Squeeze, Freeze, Please: Estate Planning Strategies Explained

Over my 40 year career as an Estate Planning lawyer, Clients have often asked me “What do the wealthy people do to save death taxes?” The long answer would take an entire semester in Law School to explain. I will try to summarize the strategies of a High Net Worth client in this one article. Although most lawyers like to talk code section and regulations to make them look smarter, I try to talk in simple terms and in parables. I promise you that all Estate Planning strategies for the wealthiest families in America can be summarized in three simple words, “squeeze”, “freeze” and “please”.

Until the end of 2025, the hottest Estate Planning strategy in the entire United States is the “squeeze”. Don’t try to google this. At Dana Whiting Law we made up these terms as symbols for complex strategies. The “squeeze” is nothing more than locking in your Federal Estate Tax Exemption of just under $14 million, before it “sunsets” back to $7 million the end of 2025. And, the best way to lock it in is to make an Irrevocable Gift into a “Green Box” (see our Article on this website “Red Box Green Box”). A “green box” is an Irrevocable Trust that will not be subject to the Estate Tax when you die. A “red box” will be subject to Estate Tax at the time of your death. The Article on “Red Box, Green Box” describes the different types of “green” boxes that exist. But a “squeeze” is simply “squeezing” more into your Federal Exemption as it goes into the green box by using Valuation Discounts. To understand a “valuation discount” see the Article on this website entitled “The Family Limited Partnership, the Greatest of all time”. In other words, with a “squeeze’, your Federal Exemption is more valuable. You end up “squeezing” discounted assets that have an actual value of $18 to $20 million into a $13 million Exemption. The national average for valuation discounts is approximately 33%. What a country! So, I am saying that a husband and wife, using the “squeeze”, can lock in their Federal Estate Tax Exemptions before they expire and reduce their “red box” by almost $40 million in assets. And, as you will read in “Red Box, Green Box”, the most popular “green box” currently in the United States is the Spousal Lifetime Access Trust, or the “SLAT”.

Ok, we are off to a good start. But, your Taxable Estate (red box) is at $100 million, so now what? Well, let’s talk about the “freeze”. We can’t shrink your Estate any more through gifting because we have completely used all of your Federal Exemption. But what we can gift into a green box, is all of the future appreciation on the $100 million. In other words, lets don’t sit back and watch your Estate double in size every 8 to 10 years. Lets get the growth and appreciation in a green box, and at the same time “freeze the value” of the red box. Great idea, how do we do it? Two ways, either a GRAT (Grantor Retained Annuity Trust) or an IDGT (An Intentionally Defective Grantor Trust). Now you see why I don’t use the technical law school terms. Go to law school if you want to learn those. Come to Dana Whiting Law if you want to apply the principles and understand what you are doing. Both the GRAT and IDGT are effective to achieve a “freeze”. But here I am going to talk only about the IDGT because it is better for many reasons. If you want to learn the reasons, then call us. But, in this IDGT technique, a “freeze” technique, you don’t gift to a green box, you sell your assets to the green box over a 10 to 20 year period and take back a Promissory Note. Thus, the term “Installment Sale”. The terms of the Note and the Interest Rates must meet IRS regulations. So, lets assume that we sell another $30 million to the green box and take back a $30 million Note. This is not a “gift”. This is a transfer for “fair and adequate consideration”. I don’t need to use any Exemption to do this. I don’t even need to file a Gift Tax Return, form 709, although for reasons beyond this Article I probably will. Now over the next 10 to 15 years, the assets are in the green box appreciating in value. The asset in the red box, the Note, is “frozen”. And better yet, I still get the use and enjoyment of the income in the green box thru the payments of the Promissory Note. The “freeze” is on.

