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Ultra High Net Worth Estate Planning: The Top 5 Strategies · The Practical Planner

• Practical Planner (Wealth.com): Every state has a a period of time where the maximum amount of time a trust can exist. And then after that point the trust has to terminate and distribute to beneficiaries. And in most places it's about ninety years. For some people that's more than enough time. The money I put in the trust is gonna only last ninety years or less and so it's fine. But you know, if you're putting meaningful assets into the trust, and frankly, even thirty million dollars might last more than ninety years if you've invested well. All right. What is up and welcome back, everyone, to another another episode of the Practical Planner Podcast. I'm your host, Thomas Coleman. ⁓ here me again is Lisa Weigel and Chris Nason. Thank you guys for both joining me today. We're happy to be here. Yeah, glad to have you guys. So, ⁓ you know, we've done a bunch of episodes talking about different tools, but this episode is going to be all about kind of like the five most common or most popular, you know, ultra-high net worth estate tax planning tools. ⁓ but before we dive into it, Chris, quick question for you. You know. Obviously, for so long, we were all talking about this, you know, sunset of the estate exemption. You know, we gotta get hired your planner, you gotta be with them a year early, everybody's gonna be full. And before we know that it's gonna get cut, you're gonna, you know, they'll be full, you can't make any decisions. I'm curious though, for you, you've done planning well before that. Then we had all the sunset. Like, how has planning changed before when it was lower to then it got higher, to then maybe it was gonna get lower to what it's at today? Yeah, I mean the recent tax laws have been ⁓ a boon for lawyers, right? Like a great way of advertising people to to get into practice. I think it put a lot of stress on people who weren't quite ready to give. But in general, you know, regardless of law changes, it makes sense to give when you can afford to give. And it doesn't make sense to give when you can't afford to give, right? Like no one wants to impoverish themselves in order to use up all of their exemption. But by the same token, if you have extra money lying around that you're never going to use, giving it now when there is exemption makes sense because you get the time value of the appreciation outside of your estate. Yeah. And so you worked with a lot of these people in this like hundred million space. So did you mostly see like, regardless of exemption at that point, people are like, I have more than enough money that I could ever really need. I can use the entire exemption, not really worry about it. So it was pretty much a given that like everybody was doing some estate tax planning and using the full exemption. Yeah, for most of the clients I was dealing with, ⁓ when the exemption doubled, you know, the next day they wrote really big checks and that was the end of it. ⁓ and then when it was thinking about being cut in half, nothing had changed because they had already used their full amounts. Yeah, that makes sense. That's what I see too, is like that hundred million number is like where it becomes kind of obvious. But Lisa, obviously you worked in still kind of a high net worth space, but not quite that level. What did you see? Like when people were generally this like, you know, 30, 40, 50 million range, was this something that they would use? Did a lot of people not use? Did they drag their feet? What did you see? Yeah, it's been a r ⁓ funky couple of years. Certainly, we had a huge rush. ⁓ I remember when ⁓ Biden was elected, there was like this mass, like there was an uncertainty that was involved. So we had a ton of clients like, I gotta gift all these things before the year end. ⁓ and then you know, we had we had a little more certainty. And then when TCGA ⁓ happened, and then when we were anticipating the sunset, it was always this like, are we we were kind of dreading like, okay, we got to get people in the door. And I remember last you know, when we were waiting for ⁓ you know, the One Big Beautiful Bill Act, ⁓ it was it came out, you know, it was passed on July 4th that year. And then June, we were having meetings at the firm saying, like, we have to tell clients, like, you can't wait till the last minute's a gift. We can't all be doing this in December, like. You and really the philosophy at the time was like you shouldn't be gifting with a gun to your head. So as Chris mentioned, like if you can do it, you should be doing it. If you can't do it, you shouldn't do it. So it shouldn't be about, you know, whether that clock was gonna run or not. But yeah, I I advised a lot of entrepreneurs in particular. So we had a lot of folks that had like, you know, ⁓ interests in companies that were potentially gonna explode, but at the time, you know, was it was a little bit low. So we did a lot of like