By Aviva Sapers
For high net worth individuals, finding efficient techniques for limiting the amount that goes to the IRS when you die is always a challenge. Typically, your estate has three beneficiaries: your family, charity, and the IRS. No one has ever said they want to leave money to the IRS. Therefore, the questions to answer are how much do you want to go to your family? How much to charity? And how can you disinherit the IRS? Another concern we often hear is, “I don’t want to leave my kids too much so that they don’t ever learn the value of hard work.” We can suggest a technique to help answer all of these questions and concerns.
Current federal estate tax laws allow each individual to pass approximately $12.06mm to the next generation in 2022 without any federal estate taxes. This would allow a couple to pass along $22.120mm to their kids tax free at the federal level. The current exemptions are set to sunset and revert to smaller numbers in 2026, but for the sake of this concept, let’s use the current exemptions and assume an estate worth $50 million, far larger than the $22 million of protected inheritance
Under today’s rules, assuming a 40% marginal tax bracket, the remaining approximate $28mm (the amount over the exemption) will be taxed to the tune of $11.2mm, typically due within nine months of death—leaving $16.8mm after taxes for a total inheritance of $38.8mm.
Now let’s apply a different technique to the same estate to see if we can maximize the amount that goes to your family while also benefiting charities of your, and your beneficiaries choosing.
A Zero Estate Tax Strategy utilizes the estate tax exemptions along with an Irrevocable Life Insurance Trust and charitable beneficiaries to maximize the inheritance and disinherit the IRS. By purchasing a large life insurance policy to be held in a trust outside of your estate, you can make up the difference between the exclusion total and the amount you would like to pass on to your family. The key step is to name one or more charities or a Donor Advised Fund (DAF) as the beneficiary of the rest of your estate beyond the estate tax exemption. By making annual gifts to a Wealth Replacement Trust which pays premiums for the life insurance, you can determine how much your family will inherit and how much will pass to charity.
At death, the Irrevocable Life Insurance Trust will receive the insurance proceeds (income and estate tax free) for the benefit of the beneficiaries in accordance with your wishes. The remainder of your estate will go to the named charities or a DAF, allowing your children to distribute the funds from the DAF over their lifetime.
For the sake of our example, the Irrevocable Life Insurance Trust will own $20mm of insurance, which along with the $22.12mm in exemptions brings the tax-free inheritance to $44mm. The remaining money all goes to charity and the IRS is effectively disinherited from your estate.
If you are concerned that $44mm is too much for your kids to inherit, you can reduce the amount of insurance and leave more to charity. The same concept applies when the exemption reverts to a lower number in 2026. If you have any questions about how this technique might apply to your estate planning, don’t hesitate to contact me.