There’s an ancient Chinese proverb that says, “Wealth is lost within three generations.” The American saying is, “Shirtsleeves to shirtsleeves in three generations.” The Williams Group did a groundbreaking study over 20 years that looked at 3,200 families, and 70% of wealth is lost by the end of the second generation. 90% of wealth is lost by the third generation.
In this video, I’m going to share with you some of the common techniques and strategies we use with ultra-high-net-worth clients so you can opt out of the plan Uncle Sam has for you, and sign up for your own plan to help you keep more money in your family for generations to come. After we go through some of the techniques and strategies, I’m going to share with you what researchers have determined to be the number one culprit for wealth being lost across generations.
CRATs, GRATs, CRUTs, and SLATs. GRATs, dynasty trusts, irrevocable life insurance trusts, QPRTs, and QTIPs. All of these different techniques have a specific purpose and can be used in different economic environments, particularly, what the interest rate environment is because a lot of the gifting techniques use what’s known as the AFR rate to determine what income tax or gift tax deduction that you receive.
How do you put this all together? How do you find the correct attorney? How do you find the correct financial advisor that has the skills, the experience, and the chops to help navigate all this? What I think is most important to keep you on page as time goes on, doing the things you need to do to make sure that the legal instruments and plan that you put in place, you’re actually following by the rule of law so all of that doesn’t go to waste.
Whether you have $10 million, like the title of this video, or $200 million, the techniques and strategies that we use to help mitigate the impact of Uncle Sam are very similar. Now the $200 million estate may require more trusts or tools. There may be more wishes to be carried out, more charitable inclination, but overall, it’s fairly similar. Now, the urgency for the person with $200 million is more so than the person with $10 million.
The reason is because under current law you can pass away with $10 million and not owe any estate taxes. If you have $200 million and you pass away, well there’s a very good chance if you’ve done no planning, the government’s going to get $70 to $80 to $90, possibly $120 to $150 million of that. It just depends who you leave it to. If you leave it to your grandkids, not only are you going to be likely subject to estate taxes at 40%, but also generation-skipping transfer taxes at another 40%.
We’re going to cover these strategies at a fairly high-level today, and then as we continue this series, we’re going to get into some of these strategies in much greater detail. Now you’re going to want to make sure you work with a qualified attorney, someone who has experience with these strategies. You also need a CPA who can help with the gift tax returns and the accounting work that needs to be done.
One thing that I’m very confident in is that you’re going to want to find a qualified wealth advisor who has experience working with the CPAs and working with the attorneys and working with you as the quarterback of that wealth planning team to make sure that the steps that are needed to take place administratively in the ongoing years are carried out, properly documented so that everything that you’ve done doesn’t get thrown out by the IRS and your estate gets taxed regardless.
The first thing that we have to do to help you understand the challenge that lies ahead is help lay the groundwork as far as a basic understanding of some of the complexities of the tax code and how it pertains to you and your wealth. The tax system in this country is designed to take generational wealth away from families. Uncle Sam does have a plan in place. It’s our job, it’s your job, to make sure that you opt out of that plan and create your own plan so your wishes are carried out.
Now, the numerous choices that are available to you are complex as well in making sure that the letter of the law is followed based on precedent, based on case law, based on others’ mistakes, and also based on working with qualified attorneys who have experience in this area. All of this needs to be put together, similar to pieces of a puzzle.
It’s really not a lot different from clients that we work with that have $2 million or $3 million dollars when we’re putting together the income plan, social security, the tax plan, the estate plan for those people. Except, we’re just dealing with different tools, different sections of the tax code, and the consequences are much more severe because the mistakes could be tens of millions if not hundreds of millions of dollars.
Here’s what I mean when I say the tax code in this country is designed to take generational wealth away from you and your family. We have the first generation. This is the family that creates the wealth. Typically, they’ve grown up in more difficult circumstances, they understand the value of the dollar, they’ve worked hard, they’ve built businesses, or were very well-compensated executives at large institutions, but they generate the wealth. They pass it on to the second generation. Without planning, you pay estate taxes.
Right now, the estate tax rate is 40%. If you go back to the late 1990s, early 2000s, anything over roughly $600,000 was taxed at 50%. We’re going to get into some of these concepts in more detail as it
pertains to today’s rates and exemptions. Understand this. First generation earns the money. It goes to the second generation, without planning, you pay estate taxes. If the first generation leaves it to the third generation, this is known as a skip person, a grandchild, for example, not only do you pay estate taxes, but you pay generation-skipping transfer taxes. That’s 40% and 40% everything above the exemption amount.