slat planning, Spousal Lifetime Access Trust, where we're like, let's get that like right now where it's a lower value. We anticipate it growing. So let's like lock it into this mechanism. But of course there's there's always pros and cons to each of those strategies. So yeah, it's kind of gone in waves over time based on the exemption and kind of where people are. But ⁓ yeah as Chris mentioned, the the general themes sort of remain the same over time. It was like the greatest like ⁓ estate planning sales tool possible, right? Like, you know, not not saying that estate planners are selling and they're they're bad at they're like, you know, salesy people, but I mean, the we know that a lot of where people end up with financial advisors or tax or estate is out of fear. And so, like that kind of fear of changes and you don't want to miss out on that was a pretty kind of crazy tool. But I think you starting to walk into slats opens the door to the conversation around like What are the some of the most common tools that we see used today and why? ⁓ so Chris, like what's kind of like that that first tool you think of that is is really being used? Sure. And I think we've already touched on it slightly. It's it really is gifting, right? I mean, as an individual, you have $15 million. As a couple, you have $30 million. That's an enormous amount of money that you can get out of your estate in a reasonably easy, reasonably efficient way. And, you know, assuming that the money grow doubles every 10 years, you know, if you Give away thirty thirty million dollars and then live an extra twenty or thirty years. That's a hundred million dollars to your descendants with almost no planning. Do you find inside of that, like most people's first step is kind of a slat, like Lisa brought up? Sure. And and the slat is great because ⁓ the beneficiary of the slat is your spouse. And so it's sort of a break glass in case of emergency situation. Like I'm willing to give this away, but I maybe I need it at some point in the future. So let's make my spouse the beneficiary. ⁓ it comes with, you know, a handful of uncertainties, right? I mean, first off, it's not guaranteed. Your spouse could die, your spouse could divorce you, and then you're you're out of the money. And so the question is, you know, you have to think about that. But then the question is, how do you define spouse? Right. For a lot of clients, they would say spouse is. you know, the person I'm married to now. And if that person isn't my spouse, we'll deal with it in the future. But sometimes clients would hedge their risk and they'd say, actually, I want to define spouse as the person to whom I'm married at any point in time. And so if I divorce my current wife and I marry, you know, my new wife, my new wife steps into that role as the beneficiary of the trust. if you're not married. What's that? What about that gap time where you get divorced and you're not married to anybody? Well then you're not then You know, your descendants are beneficiaries of the trust, but you're essentially locked out of the trust. Okay. Okay. And again, that's a difficult conversation to have if you're advising a married couple, right? We're setting up this structure for the family and potentially second life. Yeah. I mean, because it's hard. Like you don't you don't know the ins and outs of the marriages, right? And so like it has to be one of those things that you bring up right away. I I actually don't hear people bring up like the death side very often. Like obviously there isn't much control there, but I hadn't really thought about the fact that like You're most people are like, well, I'm a little scared of gifting. So SLAD is kind of that middle ground where like I am gifting, but like if we need the money because, you know, my employer stock or my business fails, we have it. But, you know, if we get divorced, that's a big risk. But you fail to think about that. If they pass away, now this is truly just for your kids. And you are actually pretty much locked out of that. Right. And the two ways of dealing with that, right? The obvious one is the way everyone deals with ⁓ the risk of a spouse dying is life insurance. Yeah. Right. So put a bunch of money in the trust, figure out the actual chances that your spouse will die and buy ten million dollars of life insurance on that person. And so if your spouse dies, there's a second trust with a similar amount of money waiting for you. And it's not often that expensive to buy a big policy. So you basically have a an islet paired with a slab. Exactly. That is super interesting because what you'll find is a lot of times, you know, you have the the earner, they have the slat for the spouse. They don't have life insurance on the spouse because the spouse doesn't really have the earning potential and maybe you're self-insured, but like that kind of helps. Well, that really solves the myth of why life insurance is even is still extremely valuable on them. Right. And it depends in part on your risk