The scene is familiar one. The client, seated at the head of his large conference room table, is the sole owner of a successful business that comprises a significant portion of his taxable estate. Joining him around the table are his estate planning and corporate attorneys, audit and tax partners from his accounting firm and his life insurance agent. Also sitting in, and leaning very close to the conversation, are two senior members of the client’s executive team.
A Very Taxing Situation
The subject of the meeting is how to deal with, meaning pay, the very considerable estate tax that will be due when the client dies. You see, the client is a widower, so there’s no marital deduction to defer the tax to the death of a surviving spouse.
The client established an irrevocable life insurance trust (ILIT) some years ago. The ILIT owns a policy that’s nowhere near sufficient to cover the estate tax. The beneficiaries of the ILIT were originally his wife and two, now usually adult, children, neither of whom are involved in the business. If you listen carefully to the banter among the professionals at the table, you’d hear them describing the ILIT as a grantor trust for income tax purposes. You’d also hear them point out that the ILIT has the usual provision about providing liquidity to the estate by way of loans or purchases of assets.
Discussions with this client about estate tax planning have never been fruitful. He has steadfastly refused to do any planning that would result in his having anything less than complete control of the enterprise. Even the acronyms for the various planning strategies are now crying out from the slide decks, “Hey, enough. He’s just not into us! Never was and never will