Second generation receives the wealth. Typically, they don’t have the same work ethic, the same values. They don’t typically understand the planning strategies that you need to keep this money in the family. It passes on to their kids. They pay estate taxes again. Third generation gets it. At this point, statistically, again, this was a 20-year study looking at 3,200 families. 90% of this wealth is gone by the time the third generation passes it on. If somehow they manage to hold onto it, guess what? You pay estate taxes again.
This is Uncle Sam’s plan. This is what I mean when I say it’s designed to destroy generational wealth. This is the plan that you’re signed up for unless you’ve worked with a wealth advisor, a board-certified estate planning attorney, and then taken the steps necessary after that plan is put into place to maintain the integrity of the plan, and following the rule of the law, to make sure that no mistakes happen when and if you get audited, your estate gets audited down the road.
I’m going to start at the ground level here, make sure we provide the context and set up the framework for the challenge, and then we’re going to pretty quickly accelerate to more advanced, sophisticated strategies and getting into some of the techniques, but it’s important that we lay the groundwork first.
The basic challenge that we have is everything that you own is inside of your estate. If it’s inside of your estate and you pass away, you’re potentially subject to a state tax, of currently, 40% over a certain exemption amount, and a generation-skipping transfer tax of an additional 40% if you leave money to a skipped person.
The goal of estate planning when you have $10 million, $20 million, $100 million is to maintain this balance of getting enough money outside of your estate to optimize the tax planning, but also retaining enough control or the ability to generate interest from either these assets or these assets to support your lifestyle and maintain your standard of living. This is where different techniques and different strategies and trusts come into play, and all of them have different considerations that you should look at, as well as benefits, and should be used in different situations.
Now, the reason when you get money outside of your estate that it is no longer subject to a state tax is because you’ve permanently given up control, theoretically, to this asset. The government cannot tax something you do not own. This is the basic idea of what we’re trying to do with estate planning to avoid estate taxes. You may be saying, what’s the big deal? If I need to get money outside of my estate, I can just gift money outside of my estate. No biggie.
Here’s the problem. There’s another tax called the gift tax. In order to get money outside of your estate, we have to gift it, and we are limited with what we can gift before the gift tax is levied. We have an annual gifting limit at $17,000 per spouse, per person. Meaning if you’re married, you can gift $34,000 per year to anyone without any gift tax being levied. If you go over that limitation, you either pay gift tax on it, and if you’re the one making the gift, you’re the one who owes taxes. You could also, though, to avoid those taxes, use your lifetime exemption.
Currently, that’s $12.92 million per person or per spouse. If you’re married, it’s $25.84 million. The first challenge is we’re limited with how much we can gift during our lifetime without incurring tax. The annual exclusion is pretty clear, but the lifetime exclusion, if I gift $12.92 million into a trust outside of my estate, that money is outside of my estate. Okay, no problem there. That also uses up my lifetime exemption for avoiding or reducing potential estate taxes that are owed. This is the same number.
To put another way, if I die with $12.92 million today and I’ve made no gifts whatsoever, I can use this full lifetime exemption, $12.92 million, to offset the assets that I owe, and I owe zero estate taxes. If I’ve gifted outside of my estate during my lifetime, this $12.92 has been used up. It’s no longer there. If I still have $12.92 million in my estate, I don’t get that exemption to bring it down to zero. What’s left in my estate will be fully taxed at the tax rate at that time.
Okay, hang with me here because I know this can start to get a little bit complex. If you need to go back and re-listen to what I just said so it sinks in a little bit more, please do that. We’re keeping this very high level and very simple so you understand the basics. Okay, next problem. The current lifetime exemption that we just talked about sunsets in 2026. You can gift $25.84 million today if you’re a married
couple outside of your estate, no problem.
In 2026, that number under current law is reducing to approximately 12.4 million if you’re a married couple. If you’re a single individual, it’s 6.2 million. When I said there’s more urgency with someone who has 10 million than 200 million in the beginning of this video, this is what I’m talking about. Because if you die today with $10 million, either one, if you’re single or married, you have less than the lifetime exemption. You do not owe any estate taxes.
Now that money is probably going to grow over the next 20 to 30 years. We don’t know necessarily what the exemptions will be in the future or estate tax rates, but there’s still urgency to get something done. Because if we do the planning now, we can gift this much money into some type of estate planning strategy to get it outside of our estate, create some type of balance where we’re either able to generate income or have a trust strategy that gives us the income that we need while also getting money outside of our estate.