Yes, but what about Capital Gains? You were taught all your wealthy life, that selling assets, with low basis, generates Capital Gains. That is not a smart idea you say. But wait, I need to tell you that the green box, this particular green box, is “intentionally defective”. What does that mean? Well the technical term is that it means that this green box is a “Grantor Trust”, and that means that for Income Tax purposes it is ignored. So, for Estate Tax purposes, the assets are in a green box. But, for Income Tax purposes the sale of a Capital Asset didn’t happen. Therefore, no Capital Gains. What?? This is an amazing country. You are starting to learn what the rich people do. They avoid taxes by hiring smart Attorneys. Better yet, they hire smart Attorneys who can explain complex subjects in an easy way to understand. That is the advantage of hiring Dana Whiting Law. 20 years later, the green box is now worth $300 million, and it is still green. No Estate Taxes on that green box. Remember, “once green always green”. And yet, over that 20 year period you still had the payments on the Promissory Note to give you the lifestyle you want. And, if the green box is a SLAT, set up for your spouse, your spouse controls and has the use and enjoyment of the $300 million in the green box. Wow!

Ok, now I am dying to get to the last word, the “please”. So, after you have done a squeeze and a freeze, there are only 3 things left that can be done. And all three of them involve “pleasing someone”. In our example above, we gave away $40 million to a green box, and we sold $30 million to a green box. Our red box is still at $60 million (the $30 million we didn’t gift or sale, plus the Promissory Note worth $ 30 million). So, the first “please” is to please the IRS. You have fought a valiant fight. 20 years later you have $300 million in a green box. So, big deal, we will gladly pay the Federal Estate Tax on $60 million. It will cost $24 million, which is 40% of the red box. The kids and grandkids are fine. They still have $300 million.

Ok, but I don’t want to pay the IRS anything. Well, how about “pleasing” a life insurance agent. Buy a $25 million policy inside one of the green boxes, that can create liquidity to pay the Estate Taxes caused by the $60 million in the red box. Essentially you are prepaying the Estate Tax through life insurance premiums. That’s not a bad idea. I learned that when I sold Life Insurance for 8 years while I went to College and Law School. But, I am not selling insurance any longer, but I do have to admit that Life Insurance Agents like me because I understand Insurance. I didn’t mention above, but I am also a CLU. (Chartered Life Underwriter). That means I understand insurance and the role it can play.

But, maybe you don’t want to buy the insurance because it actually just makes the kids and grandkids richer and they are going to be fine with the $300 million. But, I still don’t like the idea of pleasing the IRS and paying taxes. Well, the last of the three “pleases” is to please Charity. There are two ways to do this. One is to put a formula in your Estate Plan that says this “I don’t ever want to pay Estate Taxes, so upon my death, anything that is red, that would cause an Estate Tax, make it “green” by having it pass to charity. And, oh by the way, lets make that charity my own Private Family Foundation. Most of my High Net Worth clients would rather this red asset go to the charity or charities of their choice rather than to the IRS to save the spotted frog in Hellsinki Florida. I am just making all of these names up, but I think we all get the picture of how our US Government can have wasteful spending.

And now, the grand finale. But wait, what if I want the Charitable Deduction, and I don’t want to pay any Estate Taxes, but is there any hope that some of those red assets can come back to the kids at a later date? Oh, yes there is. Do you think I am a bad lawyer and would ask a question I don’t already know the answer? Of course not. Welcome to the “Washing Machine”. That Article is forthcoming. If you want the Harvard Law answer, then you can google and research the TCLAT. The Testamentary Charitable Lead Annuity Trust. What? I like the Washing Machine better. What happens is that $60 million that is red when you die, drops into a TCLAT and for the next 15 to 20 years, it pays to your Family Foundation the entire $60 million. But, during that period of time the assets actually double to $120 million inside the TCLAT. And, 15 to 20 years later, there is $60 million in the Family Foundation, and another $60 million comes back to the kids and grandkids. So, they get two inheritances. They get the $300 million at your death in a green box, no taxes. And they get another $30 million 15 to 20 years later. And the beauty of it all is that you paid zero in Estate Taxes. The TCLAT takes 15 years or so to “wash out the dirty taxes”, but then the clean laundry comes back to the family where it belongs. Now if that doesn’t get you slobbering all over your computer then you should go ahead and believe your old family lawyer that says that “nothing can be done” after you use your exemptions up. Or instead, you can continue to study this website and look at the testimonials from some of our wealthy clients that attest to the fact that we know what we are doing.

So, in the end, send me an email and tell me that you liked this article, and you want to learn more about the “Squeeze”, the “Freeze” and the “Please”. Matt.Dana@DanaWhitingLaw.com.

Squeeze – Freeze- Please

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