Understand taxes and estate planning in transferring your wealth

Nearly 200 years later, Benjamin Franklin’s words still hold true: "In this world nothing can be said to be certain, except death and taxes." The biggest change, however, is that the complexity of taxes has grown exponentially.

In the United States, there are a multitude of taxes: income, capital gains, estate, gift, generation-skipping transfer tax, excise, inheritance, and property tax—just to name a few. The following advice will cover some specific taxes that most affect the transfer of wealth to your children and other heirs, discount strategies to consider, and experts who can help you save money on your estate plan. 


Do educate yourself and check your state law

In order to minimize taxes, you first have to know what they are. While estate, gift, generation-skipping, and income taxes will be the same from a Federal standpoint—regardless of your residence—state law can have a huge impact. Currently, fourteen states and the District of Columbia have a state estate tax, five states have an inheritance tax, and two states have both an estate and inheritance tax. All of these states have different exemptions and tax rates, which makes navigating them tricky, especially to individuals who have property in more than one state. 

Do think about gifting

One of the most valuable estate planning strategies that is often under utilized is the annual exclusion gift. The annual exclusion gift allows any person to donate up to $14,000 tax free to any recipient. Spouses can combine their annual exclusion and gift up to $28,000 per year, tax free, to to an unlimited number of recipients.

The annual exclusion gift, when made to minors, is often gifted into a Crummey trust or UTMA account. There is also an unlimited gift tax exclusion for amounts paid on behalf of an individual directly to a medical care provider or to an educational institution for tuition. For example, if a couple has five children, they can remove up to $140,000 each year from their taxable estate by gifting. 

Do leverage valuation discounts

The discount for lack of control (also referred to as a minority discount), and discount for lack of marketability, are two very common discounts used in estate planning. The discount for lack of control is a discount for not having enough of an ownership interest to have control of the business entity. For example, if you own 12% of the family business, you cannot control the business because you do not have 51%, which would give you control to direct the business, investments, etc.

The discount for lack of marketability is a discount because your small family business is not act like a publicly traded stock where there is a liquid market. The fact is there are very few buyers who are interested in purchasing a small family business, making it a very limited market. As such, the price a willing buyer would pay is discounted accordingly.

These discounts are utilized by setting up a Family Limited Partnership or Family LLC. Assets, such as real estate or marketable securities, are transferred into the LLC and then a portion of the ownership interest in the LLC are “gifted” off to children, and sometimes more remote generations. These valuations can collectively provide discounts of between 10% - 40%. 

Do use advanced planning techniques

Estate planners have an “alphabet soup” of planning techniques that can be used to minimize taxes.

A sampling of the advance estate planning techniques in the “soup” include: Irrevocable Life Insurance Trust (ILIT); Qualified Personal Residence Trust (QPRT); Grantor Retained Annuity Trust (GRAT); Spousal Lifetime Access Trust (SLAT); Charitable Remainder Annuity Trust (CRAT); Charitable Lead Annuity Trust (CLAT); and Intentionally Defective Grantor Trust (IDGT).

Depending on an your assets and situation, one or more of these techniques may be used to lower taxes when transferring assets to your heirs. 

Do hire trusted advisors

I hope by now this article has demonstrated that minimizing taxes when transferring your wealth is not a do-it-yourself undertaking. (See Don’t #2). A good lawyer is key to navigating this complex area of law. Your lawyer acts as a coach and can help guide you on which advance estate planning techniques might work for you, and guide you to other trusted professionals for the technique employed to work.

For example, you will need a good accountant who can take care of the accounting needs for a Family LLC. You will need a valuation expert to properly take valuation discounts so that these discount percentages are correct and will survive IRS scrutiny in the event of an audit. 


Do not procrastinate

Every year you wait, you lose the ability to lock value (especially in a bull market) and leverage valuation discounts, and you lose your gift tax annual exclusion. These are powerful tools that if you don’t use, you lose. Also, estate planning is never high on anyone’s To-Do list.

Unfortunately, we do not know when it is our time to go. Once you are deceased, there is very little an estate planner can do to help your surviving family. Disclaimer planning and portability planning are at the top of the list, but your death forecloses on the vast majority of planning options. The best advice is to see an estate planning attorney today. 

Do not do it yourself

There are multiple DIY commercial estate planning software kits, websites, and seminars where you can “do it yourself,” “create your own trust,” etc. If you are worried about how to transfer your wealth efficiently to your heirs, a do-it-yourself solution or an afternoon seminar at the Holiday Inn is not for you.

Estate planning is not a one-size-fits-all process. What works for one person most likely will not work for you. An estate planning attorney can guide you into a custom based solution to meet your individual needs. 

Do not be penny wise and pound foolish

Too many people attempt to save a buck and do something themselves, or just do not reach out to an estate planning attorney out of fear of the cost. Estate planning should not be looked at as a cost to you, but as a value to your family. While an estate planning attorney may propose a plan that costs you X amount of dollars, it could easily save you a hundred times that planning cost. So the fact that a high net-worth individual might spend $20,000 on an estate plan, but could save $2,000,000 in unnecessary taxes, makes that estate planning investment abundantly worth it to you and your family.

Do not fail to coordinate

With a highly mobile society, it is common for people to have assets in more than one state. For example, they may have the Family LLC in Pittsburgh, real estate investment property in Chicago, a vacation home in Scottsdale, and reside in Detroit. The client likely has four (or more) attorneys doing different things in different states.

It is important to have one “point” attorney, usually an estate planning attorney, to make sure that all attorneys involved are rowing in the same direction. For example, the attorney handling the Chicago real estate may take title to the new property you bought incorrectly because they do not know where that small piece of the puzzle fits in your entire estate plan. This can cause a probate, or worse, incurring unnecessary taxes. Coordination is key. 

Do not fail to update

Some people might think that because they made a will right after they got married that they are all set. Well, just like the way of disco suits, estate planning documents often go out of style. Tax laws are constantly changing and previous documents may create unintended results when the language of the document is applied using the current tax code. Likewise, checking your beneficiary designations not only under your will and trust, but your retirement and life insurance plans, is an absolute must.

An example is where the biggest asset in a client’s estate passed outside of his overall estate plan (his trust treated all three of his children equally) because he never updated the beneficiary designations on his accounts after his other two children were born. That situation can create difficult family dynamics, but with proper planning and guidance, it is easy to avoid. It is a good practice to check your estate planning documents and beneficiary designations once a year.

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Navigating the tax landscape with substantial wealth, and your desire is to transfer your wealth to your heirs while minimizing taxes, is not an easy task. You need an estate planner who is well versed in federal tax law, and in each jurisdiction where you have assets. These types of estate plans are expensive, but worth every penny. A good estate planner will be present when you execute your documents, and will strive to present you with new ideas based upon your unique situation as the tax landscape and your individual circumstances change.

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Ryan M. HolmesAttorney

Ryan M. Holmes is an attorney licensed in Illinois and Wisconsin and multiple Federal courts. He focuses his practice on helping clients set-up cost effective estate plans that address their specific needs while minimizing all types of taxes. ...

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