Once the sunset occurs, we can no longer gift this amount of money. We are subject to these limitations if we don’t want to pay gift tax. This is why there’s urgency, regardless. If you die today with 200 million, this is only your exemption. You’re going to pay 40% on everything else. If you die today with 10 million, you’re not going to pay any taxes, but most likely, you will in 2026. All right. Now I’m going to walk you through some of the planning process that needs to take place before we can get to some of the strategies. We’re going to get to them in just a couple of minutes.
The first thing that we have to do is identify the players in the game. This is having a conversation about how you want the money to be distributed, if there’s any limitations, but we have to create this family tree. This is a sample case. We have David and Anna with four children who have all of these grandchildren. We create this family genealogy map in order to identify who the key players are in the game. The next thing we have to do is run some calculations.
This is a sample case. We have $129 million combined net worth here, but we need to be focused on the projections in different years. This is in 2055 if both spouses have passed away. Right now, with $129 million net worth, based on the sample case, if we don’t do anything further, we’re looking at about $34 million in estate taxes. If we project out a normal life expectancy, now we’re looking at an estate value of about $333 million with estate taxes of $107 million. That $107 million in taxes does not have to be paid.
It will be paid, possibly more, without planning, but this is where the techniques and strategies we’re about to get into come into play. I have a hypothetical case study here that we just looked at, but now we’re going to look at numbers. This video is titled $10 million. This hypothetical case study shows over $100 million. It doesn’t change the techniques or strategies that we’re going to discuss. It’s just a sample case that we have input into the software already, and this takes hours of work to get set up.
I just didn’t go back and redo a sample case for $10 million because we already had this one in here. Now, I love this tool that we have because so often when someone goes to an attorney and gets all these trusts put together, oftentimes there isn’t a visual understanding of what exactly takes place, where the money is going to go once the time comes. Also, as time progresses, we forget what the heck it is that the attorneys have done.
This is really where the wealth advisor comes in because it’s our job to keep track of all this, not just from a visual and a planning standpoint, but to make sure the administrative items are carried out on an annual basis. Just a very high-level estate plan here. I like to show, so we have David Taylor’s revocable trust. We have the pour-over will here. Any assets left in the estate go into the revocable trust upon the death of David. We have two trusts created. One’s a family trust. One’s a marital trust. After the death of Anna, now it goes to the four children’s, their separate trusts.
Have the same setup over here for Anna. She has a revocable trust and a pour-over will. Money flows through, goes into the children’s individual estates. We also have over here an irrevocable life insurance trust where at the death of Anna, the death benefit pays out. One of the benefits, the big benefits of life insurance when it’s inside a trust is it’s one of the tools that absolutely, if structured properly and the cash flow is directed appropriately, that it’s income tax-free and estate tax-free.
We often lose the step up in basis of our stocks when we have them inside of a trust outside of the estate. Complicated, but it’s one of the big benefits of using life insurance, and that’s why it’s so popular for families that have a lot of money. Last thing I just want to cover is the importance of the maintenance of your estate plan.
We have here, it’s what’s called a milestones tab. The information is extracted from the trust documents,
and also the administrative needs that have to take place. What we’re doing here is we’re monitoring on an annual basis the steps that need to take place. Tax preparation with the CPA. We’re going to sit down with the CPA and start doing tax preparation. Have we utilized our annual gifts? Do we need to review life insurance policies? They should be reviewed minimally every three years. Every other year is a little more ideal.
Then we go through here, crummy letters. Different administrative items that if not followed to the letter of the law, or if not looked at in some time, everything can completely blow up. Okay, now we’re going to cover some of the common techniques that we use in conjunction with attorneys to draft legal documents to help people in that ultra-high net worth asset range plan to avoid estate taxes and keep more money inside of their estate.
Now, one more time, I’m not an attorney. The goal here is to educate you about some of the strategies that are available. It’s not that you should do all of these, I’m just trying to introduce you to the concepts. We’re going to go a bit more in-depth, and I’m actually in conversation with some of the attorneys that we work with. I’m trying to get one of them who’s comfortable being on YouTube and doing these videos to come in and go more in-depth about some of the nuances of these strategies.
The first one we’re going to talk about is the SLAT. It stands for Spousal Lifetime Access Trust. Remember when I said that there’s a balance between getting money outside of your estate, but also retaining control to generate income to maintain your standard of living during your lifetime? This is one of the tools that we can use to do that. We’re able to take advantage of today’s higher exemption amounts of 25 million plus, if you’re a married couple. We can gift that into the Spousal Lifetime Access Trust for your spouse’s benefit.
