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Most Americans won’t ever need to worry about being taxed at death.

Fortunately, as of 2024, an estate is tax-free up to the threshold of $13.61 million per person. But it hasn’t always been this generous. In fact, presently this number is set to expire on December 31, 2025, possibly reverting back to the number approximating $7.5 million per person.

We’re on a wealth journey. If we stick with our plan, it’s likely some of us will be facing these kinds of numbers.

Here’s a little-known way to make someone else foot the tax bill.

How Much Is Estate Tax Really?

The estate tax rate is progressive, ranging from 18% to 40% on your first $1 million above the threshold.

But we’re talking big numbers here.

If someone’s got millions, then they’re quite likely to have millions above the threshold. That means the effective tax rate is probably approaching 40% fairly quickly!

Imagine this: someone who dies with $5 million above the estate tax exemption will pay an effective tax rate of about 39% on that amount under 2024 tax rates.

Granted, your beneficiaries would be receiving a hefty nest egg. But you worked hard for that money, and Big Brother government thinks he’s entitled to your millions just because.

Multiply the Power of Your Dollar

Keeping the government’s hands out of your pocket is rule number one.

This can be done to a large extent through gifting during one’s lifetime, most effectively to an irrevocable trust (subject to the 5-year lookback rule). Here’s an article about different ways this can be done.

But maybe you want to keep a significant portion in your own name; after all, you worked for it and want to enjoy it!

Here’s a way to make someone else pay the tax bill.

An Example

Martin is 70 years old and has $15 million more than he will ever need to touch in his lifetime. He is single, so under current law he qualifies for the $13.61 million estate tax exemption. Since we don’t know the future, let’s assume that the exemption drops back to $7.5 million by 2026 and adjusts for inflation from there.

He decides to fully use his lifetime gift tax exclusion in 2024, gifting $13.61 million into an irrevocable trust. But as a healthy male, his life expectancy is approaching 84. That means the remaining $1.39 million in his name still might have an estimated 14 years to grow!

Let’s assume both pots of money grow at 6% annually.

If that happens:

• $30+ million might be in the irrevocable trust (tax-free!)
• $3+ million might be in his personal name

That means this $3 million is still subject to estate tax, because he used up his estate tax exemption when he gifted the $13.61 million into the irrevocable trust.

We’re guessing at the effective tax rate, which could change, but let’s assume it’s around 38% based approximately on today’s rates. That indicates a tax bill of close to $1,140,000.

Here’s a Trick

Stay with me.

Martin buys a Universal Life Insurance policy with a death benefit of $1,200,000.

He places the ownership of this life insurance policy in the irrevocable trust to make sure its proceeds aren’t subject to estate tax.

It’s expensive to buy such a policy at age 70. Depending on the company, his health and the type of policy he purchases, it could easily range between $20,000 and $40,000 per year. Who wants to pay that kind of premium?

But think about it like this.

Martin already determined that this amount is what he will never need to touch during his lifetime. If he wasn’t paying life insurance premiums, he would be investing the equivalent cash.

But if he does pay a $30,000 premium, let’s say, over the next 14 years, he will have paid $420,000 in total by the time he hits life expectancy at 84. But that $420,000 will instead be worth the death benefit of $1,200,000 if he passes away that year.

In this case, the equivalent rate of return he would have needed to receive on that $30,000/year is almost 15%. That’s extremely unlikely to achieve any other way over 14 years in the stock market.

So here’s what he’s done:

• His $13.61 million has grown to $30 million within his irrevocable trust, saving about $6.5 million in estate taxes assuming a 40% rate.
• His other $1.39 million has grown to $3 million in his own name, which is fully subject to estate taxes.
• His Universal Life Insurance policy will pay out $1,200,000 tax-free upon his death, which will be used to pay taxes due.
• Of the approximate $1,140,000 we estimate him to pay in taxes, he himself has only paid $420,000 out of pocket for the benefit of the help of life insurance.
• Paying $420,000 on an estate worth $33 million is just over 1%.

What a legacy Martin has left his beneficiaries!

Through a combination of the irrevocable trust and the Universal Life insurance, he’s saved his beneficiaries nearly $8 million in taxes.

Conclusion

Life insurance is not restricted only for the accumulation stage of life!

It’s a marvelous tool that can multiply your capacity to pay estate taxes on the wealth you’ve built.

Think of a Universal Life policy as just another account in which you save your hard earned money. What goes in will come out again! It’s still your beneficiaries’ money; it’s just multiplied thanks to the power of insurance!

The magnitude of wealth you save could well change the course of generations.