Income and Estate Tax Planning

Comprehensive Estate Reviews

  • Colony conducts regular comprehensive estate reviews for all client families.
  • In this case, we reviewed this new client’s estate planning documents, personal financial statement, operating agreements for closely-held businesses and related documentation.
  • We then prepared an estate flow that illustrated the disposition of their estate based upon the order of death.
  • The analysis suggested that the prospect needed to consider updating their buy-sell agreement and obtain second-to-die life insurance that would address the projected estate tax so that the company would not have to be sold within nine months of the death of the surviving spouse.

Valuation Discount Planning  

  • In this case, we advised a client to shift closely-held company stock out of her taxable estate with a 30% valuation discount.
  • We collaborated with her attorney to draft agreements to assign a certain number of shares of company stock with a valuation of $10.2 million to a generation-skipping trust and a donor advised fund.
  • The agreements also incorporated a defined value clause to transfer $10 million of company stock to the trust and any remaining shares were to be assigned to the donor advised fund.
  • The defined value clause mitigates the potential gift tax exposure as any increase in the valuation for gift tax purposes would transfer additional wealth to charity and the taxable gift to family members would stay the same.

Relocating Assets to Achieve Tax-Free Growth

  • This client had existing “paid-up” life insurance policies that were held in a Dynasty Trust that also owned an investment portfolio.
  • We were able to implement Private Placement Life Insurance (PPLI) that enabled the Dynasty Trust to locate $5M of cash inside the PPLI policy and make investments yielding earnings that would otherwise be taxable as part of the investment portfolio.
  • The new PPLI policy did not involve any medical underwriting or the cost of insurance.
  • The insurance carrier did charge annual administrative fees of less than 0.35% each year, however, this was far less than the projected annual income tax drag had the trust continued to own the tax-inefficient investments.
  • This structure enabled the trust to grow the assets within the PPLI policy on a tax-free basis over the lifetime of the insured and not alter how the portfolio was otherwise invested.

Multi-Generational Basis Step-Up

  • A substantial portion of this client’s net worth consisted of low basis, closely-held company stock.
  • His sole surviving parent had a taxable estate far less than the current estate tax exemption.
  • We advised him to create an irrevocable trust that named his wife and his descendants as beneficiaries and transferred the closely-held stock into the trust as a gift.
  • The trust document granted a testamentary general power of appointment to the grantor’s father, and upon his death, the father chose not to exercise the general power of appointment.
  • This allowed the closely-held stock in the trust for the benefit of the grantor’s wife and descendants to receive a full step-up in cost basis equal to the fair market value, thus avoiding $5 million in federal and state income taxes.
  • The grantor also retained indirect access to the closely-held stock by virtue of his wife’s continued beneficial interest in the trust.

IRA Distribution Planning

  • The COVID relief provisions apply to tax years 2020 and 2021 to allow charitable contribution deductions for cash gifts to public charities up to 100% of a taxpayer’s Adjusted Gross Income.
  • During these years, Colony worked with a number of clients with large IRAs and charitable intent to mitigate or eliminate the client’s required minimum distributions going forward.
  • In one case, Colony worked with one of its 73-year-old clients and advised him to liquidate his $250,000 IRA in exchange for cash.
  • Colony then identified $250,000 of highly appreciated securities in the client’s taxable portfolio for the client to give away to charity (limited to 60% of AGI) and thereafter advised the client to use the IRA cash proceeds to buy the same securities back that were donated, effectively re-setting the client’s cost basis in the donated securities.
  • The client received a full fair market value charitable deduction for the donated securities to offset the tax from liquidating their IRA and was able to accelerate his charitable gifting desires and increase cost basis in the same securities at a neutral tax cost.