tolerance, right? Like a number of horrible things have to happen. Your net worth has to go low enough that you want to tap into the slat and your spouse has to die. And so you're getting to the point where. Maybe it's okay to not have the life insurance. But if you're really risk adverse, it's worth considering. Well, true, because you think about all the companies IPOing today. So you have the SpaceX, the Anthropics, blah, blah. Let's say you have 30 million of that stock and you're like, well, I'm 35. This is kind of a no brainer. Let's I'm gonna hold a bunch of SpaceX. Let me throw it in a slat. But then something does happen to your spouse, SpaceX is down 50%, and now you have seven and a half million in your name. That that is a risk. Yeah, the other concern that my ⁓ clients would often express, the ones that were, you know, entrepreneurs that owned businesses and, you know, they they had, you know, full ownership of a company. And we were debating should we put this, you know, some portion of this into a slat for the spouse, you know, I would often hear like, well, then what happens if, you know, like who's who's voting that those interests? Because if it's this, you know, who depending on who the trustee is, and then they're kind of driven by the beneficiary concerns, you know, I remember having one client who, you know, was so concern about like, well, what if my wife and my kids like gang up on me and then they want to make decisions in the company and they have this majority interest now. So that's also, you know, a concern when you take those type of interests and put them into a slot. You know, you you the whole purpose of of gifting and the reason that you get, you know, the benefit of getting out of your state is you do lose that control. And that can be really tough for clients too. That's a really good point. ⁓ okay anything else inside of gifting, Chris, we need to go you want to hit on? No, I mean well, I think I mean Let's talk a little bit about dynasty trusts since that's sort of adjacent. Every state has a a period of time where the maximum amount of time a trust can exist. And then after that point, the trust has to terminate and distribute to beneficiaries. And in most places it's about ninety years. For some people, that's more than enough time. The money I put in the trust is gonna only last ninety years or less. And so it's fine. But you know, if you're putting meaningful assets into the trust, and frankly even $30 million might last more than 90 years if you've invested well. And and certainly if it's 90 million of or 30 million of SpaceX stock or something like that. but certain jurisdictions, you know, have done away with or increased significantly that rule against perpetuities period. And so ⁓ I think Florida used to be a hundred years, which was too short. And so they made it 365, Nevada's 360, Wyoming's a thousand, Alaska's a thousand, South Dakota is infinite. And so if you're thinking about setting up a trust with what might be truly dynastic wealth, establishing that trust in one of those jurisdictions is a way to preserve that and keep that tax exemption ⁓ for as long as possible. Trusts are generally updatable, changeable, modifiable. This is the one thing that has to be done when the trust is created. You can't create a California trust under, you know, the 90 year rule and then move it to South Dakota and expect it to go infinitely. You have to set up the trust. in that jurisdiction. That makes sense. It's also interesting to think about like with all the advancements in medicine and life expectancy, like how important that will actually become, especially with the sudden wealth of young people too, from a lot of these companies, right? If you look at the you brought up SpaceX, I brought SpaceX, like a lot of these people are like thirty to forty five years old at, you know, fifty to a hundred million wealth. And so, you know, if their health is good, they might themselves have sixty, seventy, eighty years to live just there. Gifting, we talked about SLAS, talking about dynasty trust. What are some of the other tools ultra network people are using? The second easiest is a sale. And so, you know, I put say fifteen million dollars of assets into a trust. I can then sell up to a hundred and thirty-five million dollars, sort of nine X what I originally put in into that trust in exchange for a promissory note. And the promissory note is, you know, artificially low. Is it the AFR, the applicable federal rate? Any returns, any increase in value in that trust beyond the AFR accrues to the trust. It's a it's a freeze technique. ⁓ because the the trust you're selling to is a grantor trust, there's no realization event on the sale in. And as the payments come out, again, because it's a grantor trust, there's no income tax due on the interest when it re when it returns to you. And so it's a great way to sort of affect an estate freeze after you've ⁓ You used up your exemption amount. Is that a beat it? Is that kind of what that