|
The
Federal Estate Tax is one of the most burdensome
of all taxes. The good news is that, with proper
planning, a significant portion of the estate
tax may be deferred or avoided.
The
Benefits of Lifetime Giving. A
number of techniques are available, but it
is significant to point out most of them
are based on lifetime gift programs, often
including using trusts created during your
lifetime! After a person is deceased,
the planning opportunities are much more
limited. Significantly, gift taxes paid during
your lifetime are generally not included
in your gross estate, but the gift tax is
not a deduction in determining the estate
tax after your death.
Caution! If
you need to keep your assets in order to maintain
your standard of living and to provide for
contingencies such as long-term care, you probably
shouldn't pursue an aggressive lifetime giving "wealth
preservation" program. In some cases,
receiving significant gifts can corrupt the
beneficiaries, eliminating their motivation
to work. Don't let the "tax tail" wag
the dog! Maybe a charitable giving program
makes sense in this situation. (Outright bequests
to charities are not subject to estate or gift
taxes.)
Family
Wealth Planning Using the Family Business. In
the situation where the beneficiaries are
compatible and have an interest in maintaining
the assets of the family, particularly real
estate or a family business, significant
estate (and, in some cases, income) tax benefits
may be secured using a family business structure.
The most popular structures right now are
the family limited partnership and the family
limited liability company, principally because
the permit the donor(s) to retain management
control of the assets that are given during
his, her, or their life and have significant
operational flexibility compared to a corporate
structure. The principle on which the
estate tax reduction is based is that a minority
interest has a disproportionately lower value
than a majority interest in the whole. For
example, suppose a partnership's business
could be sold as a whole for $1,000,000.
An investor might only be willing to pay
about $150,000 for a 25% interest in the
partnership, because he or she would be unable
to control the partnership or easily sell
the partnership interest. We call the difference
between the amount a buyer would pay for
a fractional interest (in the example, $150,000)
and the proportionate value of the interest
based on the whole (in the example, $250,000)
a valuation adjustment. Valuation adjustments
(reductions) of 35% and up have been defended
for partnership interests where there was
a lack of control and a lack of marketability. A
donor may make annual fractional gifts to
use his or her annual gift exclusion ($10,000
per donor, per donee, per year) and lifetime
credit exclusion ($600,000 for 1997, increasing
to $1 million in 2006), thus securing the
valuation adjustments for the gifts. If the
donor retains less than a 50% interest at
his or her death, that interest should also
qualify for a valuation adjustment.
Using
Entity Fractionalization For Investment Assets. Should
a family limited partnership or limited liability
company be used to hold liquid investments,
such as securities, cash and life insurance
policies? Such entities may be defended if
a legitimate purpose can be established for
them, but expect an especially vigorous attack
by the IRS. This strategy has been targeted
as being vulnerable.
Properly
Implementing A Family Wealth Plan Is A Worthwhile
Investment. When you are seeking
significant tax benefits from this type of
plan, it doesn't make sense to "cut
corners." A competent attorney should
prepare the documents. Valuations should
be prepared by a qualified appraiser who
is educated in this area. You should use
a qualified tax advisor, such as a CPA, to
assist in assuring the entity is operated
properly, including setting up a separate
bank account, setting up separate books and
records, properly paying proportionate benefits
to partners/members, and preparing income
tax returns. The up-front investment will
pay dividends to your beneficiaries in tax
benefits and avoided litigation costs.
When
Does Entity Fractionalization Make Sense? As
you can see from the above discussion, the
entity fractionalization strategy can require
a significant investment in professional
fees and potential litigation costs. There
are three situations where the strategy makes
sense. 1) There are assets of significant
value to be transferred. ($1 million is worth
thinking about. $2 million requires more
serious consideration.) 2) The business has
a potential for significant growth in value.
(Such as a high technology start up.) 3)
The business is generating significant income.
The
purpose of this newsletter is to stimulate
thought for our clients and professionals
with whom we network. One should consult
with a qualified tax planning professional
prior to implementing any tax planning
strategies. If you are a legal, insurance,
real estate or mortgage professional receiving
this newsletter or know of one, please contact
our office to introduce yourself and your
services to us. We are always seeking
to grow our referral network and expose professional
services to our client base.
|
