Zeroed Out Estate Plan

Key Takeaways:

• A zeroed-out estate plan strategically eliminates federal estate tax liability by ensuring the taxable value of an estate equals zero at death.
• Utilizing structures like a Grantor Retained Annuity Trust (GRAT) or Charitable Lead Trust (CLT) allows high-net-worth individuals to pass significant wealth to heirs tax-free.
• Incorporating a charitable fallback provision directs any remaining assets over the unified estate tax exemption to a charity, completely wiping out the IRS tax bill.

By Matthew S. Dana, Atty, CPA, LLM in Taxation

Over my 41 year career and working my way up from Tier 1 clients to Tier 4 clients (over $100 million – for an explanation of the Tiers, go to our website DanaWhitingLaw.com), I have learned that paying the Federal Estate Tax is optional. Our firm has many clients over $100 million, and most of them are averse to paying anything to the IRS. And for the few that don’t mind paying some Estate Taxes, there are several options of how to pass that down to lower generations.

When a wealthy client dies, all “Green Boxes” pass free of Estate Taxes down to multi-generational Trusts for future generations. And we have clients that now have hundreds of millions in such “Green Boxes” by implementing our strategies on our YouTube videos (refer to
my Article “Red Box, Green Box “). Simply put, “Green Boxes” are Trusts that will pass free of Estate Taxes at each generation. Red Boxes are Trusts that will pay Estate Taxes at the death of each generation. It is not uncommon for children of wealthy parents to inherit multiple Trusts, some are Red and some are Green.

Let’s talk about the “red piece” of an Estate that exists when a wealthy client passes away. How does a Tier 4 client, worth $100 million+, eliminate all Estate Taxes. Let’s assume
that upon death, a client has $80 million in Green Boxes that pass Estate Tax free and $20 million that will be subject to Estate Taxes. At this level, there are only two choices to eliminate the Estate Tax and end up with a “zeroed out Estate Plan”.

The first, and perhaps the most common to zero out the Estate Tax, is to give the red piece entirely to either a Public Charity, or to the Family’s Private Foundation, or to a Donor Advised Fund. By doing so, the Estate receives a Charitable Estate Tax Deduction equal to the amount of the red piece. And thus, no Estate Taxes. Clients are happy that the IRS gets zero, charity is happy to get such a large donation, but the kids are upset that they didn’t inherit that $20 million red piece, minus the $8 million of Estate Taxes.

Is there a way to make all three happy, the client, the children and charity. Yes, here comes “the Washing Machine.” The technical term for the Washing Machine is a “Testamentary Charitable Lead Annuity Trust.” Once again, go to our YouTube channel to see a video on this technique first used by Jackie Onasis (called the “Jackie O Estate Plan) and then again by Sam Walton of Walmart. This is a tried-and-true Estate Tax Savings strategy used by the wealthy. I have obtained many wealthy clients by introducing the Zeroed Out Estate Plan to them. In a nutshell, here’s how it works and how you make all three parties happy. At the client’s death, the $20 million red piece goes into a Testamentary Charitable Lead Annuity Trust (“TCLAT”). The Estate receives an immediate $20 million Charitable Estate Tax Deduction and pays zero Estate Tax. Bingo, the client is happy. Over the next 15 to 20 years, the TCLAT must pay $20 million over to the Public Charity or the Family Foundation. Payments start out very “skinny” and get bigger each year. At the end of the 15-to-20-year period, the Charity received $20 million. Bingo, the Chairty is happy. And, 15 to 20 years later, with compounding interest, the TCLAT still has $20 million in it that terminates and pays out to the kids. Bingo, the kids are happy. The only party unhappy is the IRS.

If both strategies above receive the same $20 million deduction, why wouldn’t the client choose the TCLAT and the “Zeroed Out Estate Plan.” Over that 15-to-20-year period, the TCLAT washes out the dirty laundry (Estate Taxes) and pays out clean assets at the end back to the children. Too good to be true? No, “google” Zeroed Out Estate Plan” or the “Jackie O Estate Plan.” It is true and it works. And as long as we comply with the IRS Code and the Regulations, there isn’t anything the IRS can do about it.

And better yet, we like it for another great benefit. If the IRS audits all of our Green Boxes and finds another $10 million “red piece” and increases the red to $30 million, they are still getting “zero Estate Taxes”. $30 million goes into the Washing Machine instead of $20 million. In other words, the Washing Machine serves as a deterrent for the IRS to burn too many calories to audit and increase the red piece. They have nothing to gain. Our $80 million green piece passes down without any audit.

And if we pass the red piece of $20 million to the Private Family Foundation, then the kids can serve on the Board, receive salaries and manage that wealth. Having a Charitable Family Foundation, like every President of the United States has, can help the children further their careers by getting invited to every major Charitable event thru out the year expanding their network and their opportunities. What famous person said: “It’s not how much you own that counts, what counts is how much you control.”

Now, if you are one of the few clients that are so patriotic that you feel a duty to pay Estate Taxes of $8 million and pass $12 million to the kids then at least read my companion Article titled “Planning for the Red Piece Using a Non-GST Trust.” And for the record, if the goal is to make the kids as wealthy as possible, this option of paying the Estate Tax upfront and allowing them to compound the interest on $12 million will produce the most wealth to them in 20 years. On the other hand, if the goal is to pay the IRS zero, have a deterrent to an Estate Tax audit, and further the family’s philanthropic goals, then the Washing Machine (the TCLAT) is the way to go.