You use your lifetime exemption. Let’s say it’s 12.92 million. It goes into the trust. The money can be accessed for the benefit of your spouse, and then indirectly you can benefit from those assets while removing them from your estate value. It’s also what we call an asset freeze technique, where all of the growth in those assets, from that point forward, will grow outside of your estate.
The next one on this list is the GRAT, and specifically, we’re going to talk about the Zeroed Out GRAT. Now, this was made famous by Audrey Walton, the wealthy family of Wal-Mart, billionaire family. Her attorneys developed a strategy after going through the tax code to where they would gift money outside of the estate into a grantor-retained annuity trust. After two years, the money was designed to revert back to their family.
Now, what this did was, while the money was outside of the estate, all of the interest compounded and grew outside of the estate. Because written into the trust, there’s a reversionary interest to where the principal goes back inside of her estate, the attorneys argued that this is completely fine, there’s no gift tax due. It was challenged by the IRS, and the Walton family won. This was a win for their family. This is why it’s important to stay on top of this and be aware of what’s going on in the industry because laws can change.
The IRS can appeal different rulings, and maybe a different judge determines a different way. Also, legislation can be passed. It is not uncommon for these strategies to be attacked. The question then becomes, is everything grandfathered in, that’s already been put in place, and is the strategy just removed from being able to implement it in future years? This is why all of these things are very important.
Next, we have a very common and popular technique called the ILIT, which stands for Irrevocable Life Insurance Trust. What makes this very popular is a couple of things. First and foremost, as I said earlier, if the life insurance is structured properly, it can pass income tax-free and estate tax-free. We don’t have to worry about the tax on step-up in basis with assets like stocks that are inside an irrevocable trust. If those stocks are inside of your estate, they get a step-up in basis, no cap gains tax or due upon death.
In an irrevocable trust, you lose that step-up in basis. If you bought stocks for 500,000, they’re worth 2 million, 1.5 million in gain is still subject to tax upon death when they’re inside of an irrevocable trust. The life insurance trust avoids that. You can truly pass income and estate tax-free if set up properly.
Now, the second thing that makes it a very popular strategy for many decades is that we can leverage the annual exclusion amount that allows us to gift up to $17,000 per year, per spouse, per person, per year. If you have 3 kids and 6 grandchildren, and they’re all beneficiaries of the trust, that’s 9 different gifts. 34,000 per year times 9, okay? 300,000 plus a year in insurance premiums that you could use to create a death benefit, income and estate tax-free, that might be 7 million, 10 million, 20 million, whatever that number is.
You can leverage the annual gifting provision depending on the number of beneficiaries of that irrevocable trust. That means you don’t have to use your lifetime exemption. You can use your lifetime exemption to gift stocks and real estate and other assets into other
entities, trusts, et cetera, and have this whole plan come together.
Next one we have here is the donor-advised fund. We’ve put a lot of these in place for clients. Pretty simple concept. Let’s say I gift $50,000 a year typically to charity. Instead of doing that over a 10-year period, what if I just took $500,000 today, put it into the donor-advised fund? What that allows me to do is to get an income tax deduction today subject to charitable deduction limitations. 60% of your adjusted gross income under current law, if it’s a cash gift, if it’s appreciated stock, you’re limited to 30% of your adjusted gross income.
You can carry that deduction forward for up to five years. Meaning if I make a million dollars a year, 60% of that is $600,000. If I’m donating cash into a donor-advised fund, I can do $600,000 in one lump sum, take that full income tax deduction today, as opposed to if I did $60,000 a year for 10 years.
Then in the donor-advised fund, I can give that money to charity annually over the next 10 years. I can change the charities. I can do whatever I want to do. That’s the donor-advised fund strategy. One more thing to add there with the donor-advised fund. That is an irrevocable gift into that charitable trust. You cannot take income off of it. You cannot take that money back. That money is going to go to charity.
Next, we have the CRAT or the CRUT. This is a charitable remainder trust, and we’ve done videos specifically on the charitable remainder trust, but very high level. Same thing, we can take– typically, it’s appreciated assets, so maybe it’s a business interest. Let’s say you’re about to sell your business. Let’s say it’s appreciated stock. We can gift that into the trust because it’s a charitable trust. There is no gift limitation. No $17,000 per year, and you don’t have to use your lifetime exemption.
