“Despite their wealth and business savvy, more than one-third of high-net-worth families have not taken the most basic steps to protect and provide for their loved ones when they die,” CNBC.com cites a 2015 millionaire survey.
Don’t Get Overwhelmed
You’re not alone if the words ‘estate planning’ make you feel like a deer in the headlights. With the changes from the recent tax bill being signed into law, you may feel even more unsure of how to move forward. But there are a number of reasons to carefully consider what will happen with your estate when you die. The top reason is to save your loved ones from expensive legal nightmares, just when you thought you were blessing them. Another important reason is that the change in tax laws could have a significant impact on how much you transfer to the next generation versus how much you transfer to the federal government.
$4 million lost in 1 day
Under the previous 2017 tax law, any estate above $5.6 million per individual ($11.2 million per couple) would be subject to a 40% estate tax. The new tax law doubles the estate tax exemption to $11.2 million per individual ($22.4 million per couple). Before we get too excited, however, note that the new bill states that the exemption reverts back to $11.2 million per couple (adjusted for inflation) in 2026. With this in mind, one day could mean the difference of over $4 million. For example, if you die on Dec 31, 2025, and your estate is $22.4 million, it will be tax exempt. But if you die on Jan 1, 2026, somewhere around $11 million of your $22.4 million estate will be taxed at 40%. That amounts to a difference of at least $4 million!
Unless you can take advantage of the increased exemption between 2018 and 2026 (and we have some ideas below), it will still be worthwhile to minimize the effect of taxes on your estate. There are a few secrets that are hidden in plain sight, options provided by the law for protecting some of your assets from Uncle Sam himself.
Secret # 1: Irrevocable Trust
Consider this: a Family Legacy Trust is one type of irrevocable trust that creates a perpetual source of wealth and eliminates the IRS.
One way to take advantage of the higher exemption amount is set up an irrevocable trust (in which assets gifted to the trust are completely removed from your estate for all tax purposes), with your spouse as the beneficiary. Your spouse would then receive income (for which they pay income taxes) from the assets while they are still living, and your children would be able to receive the actual assets when the spouse passes; free of estate taxes. Ideally you and your spouse would gift each other 50% of the estate (or $11.2 million) so that each spouse is covered equally. This would effectively ensure that you benefit from the higher estate tax exemption before it is gone with the wind.
Secret #2: Portable Exemptions
Don’t forget this one simple action that can save millions in estate taxes.
The current $11.4 million estate tax exemption is portable, meaning that upon death, your surviving spouse can take on their late spouse’s tax exemption as well as their own. So, as long as the estate is below $22.8 million (between 2019 and 2026), no tax will be owed. The exemption must be taken when the estate tax return is filed or your beloved spouse may receive a large and unwelcome tax bill.
Secret #3: Life Insurance
Become untaxable. It’s like a real-life super power.
There are several options for life insurance that would protect your loved ones. Universal life insurance will include a death benefit that is entirely tax-free. Also, assets invested within a life insurance policy grow on a tax-deferred basis, allowing the money to compound at a higher rate than outside of an insurance policy. Because of its tax advantages, insurance can allow investors to amass more wealth, and transfer more of it to their heirs. Check out our blog on how to take advantage of options such as Private Placement Life Insurance.
Secret #4: Premium Financing
Why pay for life insurance when you can finance it and pay pennies on the dollars? At fraction of the cost, you can enjoy the full benefit.
Life insurance premiums can become very costly, especially when life insurance is purchased during an illness or late in life. Many people are unaware that they can take out a loan to pay the premiums. The loan payments amount to a fraction of the cost of the premiums, and the insurance policy can grow on a tax deferred status, overshadowing the loan interest. This allows the loan to be paid off, and the survivors to retain the entire death benefit tax-free. There are risks to financing the premiums, but this option should be considered carefully due to the potential benefits.
Secret #5: Charitable Giving
Done correctly, the family wins, the charity wins, and the IRS loses.
Another way to reduce your taxable estate is to create a trust for charitable giving. The trust can be set up where the beneficiary (not the charity) receives a set percentage of the trust or a fixed amount for the rest of their life, and the charity receives the remainder. This type of trust also enables the donor to sell highly appreciated assets (that would otherwise be subject to a large capital gains tax), and place them in the trust tax-free. The donor can still collect interest on the proceeds (now in the charitable trust) per year, and a charitable contribution deduction on their tax return! Most importantly, a life insurance policy can be purchased within the trust, incorporating a death benefit for the full value of the donation, so the heirs still receive all the money, tax-free, when the 2nd spouse dies.
Secret #6: Qualified Leverage Strategy TM
Retirement Plans are double taxed – with IRS charging both income taxes and estate taxes. Avoid both.
You can used retirement plan dollars to fund a non-taxable life insurance policy. Also, if you have an insurance policy within a profit-sharing retirement plan, the cash value portion of the insurance policy is taxable. You may be able to avoid the tax if you buy out the insurance policy at fair market value. You can then reposition the funds into more tax advantaged vehicles such as a Roth and a life insurance policy, reducing current taxes, and future estate taxes. More on the Qualified Leverage Strategy here.
If you would like to determine whether some of these strategies would work for you or your affluent clients, feel free to reach out to someone on our team. Our goal is to make a measurable difference in your financial life.
About Axia Global
J. Michael Roney, founder of Axia Global, has worked alongside the best financial and legal professionals in the field to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century of combined experience in the financial services sector.
Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.