“The estate tax is a voluntary tax imposed against people who fail to plan or have poor planners,” says Chris Christensen, president and CEO of Advanced Strategies Group in Southfield. “The government gives you every opportunity to avoid the tax within the tax code if you’re willing to start planning early enough.”
Smart Business talked with Christensen about how to transfer wealth and keep the IRS happy at the same time.
Can estate planning be effective without a life insurance policy?
There are a lot of other gifting techniques available besides life insurance. However, nothing gives you the leverage that life insurance can in terms of death benefit per premium dollar. If you qualify for life insurance on a favorable basis, it’s the most-used planning tool and a safe one, as well.
Outside life insurance, are there ways to accumulate wealth without accelerating your estate tax liability?
Life insurance wouldn’t accelerate your estate tax liability because it would never be involved in your taxable estate. When you purchase life insurance for estate planning, you set it up in a trust that is outside your estate and use it as the funding vehicle for your estate taxes. It will provide liquidity to pay the estate tax on whatever you own when you die.
Can purchasing a will or trust divert enough money to reduce a large estate tax?
Wills and trusts are not avoidance vehicles. All a will does is say who gets what when you’re no longer around. A trust is a will replacement; it replaces the will by helping you avoid the probate process because a will can’t take ownership of an asset. A trust during your lifetime can take ownership of your assets and set provisions after your death.
What are some ways estate tax can be avoided?
If you’re not willing to make lifetime gifts, then you’re doomed to pay tax. You can leave it all to charity or make lifetime gifts, using your annual exclusion ability to give away $11,000 a year to each child and grandchild and that adds up pretty quickly. You also have a $1 million exemption against gift and estate taxes that you can use during your lifetime or at the time of your death.
Will the federal government ever eliminate estate tax?
There’s been some talk about it in Washington D.C., but nothing has been done. In 2001, we got a repeal bill that phases in a total repeal to the year 2010. On Jan. 1, 2011, the tax repeal bill ‘sunsets’ and is restored back to 2001 law.
What’s the best strategy being used today?
The Zero Estate Tax Plan is the No. 1 planning tool today. You create a revocable living trust that states that at the time of your death you want a private charitable foundation created in your name for the benefit of the charities that you care about. You state that you want your children to be the board of directors of the foundation, and as such, they are entitled to a reasonable fee in exchange for their efforts to run the foundation. You then state that you want to disinherit all of your children of everything you own in lieu of charity so that it all goes into the foundation.
Next you create an irrevocable generation-skipping trust and buy the same amount of life insurance that your estate is worth for the benefit of your children, which you use to replace the wealth that you disinherited them out of. So your kids still get the same amount; in fact, they’re going to get more because they won’t have to pay the 50 percent estate tax. The children get to run a private foundation that perpetuates philanthropy in the family for generations. Charity is getting everything and the only loser is the IRS.
Think Bill and Melinda Gates, the Henry Ford Foundation, the Rockefellers, the Kennedys, the Carnegies. This is how real wealth is transferred in this country. And the IRS doesn’t mind, because without the private sector and charities there would be a bigger burden on the government to take care of the people who need help.
CHRIS CHRISTIANSEN is president and CEO of Advanced Strategies Group. Reach him at (800) 229-5141 or firstname.lastname@example.org.