You actually get an income though, during your life. That’s what the annuity or unit trust, the A or the T stands for. There are certain formulas that we have to follow, but it’s 5% minimally of whatever you put in. If it’s a CRAT, it’s a level payment of 5% of your initial value. If it’s a CRUT, it’s revalued annually, and you can determine the percentage. It can be anywhere from 5% to up to 50%.
Now, a couple of other things to add here. You get not only the ability to sell that appreciated asset with no capital gains tax inside the CRUT or the CRAT, basically the same thing. The U and A only refers to how income is calculated and comes out to you over a period of time. You not only get to sell the capital gain asset tax-free, but based on an actuarial calculation that determines what the remainder interest in this trust is, the amount that actually is going to go to charity when the trust expires.
Let’s say it’s $400,000. You get an income tax deduction today that you can use to offset income on your tax return. To summarize, we make a gift of a highly appreciated asset, typically, into this charitable trust. We’re going to receive an income during our life. We don’t pay capital gains tax when that asset is sold inside the trust, but it also creates an income tax deduction for us today based on the actuarial value of the remainder interest inside the trust that will ultimately go to charity.
Again, just like the donor-advised fund, this is an irrevocable decision. It’s part of a planning technique, though, that can be used to help offset income taxes, estate taxes, gift taxes, generation-skipping transfer tax, and capital gains taxes. Another very common estate planning technique that we see is the intentionally defective grantor trust.
I’m not going to go too far down this rabbit hole, but essentially, it’s a grantor trust, meaning that the assets that you put inside of that trust, the income and gains from the sale of those assets or income generated, flows through to your personal tax return. You pay taxes personally. This has the benefit of helping to reduce your taxable estate because you use money from inside your estate to pay taxes, which lowers the value. For estate tax purposes, that money is now outside of your estate.
It’s another asset freeze concept where if I gift $15 million into the intentionally defective grantor trust, I’m going to pay income tax. It flows through to my personal return, but the asset itself is frozen at that value, so all the appreciation grows outside of my estate. That’s just very high level. Intentionally defective grantor trusts get to be a bit complex, but I want to introduce you to the concept so you have the opportunity to learn more.
Again, most importantly, work with a CPA, work with a board-certified estate planning attorney, and also, the wealth advisor to bring this whole picture together. The last one that you may have heard of, but is very popular for passing wealth across multiple generations, possibly hundreds of years, is the dynasty trust. It’s a specific type of trust domiciled in one of the states that allow dynasty trusts because many states do not allow trusts to go on in perpetuity or for an unlimited number of years. It’s an irrevocable trust, again, where we gift money into it.
We have some limitations there, but the dynasty trust allows you to have control and limit the ability to access principal, income, whatever your wishes are for multiple generations. Now, for the number one reason that most wealth is lost by the third generation, it’s poor communication amongst family members.
The studies have shown that parents typically either don’t want their kids to know how much money that they have, or they don’t have a family governance structure where they’re having meetings, they’re discussing these things. They’re identifying the specific roles that different family members play. They’re introducing them to the wealth advisors, the CPAs, the attorneys. They’re not having this open dialogue of the wealth and how to properly manage the wealth across generations. The number one reason that they found is poor communication amongst family members.
In summary, you want to make sure that you find a really good wealth planner. I would recommend going to the CPWA website, so that’s the Certified Private Wealth Advisor website. As a CFP pro myself, the difference between the CFP and the CPWA is the CFP covers a broad array of content, but it does not go very deep. The CPWA covers much less content, but it goes tremendously deep, and it’s focused on the super high net worth crowd.
I did mine through the Yale School of Management, and hundreds of hours literally of studying a very comprehensive exam, but then applying that information along with the experience that I’ve had working with ultra-high net worth families, having conversations with attorneys and CPAs, and bringing this all together has resulted in hundreds of additional hours of studying the law, understanding how these strategies work, and then seeing them play out in the real world.
The CPWA website, it’s administered by the Investments and Wealth Institute. They have a feature where you can find a CPWA in your area, and that’s the person I believe you want quarterbacking the team, is the Certified Private Wealth Advisor Professional. Make sure for attorneys, you find board-certified estate planning attorneys and interview a few different ones. This is what we’ve done. We went around to get to know the expertise and the experience of different attorneys in our area, as well as even in different states now that we work with clients all over the country.
Then also the CPA. You want to make sure that the CPA has the chops to be able to file the proper returns, specifically, gift tax, estate tax, because not all CPAs, just like not all financial advisors and all attorneys are the same. Everyone has their different area of expertise. This information, though, should help get you on the right track to putting your team together.
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