By: Louis Vlahos
Shareholder, Farrell Fritz PC
One of the traditional goals of estate planning has been to remove valuable and, preferably, appreciating assets from a taxpayer’s estate. In the case of interests in a closely held business, a related goal has been to structure the taxpayer’s holdings in the business, or to reduce those holdings, so they may be valued on a discounted basis at the time of the taxpayer’s death for purposes of determining the value of the taxpayer’s gross estate.
The objective of this estate planning has been to reduce the value of what will be the taxpayer’s gross estate, to thereby reduce the estate tax liability arising upon the taxpayer’s death, and, thus, to maximize the amount passing to the taxpayer’s family.
An important consideration in many estate tax planning scenarios, however, and a factor to be weighed by the taxpayer against the anticipated transfer tax savings, has been the taxpayer’s continuing ownership of sufficient other assets, or the retention of some “access” to the gifted assets, so as to enable the taxpayer to maintain his or her lifestyle and otherwise feel secure and “comfortable.” It cannot be said often enough that estate planning must not be done in a vacuum; among other things, it must consider the individual’s financial security, his or her tolerance level for giving up ownership of property, the availability of “disposable assets,” and the family and business situation.
- With the increased exclusion amount, business and family planning can become the primary focus of estate planning; for example, clients may be able to establish trusts for creditor or spendthrift protection, or to secure a specific disposition of assets, without regard to the tax consequences of the transfer.
- The increased exclusion amount and portability are welcome developments, but they are not a substitute for planning, especially as regards family, business, and asset protection concerns.
- Make sure your clients are still mindful of tax planning, especially if their taxable estate may approach the exclusion amount. Ignoring transfer taxes may waste the benefit and flexibility afforded by the increased (and indexed) exclusion amount and portability.
- The goal of business planning is to transition the business and preserve the value it represents. Where appropriate (for example, no successors within the family), clients should consider how to retain and incentivize key employees-not necessarily with equity, but perhaps with something that mimics it.
- Portability does not apply to the GST tax exemption; consider how to optimize the allocation of the exemption when planning gifts that may benefit grandchildren.
- Weigh the benefit of a gift (and the transfer tax savings it may represent) against the loss of a basis step-up in the decedent’s property.
- Very wealthy clients should consider establishing short-term, zeroed-out GRATs sooner rather than later. They may also want to consider transfers, including sales, to grantor trusts before their use is restricted.
This article is an excerpt from Estate Planning Client Strategies Chapter 1, 2014 ed. This excerpt was provided by Aspatore Law Books, part of Thomson Reuters. Aspatore books were originally created for a legal professional audience, but have since become popular with non-attorneys thanks to easy-to-understand writing and smart, real-world insights. You can find the entire book available for purchase on the Thomson Reuters Legal Solutions website by clicking the book title linked above.