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The Dynasty Trust Legal Tax Angles: How to Save Taxes Without Going to Jail Suppose you have an estate of about $10 million in liquid assets, and no capital gains taxes due on the sale of any of your assets. Without any estate planning the IRS could take as much as $4,948,000 - nearly half of your estate. Your heirs would get what’s left. What if you could find a way to leave your family as much as $32 million after taxes instead of just $5 million? Assuming you are about 60 years of age and in good health, you could buy that much life insurance with your estate. But there are a couple of catches. The first catch is that you must give your heirs about $6.5 million which they are then expected to use to buy the $32 million of life insurance on your life. The second catch is that you will have to use the other $3.5 million to pay gift taxes on the $6.5 million gift to your children. By the way. You can always leave more to your heirs with gifts while you are alive because the gift tax is based on the net gift, whereas the estate tax is based on the gross estate. For example, with a 50% estate or gift tax rate, the estate tax on $9 million would be $4.5 million, leaving $4.5 million for the heirs. However, the gift tax on a $6 million gift is 50% of the gift - or $3 million. Thus, the kids get more with a gift than with what’s left from an estate. Back to the subject of the $32 million that goes to your kids. That could be accomplished by using $6.5 million of your estate to buy life insurance at a cost of about $200,000 per million (at age 60). When the life insurance is owned by the insured, the proceeds of the policy is included in the estate and increases the estate tax. But, if the policy is owned by the heirs (beneficiaries of the policy), the death benefit if free of estate taxes and income taxes. Your heirs would get the entire $32 million free of any taxes. The “Dynasty Trust” is a trust that is arranged to receive the $32 million of life insurance proceeds and to manage the money for up to 100 years. In some states, it can be in perpetuity. The money is not subject to estate taxes when your children die or even when your grandchildren die if the trust is drafted so that they have no powers over the trust. The numbers given here are simply one example. Some insurance policies may cost a lot less and others might cost a lot more. This example is based on a single male, age 60. With a joint and survivor (last to die) policy with a couple who are in their early fifties, the cost of the insurance would be much less than in this example. And, this example assumes there is no gifting on an annual basis to children and grandchildren. With a large family, huge amounts of insurance could be purchased each year without paying any gift taxes. A “Dynasty Trust” will usually have a lot of other features (“bells and whistles). In some cases, the trust can be partly funded with some assets that are growing very rapidly instead of with life insurance. However, life insurance does provide the leverage to convert a modest estate into a very large estate (after taxes) - almost overnight. Vern Jacobs Copyright, 2003 |
Books and Services by Vern Jacobs
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