is? No, that that's just a ⁓ an installment sale. ⁓ a beat it is not something I'd recommend, but it's a a very aggressive technique to sort of change the grand tour of a trust. Okay, yeah, because I've seen I've seen like two beat it's come across my desk from like clients, and every time I go talk to somebody about it, they're like, I just don't see why it would ever be be used and it's almost never written. And then I talk to people, it's a pretty confusing tool. It is. Yeah. And I happy to chat about it if you'd like, but this is a much more straight down the fair way. You know, the trust has money, the trust buys an asset with that money and appreciates. But ⁓ I did one of these for a client in ⁓ you know, 2020 when the company was the you sold interest in a a privately held company to the trust. And the company was was worth a reasonable amount of money. But over the and so sold You know, gifted $11 million in, sold another $110 million in. So $120 million with a promissory note of $110. And then the company really exploded in value. And so within five years, the trust had a net asset value of about half a billion dollars. And that was just on the appreciation on that extra hundred million dollars he had had sold in. And it was in a a South Dakota dynasty trust. He'd applied GST exemption. So it was a trust that was going to exist forever and be exempt from GST taxes forever. And so, you know, it borrowing changes in law, no transfer taxes for the end of time. Becomes a borrowing tool. Yeah, exactly. Okay. And I mean, I honestly I think inside of that too, just like lending to kids and family is probably one of the most common tools you see too, right? Like it's you've used your exemption, you've you've given a trust, you want to get out more. Just lending to them at AFR rates when they're young is is super advantageous. It's super advantageous. It's a a trap for the inquiry sometimes because you really have to make sure they have the ability to repay the note. Right. Like I can't I can't lend my 18 year old five million dollars unless my 18 year old has means to repay that. And if the plan is, you know, I'll lend you $200,000 today and then forgive it, you know, using my annual exclusion amount over the next five years. Yeah, the IRS, if they look at it, will say, No, no, no, that was a gift from day one. There was never a plan to repay. Yeah. Yeah. But I mean, if you do it and actually have the loan or like, you know, every once in a while you forgive a year or something, you're probably okay. But very different. That's exactly right. And with mortgage rates as high as they are, I think you see a lot more people lending to kids, you know, at a much more reasonable rate to get them started with a home or something. Yeah, that's the most common. A lot of my clients end up doing that. Like, hey, if I'm gonna hold bonds, why not create the same thing with my responsible kids who I know will pay me back? And help them out. That's right. I mean, there's of course a a slight family issue there. I mean, God forbid if your kids don't pay you back, then you you're a creditor to your children, which can be ugly if you actually plan to collect or need to collect. Yep. Agreed. Okay. What's the next tool? So we've ⁓ I think the next one would be the graph, right? ⁓ the biggest tax loophole in the code. Backdoor SpaceX clients is a great tool. Exactly. I think ⁓ there was an article in the New Washington Post, it's a few years old now, I think 2010. Where they analyzed SEC filings to find that ⁓ Sheldon Adelson had transferred $7 billion to his kids using GRATS. But the GRAT is another freeze technique. You take assets, you put them into a trust, and the trust agrees to pay you ⁓ an annual annuity amount, usually for two years, so that the present value of the stream of annuity payments is approximately equal to the amount of money that you put into the GRAP. So I transfer $100 into a GRAP. Year one, the Grat agrees to pay me $50, $55. Year two, the Grat pays me $55. The value of those payments cumulatively are say $99. So I've made a $1 payment to the Grat and I received back $110 over two years. And if that $100 grows faster than that rate, and that rate's calculated using the $7520 rate, which is tied to 10 year treasury bills, so it's always pretty low. ⁓ the appreciation stays in the grat. And it's tax-free. You know, the the great thing about this, of course, is that you know, if the assets increase in value, you've got tax-free appreciation out of your estate. If they decline in value, if they go down, then the grad just fails. It pays back everything it had to you, but it fails. You've used a dollar in this case of exemption. You've wasted a little bit of money on legal fees, but you haven't made any other bad transfers. And so, you know, doing this with single concentrated positions. Or doing, you know, five or six GRAS at a time, each with different stocks, means that the w some will go up, some will go down, but you get to keep all the winners and dump all