First Story - How We Turned a Long Term Note into Instant Cash. Our client was the widow of a shareholder in a successful business. There was a buy and sell agreement funded by life insurance. Every other agreement I’ve seen required the deceased shareholder’s executor to sell to the survivor any policies on his own life for their cash surrender value.
This agreement had a unique provision. It said that the executor of the estate of the first shareholder to die could sell the policy on the survivor’s life to him "if she wished to." The policy had a death benefit of $750,000 and a cash surrender value of $75,000. The surviving shareholder was himself terminally ill, making the real value of the policy close to its death benefit.
The agreement provided that the survivor could elect to pay for that stock over ten years at 4.5% interest. Our client wanted to make an all cash deal. The survivor was adamant that he would hold us to the ten year payment schedule. I told his lawyer that if that were the case, we would hold him to the terms of the agreement as well. The executor did not "wish" to sell the life insurance to him and would hold it as an investment. He almost immediately saw the benefit of paying cash. We received approximately $1.9 Million within a week.
Second Story - Avoiding $60,000 of Income Tax on an IRA Distribution. We recently settled an estate that was distributable to more than twenty beneficiaries, including several charities. The decedent had an IRA of approximately $180,000. The beneficiary of the IRA was "the Trust," without any specific allocation to any beneficiary.
The value of the IRA was substantially less than the share of one of the charities. If the trustee received the IRA and then distributed the proceeds, the entire $180,000 would have been taxable as income. The trust would not have received a charitable deduction.
We found several Private Revenue Rulings in which a trustee assigned an IRA directly to a charity. The direct assignment totally avoided the income tax on the IRA.
We assigned the IRA to the charity, but the custodian refused to honor the assignment. All’s well that ends well because we found a custodian which, when we sent them the Rulings, agreed to accept the assignment, saving our client over $60,000 of income tax.
Third Story – Saving $1.75 Million for a Non-Citizen Spouse. A local lawyer called us about the Estate of Smedley Multibux. Smedley left his $5 Million estate to his wife, Lindy, who had been born in the Tahiti and wanted to keep her French citizenship. Since outright bequests to non-citizen spouses are ineligible for the marital deduction, Lindy would have to pay Federal estate tax on the $3.5 Million over the $2 Million exemption. What’s a poor immigrant woman to do?
A bequest to non-citizen spouses only qualifies for the marital deduction if it is in the form of a special, and somewhat complex, trust called a Qualified Domestic Trust "QDOT". I explained to Lindy that, even though Smedley had not set up a QDOT, she could create one herself and transfer the inherited assets to it, saving $1.75 Million in estate tax.
Fourth Story (Part I) - Taking Advantage of Valuation Discounts. Mr. and Mrs. Welloff died within three weeks of each other. We became involved in the administration of their estates approximately ten months after they died. The executors had been working with a law firm, but no estate tax returns had been filed, although a draft had been prepared.
The Welloffs owned their $800,000 house as tenants in common. That means that each of them owned a separate one-half interest. In the draft return, each of these interests was valued at $400,000. We claimed a 20% discount because partial interests are virtually unmarketable. We eventually settled for a 10% discount, largely because the house had been sold shortly after they died. This discount saved the beneficiaries of the estate $40,000 of estate tax.
Fourth Story (Part II) - Whoops ! ! This is the second half of the Mr. and Mrs. Welloff tale. Mr. Welloff died first, leaving all of his assets to his wife. Mrs. Welloff’s estate, including the assets she inherited from her husband, was approximately $210,000 over the estate tax exemption. When the executors asked their former lawyer’s assistant if their parents’ estates could be "equalized" for estate tax purposes, she told them: "no." This is an incorrect answer. They could have, as their mother’s executor, disclaimed sufficient assets from their father’s estate to bring their mother’s estate below the exemption level.
Since the nine month disclaimer period had already expired, our only recourse was, most regrettably, against the law firm. They eventually agreed to pay $74,000 of the $94,000 of overpaid estate tax. The family was not completely whole. An otherwise decent, well regarded law firm had to make a substantial payment due to an unfortunate error. This is a sad, and totally avoidable, result.
These are some examples of how we’ve added value in the estate settlement process. We can often see ways to save taxes and increase the assets passing to the beneficiaries. We welcome the opportunity to discuss estate settlement engagements with you and your clients.