Maximizing Tax Efficiency: An Estate Planning Case Study for a $115 Million Estate

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Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
In this estate planning case study, we will explore the various types of trusts and business entities that an ultra-high-net-worth married couple can utilize to minimize their estate tax. By no means is it a complete list of the trusts and strategies available; rather, it is an attempt to show what is possible when utilizing various estate planning strategies versus the consequences of not using any.
Josh and Judy are both 56 years old with an estate worth $115 million. Their assets include several commercial and residential properties worth $75 million and a 50/50 split in a master limited partnership (MLP) worth $40 million. As ultra-high-net-worth individuals, they require sophisticated estate planning strategies to minimize taxes and efficiently transfer wealth to their beneficiaries.

Business Strategies

Family Limited Partnership

Josh and Judy establish a Family Limited Partnership (FLP) worth $60 million to centralize management of their real estate holdings and other assets. They retain general partnership interests while transferring limited partnership interests to their children. By doing so, they benefit from a valuation discount of 35%, reducing the taxable value of their estate by $21 million ($60 million * 35%).

Master Limited Partnership

Josh and Judy also leverage valuation discounts by gifting MLP units to their children. They transfer $20 million of MLP units, benefiting from a 30% valuation discount due to lack of marketability. This reduces the taxable value of the MLP transfer by $6 million ($20 million * 30%).

Traditional Trusts

Trusts are vital in estate planning for high-net-worth individuals like Josh and Judy. By establishing various types of trusts, they can efficiently pass on their wealth while minimizing estate and gift taxes.  Inside a trust they can place stocks, bonds, cash, ETFs, bonds, real estate, and other assets. Trusts also allow them to control the distribution of their wealth according to their specific wishes and goals.

Irrevocable Life Insurance Trust (ILIT)

Purpose: To hold life insurance policies outside of Josh and Judy’s estate, protecting the death benefit proceeds from estate taxes. They establish an ILIT and transfer $5 million worth of life insurance policies to the trust, reducing their taxable estate by $5 million.

Grantor Retained Annuity Trust (GRAT)

Purpose: To transfer appreciating assets to beneficiaries with little or no gift tax. Josh and Judy create a GRAT with $6 million in assets. As the grantors, they receive an annuity payment for a specified term, and at the end of the term, the remaining assets pass to their beneficiaries. Let’s assume they successfully reduce their taxable estate by $4 million through the GRAT strategy.

Intentionally Defective Grantor Trust (IDGT)

Purpose: To transfer assets outside their estate while still being responsible for income taxes on trust income. Josh and Judy establish an IDGT with $5 million in assets, which grows outside their estate. By paying income taxes on the trust’s income, they effectively reduce their taxable estate by an additional $3 million over time.

Generation-Skipping Trust (GST)

Purpose: To transfer wealth to their grandchildren while avoiding estate and gift taxes at their children’s generation. Josh and Judy create a GST and transfer $3 million into the trust. Utilizing their lifetime GST exemption, they successfully reduce their taxable estate by $3 million.

Crummey Trust

Purpose: To make annual gifts to their beneficiaries while maintaining control over the gifted assets until their beneficiaries reach a certain age or meet specific conditions. Josh and Judy establish a Crummey Trust and contribute $1 million, taking advantage of their annual gift tax exclusion to reduce their taxable estate by $1 million.
By implementing these trusts, Josh and Judy significantly reduce the size of their estate by an additional $16 million ($5 million + $4 million + $3 million + $3 million + $1 million).

Philanthropical Trusts

Charitable-Remainder Trust (CRT) and Charitable Lead Trust (CLT)

Josh and Judy contribute $10 million to the CRT and $5 million to the CLT, benefiting their chosen charities while further reducing their taxable estate by $15 million.

Total Savings

By employing a combination of estate planning strategies, including valuation discounts for FLP and MLP transfers, various trusts, and charitable giving vehicles, Josh and Judy can potentially reduce their taxable estate by $58 million ($27 million through business entities + $16 million through traditional trusts + $15 million through philanthropical trusts).
What is left is $57 million, but there is still the estate tax exemption, which, in 2023, is $12.92 million. That means, out of their original $115,000,000 estate, only $44,080,000 is taxable.
Let’s compare the figures:
Taxes owed WITHOUT estate planning strategies: $40,832,000
Taxes owed UTILIZING the above estate planning strategies: $17,632,000
Amount saved on taxes: $23,200,000

Future Values and Savings

Now, this assumes that those assets freeze after getting transferred out of the estate, which would not be the case. A major aspect that we haven’t touched on is the future value of all assets. Josh and Judy are only 56. If their life expectancy is 92, that’s 36 years and millions of dollars worth of accumulation and growth. By transferring out now, the future value saved is much greater than $23,200,000.

In Conclusion

For high-net-worth individuals like Josh and Judy, collaborating with seasoned estate planning professionals is essential to developing  tailored strategies that align with their unique goals and circumstances. This proactive and strategic approach not only results in substantial tax savings but also enables them to preserve generational wealth, leave a lasting legacy through charitable endeavors, and ensure the continuity of their businesses. By working closely with experts in estate planning, they can effectively create a more secure financial future for themselves and their beneficiaries while making a lasting impact on the causes and communities they care about.
This estate planning case study showcases a basic approach utilizing broad-based estate and tax planning strategies, but by no means is it exhaustive and inclusive of all strategies that can be utilized nor does it mean that these strategies would be useful for you. There are pros and cons for each strategy that should be carefully weighed with an estate attorney and financial advisor.
Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

Author

  • Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

    A Florida native, and full-time Sarasota resident, Ken founded WealthGen Advisors, LLC after spending more than fourteen years in the financial advisory industry. Ken holds multiple industry designations, as well as a master's degree in Financial Planning. Prior to founding WealthGen Advisors, Ken spent almost a decade in New York and then Texas as Vice President at The Capital Group, a $2T global investment manager serving institutional clients and pension funds.

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