get hit with a huge estate tax bill as a result of the death benefit.
For instance, suppose your family has a $50 million estate and each spouse has a $10 million life insurance policy. When the first spouse dies, if the other spouse is the beneficiary, they will get the $10 million benefit. But now the estate is worth $60 million. $4 million of that increase is essentially earmarked for the estate tax before you even see a dime of it.
The ILIT prevents this from happening by altering the structure of your life insurance.
For details on this and other estate tax avoidance strategies –
5. Set Up a Charitable Trust
There are two main types of charitable trusts – remainder trusts and lead trusts.
Both work by assigning portions of your estate – which can be hard assets, investments, or cash – as charitable donations, thereby removing the value of these from your estate.
For instance, if you owned a business property, you could assign it to a trust. When it is sold, the proceeds would go into the trust, which removes that value from your estate.
The details of charitable trusts become very complex. This is not something you can do on your own. You will need a team comprised of a tax accountant, an estate attorney, and a wealth manager to ensure everything is set up properly so it functions as it should. When it comes to trusts, the requirement to have a team working with you is basically non-negotiable.
If you’d like to talk to someone more knowledgeable about trusts and their impact on estate taxes, specifically as they apply to ultra-high net worth investors, contact Hutch Ashoo, Co-Founder of Pillar Wealth Management at the phone number or email address below. Hutch can give you the advice you need.
6. Set Up a Donor Advised Fund
A DAF is sort of like a health savings account. It is a separate account where your investments can grow tax-free, set aside for a specific purpose. With a donor advised fund, the purpose is to give that money to charity.
Unlike a trust, you still retain control of the money in that you decide when and to which charities you want to donate it. And after you die, your heirs can continue to manage it.
But once you put money into the DAF, it is removed from the value of your estate. It also gives you a nice tax break the following year. Here’s an article with more about donor advised funds
7. Set Up a Family Limited Partnership or a Foundation
Both of these options involve starting a new organization.
A foundation tends to focus on charitable giving, but it remains under the control of your estate. As a foundation you can decide what area of need you wish to focus on. It might be college scholarships, medical research, environmental stewardship, business grants, art endowments – there isn’t much to limit you here.
A family limited partnership, like a trust, is also very complicated to explain and set up.
In short, it’s an arrangement where your investments can still be managed by you, but they are protected from entities such as creditors, or divorced spouses who are not direct relatives and should no longer have access to your estate.
When you die, or at a specified time, the management of these funds transfers from you to your ‘limited partners,’ who are generally your heirs. When this happens, they get a three-part tax break on income, estate, and gift taxes.
Again, you will need a team of experts to make a family limited partnership work. But the wealth protection and tax savings you can gain from it make this one of the most powerful strategies on this list.
For details on this and other estate tax avoidance strategies –
8. Invest in a Business Such that Your Heirs Become Part-Owners
You may have a friend or associate who wants to start up a business and needs capital. If the situation works out right, you may be able to arrange for your heirs to become partial owners of the new business, reaping some of the profits that eventually get generated.
This is certainly a more risky option, but if you are in the business-startup game and this kind of arrangement is familiar and attractive to you, this is a way to reduce the value of your estate while giving your heirs a stake in a new business.
9. Just Spend It or Give It Away
Nothing stops you from reducing the value of your estate by just spending the money, or giving it directly to charity now. You can donate unlimited amounts of money to charity any time you want, reap tax benefits the next year, and reduce the value of your estate. You can also give away properties and other hard assets.
Also, you can just increase your own spending on yourself. Travel more. Try out new experiences. Live it up. If you have the funds to spare and want to reduce your taxes, just use the money for yourself and it won’t go to the government.
10. Married Couples – Double Your Exemption Amount
In addition to an estate plan, you should also have a living trust. In your living trust, you can specify that your estate gets split between you. When the first spouse dies, that person would get to use their exemption on their portion of the estate. When the second spouse dies, that person gets to use theirs.
For example, let’s go back to that $20 million hypothetical estate.
Your living trust could assign $10 million to each spouse. When the first spouse dies, their $10 million falls under the $11.58 million exemption. And their estate plan can then direct where those funds go. When the second spouse dies, they can claim their own $11.58 million exemption (or whatever it is in the year they die) on their portion of the estate.
If you’d like to talk to someone more knowledgeable about marriage exemptions and their impact on estate taxes, especially as they apply to ultra-high net worth investors, contact Hutch Ashoo, Co-Founder of Pillar Wealth Management at the phone number or email address below. Hutch can give you the advice you need.
In effect, you can get about a $23 million exemption using this strategy, unless Congress changes the numbers.
For details on this and other estate tax avoidance strategies –
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