Case Study Two

Mrs. B: $18M Discount Sees an Immediate Estate Tax Savings of Nearly $10M

The following Case Study illustrates the methods that can be employed in designing an estate plan to reduce, or even eliminate, the federal estate and generation-skipping transfer tax at death. The subject of this Case Study attended one of Mr. Verdon's seminars on Advance Estate Planning, saw the application of the strategies to her situation, retained our law firm to analyze her specific factors, and elected to modify her estate plan to achieve the desired tax savings.

Existing Estate Plan Design: Several years before the death of Mr. B, he and Mrs. B had their estates planned by a very competent estate planning lawyer in their hometown. The attorney had formed a living trust and funded it with their joint assets, formed an irrevocable life insurance trust that purchased substantial amounts of life insurance to pay the estate taxes upon the death of the survivor, and transferred their home to a QPRT (a device to reduce the estate taxation on their personal residence). Most of the conventional estate planning strategies were in place when we met.

When Mr. Verdon met Mrs. B, she was in her early 70s and in very good health. When Mr. B died, the estate was valued in the area of $60M. The living trust was established to take advantage of the full marital deduction, so that the estate tax would be deferred until Mrs. B died. When we projected the value of the estate at Mrs. B's death, we concluded that her estate taxes would far exceed the amount of life insurance payable at her death, and would substantially reduce the liquidity available in the estate.

Mrs. B was also making gifts of almost $1M per year to the life insurance trust in order to keep the life insurance policies in force. Mrs. B had consumed her available unified credit, resulting in the gifts being taxed to the tune of $550,000 per year.

Finally, Mrs. B has adult children to whom the estate is to pass at her death. She wanted to examine the ability to reduce the taxes at death, but during her lifetime she wanted to retain full control of her holdings without any interference from the children.

Objectives: Our objectives in planning this estate were as follows:

  1. Freeze the value of the estate at current values and transfer the current assets out of her estate to shift the future growth to Mrs. B's descendants;
  2. Accomplish #1 without Mrs. B having to incur any immediate gift or capital gains tax;
  3. Reduce the value of the current estate by using available discounting techniques;
  4. Eliminate the annual gift tax on the funds used to maintain the life insurance policies in the insurance trust; and
  5. Arrange for Mrs. B to remain in full control of her holdings, without such control resulting in the assets being included in her estate.

Results of Revised Planning

Most of our higher-net-worth clients come to our firm with many of the conventional tax planning strategies already in place. However, the conventional estate planning strategies are designed to deal with a much smaller estate tax problem than we often find.

As you saw from the Case Study illustrated above, by looking at the same problem from a different perspective, and by utilizing legal principles currently available to everyone, substantial tax savings can be achieved. In Mrs. B's case, the following was accomplished:

  • Removal of appreciating assets from her estate without any transfer tax cost;
  • Reduction of her estate by 30% ($18M) by using the valuation discounting currently available to everyone;
  • Estate value frozen at $42M (not $60M) and all future growth to occur outside Mrs. B's taxable estate;
  • The $18M discount equals an immediate estate tax savings of almost $10M;
  • Using the SFT to purchase the life insurance policies on which Mrs. B had been making annual gifts of $1M, she will save over $500,000 annually; and
  • By using South Dakota for the domicile of the SFT, the estate and generation-skipping transfer tax will be avoided in perpetuity.