Estate planning has changed dramatically over the past few years. The increase in the estate, gift and generation-skipping transfer tax exemption to the current (2020) amount of $11,580,000 has made estate planning decisions for smaller estates much more difficult, as the increased federal exemption presents multiple competing planning options for smaller clients.
Those options require a detailed analysis that can make it harder for the client to decide among them. Planning for high-net-worth clients remains focused on traditional estate planning techniques. These clients, generally defined as those with estates in excess of the $11,580,000 exemption, have a number of techniques available to them to either transfer appreciation to younger generations or to reduce the value of assets included in their taxable estate.
The federal transfer tax system, which includes the estate, gift and generation-skipping transfer tax, imposes a tax on gifts made when the client is alive or on clients’ assets when they die if their estates’ value exceeds the $11,580,000 exemption. A decedent’s gross estate includes all of the assets over which he or she has control, including taxable gifts the decedent made while alive. The gross estate is reduced when qualifying amounts are left to a surviving spouse and charity. It is also reduced by administration expenses and debts. The result is the taxable estate, which, if over the amount of the exemption, is taxed at a rate of 40%. As a result, high-net-worth clients will want a plan to avoid or minimize the gift and estate tax.
Preliminary planning. Planning for high-net-worth clients involves a collaborative effort by a number of advisors, including the clients’ attorneys, CPAs or other tax advisors, investment advisors, insurance professionals and the trustees. Working together, these professionals strive to not only minimize taxes but to make sure the disposition of the estate meets the client’s goals and objectives.
Developing the plan. There are a number of tax planning strategies available to high-net-worth clients. Some may be interested in how to efficiently transfer assets to their descendants. Others may have charitable goals. Still others, especially those involved in high-risk ventures, may be interested in asset protection. Some are interested in all three. It is important to identify which goals the client has in mind and develop a plan consistent with those goals.
Tax-efficient transfer of wealth. There are a number of techniques a high-net-worth client can take advantage of to transfer wealth in a tax-efficient manner. Some techniques are useful for transferring wealth to the next generations while others aid in tax-efficient charitable giving or asset protection.
For those interested in transferring wealth to descendants, the primary objective is valuation. The goal is to lower the value of transferred assets or the value of assets retained by the client. This is accomplished by discount valuation—the idea being to put some type of legal wrapper around assets that will make the valuation lower.
For example, a client could sever the ownership of an asset into a tenancy-in-common ownership with another person, giving both owners an undivided 50% interest in the asset. Since neither owner would have control over the asset, the value would not be 50% of the whole but something less. There are few buyers for a 50% interest in an asset, so the 50% interest in the asset should be entitled to a valuation discount.