Estate taxes have decimated the wealth of many wealthy families over the years:
John Rockefeller and Elvis Presley lost 70% of their estates to taxes at death.
Estate tax planning has the capability to completely avoid a large amount of estate tax losses.
What does this really mean? Here is an example.
Imagine John Smith and his wife have an estate worth $150M.
As they enter their 80s, they are excited to leave that hard-earned $150M to their heirs and charity.
After all, they have paid top-tier income tax their entire professional lives on that $150M - this is after-tax money.
Not so fast, Smiths.
As soon as they pass away, the government assesses the value of the estate at $150M fair market value and imposes a tax on the amount above the exclusion value of $23.4M - $126.6M, at 40%.
That's $50.6M in taxes right away. So that leaves $99.4M.
Plus, depending on the state that the Smith parents reside in, there is up to 20% in additional state estate tax.
Since they live in Chicago, Illinois there is a 16% state estate tax levied on any assets above $4M.
$23.4M in additional taxes.
The estate taxes total $74M, and the estate is reduced to $76M.
The Smiths' estate - which they have already paid income tax and cap gains tax along the way on - has been nearly halved at the moment they die.
Ouch.
But, there are many planning tools to navigate estate taxes intelligently, reducing that burden to near 0.
They involve moving assets out of the estate while the Smith parents are still alive.
For example:
Using a leveraged gifting strategy to discount and sell the assets to, for example, a couple of Spousal Limited Access Trusts (SLATs), they can get up to $150M of assets out of their estate without being subject to gift tax while alive or estate tax after death.
These assets, plus all of the appreciation of those assets after this strategy is executed, will be completely free of estate tax.
This strategy requires some significant sophistication, but if the estate is relatively simple, it can be done for roughly $100K using an experienced advisor team.
(This $100k is highly dependent on estate complexity - it could be up to $1M if there are a lot of private assets that are hard to value).
So, for the Smiths, that ROI is a $100K investment for a $74M return.
That is a 740x return on investment.
There are not many places in finance where such returns can be had, especially with zero risk!
Biden has proposed reducing the exclusion amount to $3.5M for singles, $7M for couples.
That would make the Smith's estate liable to $58.6M in Federal taxes, then another $23.4M, leaving $68M.
If/when Biden changes the tax code, it will be significantly harder to get assets out of the estate.
This strategy will be limited to about $45M of assets able to be moved out of an estate using the same strategy.
That would net the Smiths a reduction of their taxable estate to $105M, resulting in $39.2M in tax.
Doing nothing before a change in the estate tax code will cost the Smiths $39.2M in taxes, immediately.
Remember, these numbers compound every year, since assets moved out of the estate grow estate tax free - so the quicker you move the more you save.
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