Leveraged Gifts, Tax Break for the Family

Want to win the estate-tax game? Gifts, leveraged gifts and lifetime gifts to your family represent a major tax-planning strategy. Gifts are an easy to move assets within the family unit, remove future income from your estate and provide for future generations. In the discussion that follows, all gifts are made by Fred (married to Wilma) to his children or grandchildren.

Gifts divide family income by taking advantage of the zero or low-tax bracket of one or more family members. This strategy accomplishes two tax savings:

1) Income tax—transfers income (produced by the asset gifted) from Fred’s high bracket to the low bracket of his children and/or grandchildren, and

2) Estate tax—the asset is removed from Fred’s estate.

Current law provides these advantages: 1) the $24,000 ($12,000 for Fred and $12,000 for Wilma) annual exclusion per donee, and 2) gift splitting with Wilma removes one-half of the gift from Fred’s estate and Wilma’s estate as well.

I’m about to use boxcar-dollar numbers to show the power of leveraged gifts. Adjust the numbers (raise or lower the amount of the gift) to your liking.

Here’s an example of a classic leveraged gift. Fred and Wilma (both 60 years old) would like to enrich their six grandchildren. Instead of making $24,000 gifts annually to each grandchild, here is what they do: Fred and Wilma create a wealth creation trust (an irrevocable life insurance trust that receives insurance death benefits free of income and estate tax). They find out that they can purchase a $1 million second-to-die policy (pays after the second death of Fred and Wilma) for a premium cost of only $12,709 per year, with premiums stopping after 15 years.

So, they make a gift of $12,709 each year to each of their six (total gifts each year of $76,254; $12,709 by six grandchildren) via a wealth-creation trust to pay an annual premium for six separate $1 million second-to-die policies for a 15-year period (then the policies will self-carry). After Fred and Wilma are gone, the grandchildren will have $6 million ($1 million each) tax-free at a maximum lifetime cost of only $1,143,810 ($76,254 x 15).

There’s more. Assume Fred is in a 50-percent estate-tax bracket. Remember, every time Fred pays the $76,254 in premiums, that $76,254 is out of Fred’s estate. The result: Exactly one-half of each premium dollar is, in effect, paid by the IRS. Simply put, Fred gets a 50 percent discount on his insurance.

How much do you think Fred must earn to leave his children or grandchildren $6 million? Would you believe about $20 million? Try this: Fred earns $20 million in his life. After giving the IRS (and Fred’s home state) 40 percent for income taxes ($8 million) he has $12 million left. When Fred and Wilma die, the IRS gets 50 percent of the $12 million for estate tax. What’s left? $6 million.

Or put another : An investment of only $1,143,810 over 15 years will do the same work as Fred earning $20 million.

What most people don’t know is that life insurance is—when properly purchased—the most tax-advantaged investment available under the entire tax law. If you have funds invested in a qualified plan (for example, an IRA, 401(k), profit-sharing plan or the like), or in traditional investments (CDs, stocks, bonds or the like), and if you (and/or your spouse) are insurable, it’s easy to turn thousands of dollars into millions of dollars. To learn how these time-tested strategies can work for you, call Irv at 847/674-5295. MF

Technologies: Management

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