the losers. And so it's a really powerful, you know, it's in the code. So Congress, you know, has to change it. The IRS can't challenge it. And it's a really powerful mechanism. And do you find it's generally two years because of there's a higher chance of success than if you do like four years and then you know, the market's down 30% and now that bounce back is just too hard to recover from. So you'd rather have just restarted one quicker. Yeah. I've I've seen ⁓ you know, projections and ⁓ modeling that shows that two years is almost the best, the best case. And, you know, really the ideal is every year you're getting the annuity payment back. And so every year you're taking that annuity payment and putting it into a new grat, sort of a roll grant structure. So they're consistently in there. If you had a view that interest rates were suddenly going to spike, that might change because you'd want to lock in at six years at, you know, a low interest rate. But if you can predict interest rates, there's a lot of other plays you can have to make. Make make a lot of money. Yeah. Good point. Okay. I think we have two more tools left to talk about. So I think we have well, so we've talked about gifting slats, grats, dynasty trusts with installment sales. ⁓ So I think the last one I was going to talk about, but happy to talk about more, would be the ⁓ testamentary charitable lead trust. Okay. And so ⁓ you know, a charitable lead trust, a CLAT, is ⁓ a trust that pays, it's sort of like a grat, except that the annuity payments are paid to charity. And so the the payment is made every year to the charity of your choice. And then at the end of the term, the assets in the trust pass to the people you care about. And so again. The the annuity payments are set using that artificially low 7520 rate. And so if the assets grow faster than that, there's money left over. It's a really powerful tool to be used ⁓ at death, right? In a as a testamentary form, not for any sort of income tax benefits, but for the estate tax benefits. And the idea here is, you know, you have A million dollars left in your estate. You've done all your lifetime giving. So your your kids are reasonably well set up for a long period of time, but you've used all your exemption. And sorry, I'll make you richer. I'll say you have $10 million left in your estate at the end of the day. ⁓ you know, you'd say you'd be normally subject to 40% tax on that plus state taxes. So at least $4 million up to $5 million of tax. And so what you do instead is you put all of that money into the charitable lead trust. And set the payments so that they again have a present fair market value equal to the amount of that money. And you get a full $10 million charitable deduction on your estate tax return. And so you pay zero dollars in estate taxes. The trust exists for 10, 15, 20 years, makes payments out to charity. And at the end, there's a pool of assets that can go, you know, to your children or other people you care about completely tax free. So this works really well if you've done a lot of lifetime gifting. And your kids don't need that money immediately or be happy to wait for it for a while. And also you have to have, you know, a certain amount of charitable inclination. You have to want to benefit charities. But it's a great way to, you know, reduce your estate tax to zero, regardless of how rich you are. That's super interesting. I had not thought about that because when you first brought it up, I was like, I see CRTs talked about more often. But I think the reason why you see that is while alive people are like, okay, great, I want to diversify out of a concentrated position or do something like that. But I still want income. I don't want to give all that away at the end of going to charity. This is more of an ad-death estate planning tool. Or I still feel like I you could see people using this type of tool are very charitably acclined and more in that hundred million wealth while alive as well. That's true. Although you couldn't reduce your estate tax to zero unless you could plan, you know, exactly how much money you're going to spend for the rest of your life and time that perfectly. Yeah, it's kind of like the eyelid idea, right? Like you can never be perfect on what the estate tax number is going to be, but you can guess. Yeah, no, you can you can certainly guess and you can try to get close, but this is sort of a way to soak up anything that you're wrong about or this leftover. Super smart. Okay, perfect. Well, I think this was a super awesome episode. Glad we're able to hit on those. I think those are all really valuable tools. And I don't think it's just in the hundred million space. I think there's a lot of people in kind of this, you know, high net worth space that this makes sense for. Chris, really appreciate you coming on for the two episodes that we've had you on. ⁓ you know, wealth of knowledge and Lisa, appreciate you as always. ⁓ and everybody ⁓ tune back in the next couple of weeks. We'll see you then.