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Hugh Hefner – the Quintessential Tax Planner

Kudos to Hugh Hefner. In case you haven’t heard, the 84 year old entrepreneur just announced his engagement to an attractive 24 year old. Now, I know you presume that this is the natural outcome when two people fall in love, but I suspect there may be ulterior motives.

We all know that Hugh is, from all appearances, a pretty wealthy guy. I can only conclude from this most recent nuptial announcement that he is also an incredibly gifted tax planner.

I am not sure the ink was even dry on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 before the perennial purveyor of porn jumped into action. You see, included in Congress’s extension of the Bush tax cuts was a brand new provision in the estate tax law dealing with “portability” of the estate tax exemption. Beginning in the year 2011, the estate tax exemption increases to $5 million. In addition, the executor of a decedent’s estate can elect to transfer his or her remaining $5 million exemption to his or her surviving spouse.

Hugh gets his own $5 million exemption. We all know how young and spry he is, and based upon his lifestyle, we can only presume that Hugh thinks he is going to live to age 150. His naïve yet enchanting young wife, who has never been faced with the pressure of modern day life being married to a multi-millionaire, may well succumb to the physical stress of the relationship and meet an untimely demise during either 2011 or 2012. If this is the case, Hugh will be entitled not only to his own $5 million estate tax exemption, but to the exemption of his recently deceased spouse as well. Brilliant!

This creative tax reduction “technique” provides a unique new market for the acquisition of “portable estate tax exemptions.” Let’s presume, for a moment, that we have a wealthy unmarried client (call her “Ms. A”) with no foreseeable intent to marry in the future. We explain to Ms. A that if she agrees to marry someone, and if her new husband then predeceases Ms. A, she could receive the benefit of her deceased husband’s unused $5 million estate tax exemption. Ms. A decides that this is worth looking into, so we find a lost soul with no assets, no reasonable life expectancy, and the need for some quick cash. Ms. A and her intended “spouse” would enter into a premarital agreement providing that he waives all claims against Ms. A’s estate, agrees to accept no support from Ms. A and agrees never to communicate with Ms. A again (even though the marriage would last “until death do us part”). Ms. A could then create a trust providing for monthly nominal payments to the new husband during his lifetime (an inter-vivos QTIP). The husband would agree under the prenup to sign a will giving his $5 million estate tax exemption to Ms. A.. At the new husband’s death, the trust would revert back to Ms. A or her intended beneficiaries.

What a plan! This would give Ms. A an additional $5 million of exemption to use in connection with gifts to children or other intended beneficiaries, resulting in a $1,750,000 tax reduction at her death.

If you think this whole arrangement might be comical, let me tell you what’s really comical: Congress thought that portability meant simplification, but instead they created a new quagmire and more confusion among tax advisors. When will they learn?