Kansas and Missouri Estate Planning

What are Some Advanced Lifetime Gifting Strategies?

Lifetime gifting brings many options.

You have done well for yourself.

You have money you would like to leave to your family.

However, lately you have been thinking about giving some of it to them now with warm hands.

According to a recent Forbes article titled “5 Lifetime Gift Strategies For You And Your Family To Consider,” you have several options in lifetime gifting.

What are they?

A grantor retained annuity trust (GRAT).

If you have difficult-to-value assets, this may be a wise option.

With a GRAT, you can divide property interests, keep your income stream, and make discounted gifts to your future generations.

Assets are transferred to a trust, but you retain rights to income or an annuity payment for a certain amount of time.

If the GRAT has money within it after the annuity period ends, the beneficiaries receive the remainder free of estate or gift taxes.

If you die before the end of the trust terms, the trust becomes part of the taxable estate.

These implications make it vital to carefully choose the terms of the trust.

A defective grantor trust.

This trust with a strange name (I mean, who wants a trust that is intentionally "defective"?), provides a welcome tax twist.

With this trust you can benefit from the differences between the income and transfer-tax treatments of irrevocable trusts.

Essentially, you can transfer estimated future asset appreciation at a reduced gift-tax cost.

As the guarantor, you are treated the same as the trust for income tax reasons.

For transfer tax purposes, you are treated separately.

What does this mean?

You can effect a sale to the trust without capital gain taxes.

Family limited liability entities.

Do you have a high net worth with business, investment, and personal assets?

Why is family limited liability entity planning appealing?

They can change.

They can evolve as family businesses and family dynamics change.

Such entities are useful for protecting assets from lawsuits, creating long-term estate plans, and sharing income with those family members with lower incomes.

A lifetime credit shelter trust.

Are you wary to transfer significant assets?

Do you still want to leverage the increased lifetime gift-tax exemption?

These would be a good option.

You can indirectly maintain your assets because your spouse has access to the assets as a beneficiary.

You can take advantage of the exemption ($11.4 million per person in 2019) and keep these assets out of your taxable estate.

You and your spouse can each create separate shelter trusts.

An intra-family loan.

You can loan money to family without it being considered a gift.

These means you can help your loved ones out financially without triggering a gift tax.

You do need to set up a minimum interest rate to make it an official creditor relationship.

This benefits everyone in the family by keeping the money in the family.

Although you have many options, do not attempt any one of them alone.

Work with an experienced estate planning attorney to create a plan using the best strategies for your unique goals and circumstances.

Reference: Forbes (August 5, 2019) “5 Lifetime Gift Strategies For You And Your Family To Consider”

How Might a Family Limited Partnership be Beneficial?

Minimizing transfer taxes is just one of the benefits.

Indeed, creating a family limited partnership will save you in transfer taxes, according to a recent ThinkAdvisor article titled “Estate Planning: The Family Limited Partnership Strategy.”

But minimizing tax transfers cannot be the only reason for using this tool.

A decision in the U.S. Tax Court regarding the Purdue family upheld this criteria.

What happened with the Purdue family case?

The Purdue family had an estate of $28 million and had five children.

To couple created the Purdue Family LLC and funded it with about $22 million in assets, including securities.

They also created a trust to benefit their descendants.

The trust was funded with interests in the LLC.

The operating agreement for the LLC included non-tax purposes for its existence.

What were they?

1. Avoiding fractionalizing ownership,
2. Retaining assets within the extended family,
3. Protecting assets from future unknown creditors, and
4. Providing flexibility in managing the assets that would not be available in other entities.

Mr. Purdue also created several other trusts including a qualified terminable interest property trust (QTIP).

When Purdue passed away, his QTIP trust and trust beneficiaries loaned the estate money to pay the estate tax.

The IRS was not satisfied and challenged the structure of the trusts.

A key code in the case was Tax Code § 2036?

Why?

It requires property transferred to a trust, in which a decedent holds an ownership interest, to be included in his or her gross estate with one exception.

The exception?

The property may be transferred for adequate consideration.

The estate had to prove there were lawful and practical reasons for creating the family LLC other than merely tax benefits.

The Tax Court ruled in favor of the Purdue estate.

Why?

They found seven compelling reasons for creating the trust:

• Keeping the decedent from having to manage investments,
• Reducing instability in investments by consolidating them under one advisor,
• Teaching the children to manage an investment company together,
• Circumventing repeat asset transfers among different generations,
• Combining asset ownership to meet minimum investment requirements and efficiently managing investments,
• Providing guidelines for resolving disputes and restricting transfers, and
• Giving the beneficiaries minimum annual cash flow.

Not everyone would need such a complex estate planning tool.

Regardless, working with an experienced estate planning attorney can help you determine what is best for your family.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: ThinkAdvisor (March 14, 2017) “Estate Planning: The Family Limited Partnership Strategy”

Will New IRS Regs Kill Family Limited Partnerships and LLCs?

There is an old tax maxim - "pigs live ... and hogs get slaughterer."

It seems the IRS thinks some taxpayers have become hoggish when it comes to wealth transfers leveraging family limited partnerships and family limited liability companies.

And the IRS is fixing to do something about it.

Soon.

Here is the backstory.

[Deep breath.]

As business entities, family limited partnerships and family limited liability companies have been legal traditional tools for the management and eventual wealth transfer of family businesses, real estate or other illiquid, hard-to-value investments.

Because the management authority has resided fully in the "general partners/managing members" and tight restrictions are placed on transfers of interests any held by limited partners/members, "valuation discounts" have been taken and allowed.

For example, a $1 million piece of commercial real estate can be transferred for $500,000 in gift taxes inside the entity instead of its true $1 million value.

That's leverage!

But that is legitimate planning under current tax law.

Here is the problem though.

Someone always seems to push the envelope and ruin everything for the rest of us.

It seems some taxpayers have extended this "valuation discounting" to leverage even the transfer of easy to value marketable securities ... and even cash.

That's abusive, says the IRS.

Consequently, change is in the wind and the hogs are squealing. 

The New York Times recently carried the water on this story in an article titled “Navigating Tougher I.R.S. Rules for Family Partnerships.”

While no details on the exact terms of any new regulations (or even any effective dates) have been released, it is unclear whether taxpayers contemplating such advanced estate tax planning should accelerate their discounted transfers before the sword falls.

For its part, the White House estimated in 2012 that closing this loophole could net at least $18 billion in tax revenue over 10 years.

Hoggish assets in family partnerships/LLCs (think marketable securities and cash), still have an objective value that does not justify valuation discounting.

There is a ray of sunlight in this gloom, as the article notes that some tax experts believe entities holding family businesses, real estate or other illiquid, hard-to-value investments - assets that require consolidated management - will yet enjoy see some discounting. 

In the end, the article recommends those taxpayers who are (or are) intending to utilize family limited partnerships or family LLCs for some leveraged wealth transfer not to tarry.

Change is in the wind.

Contact an experienced estate planning attorney about how these winds of change may impact your estate planning.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there. 

Reference: The New York Times (August 17, 2015) “Navigating Tougher I.R.S. Rules for Family Partnerships”

IRS Targets Common Wealth Transfer Strategies

If you have a family business, farm, ranch or have done well, then you have come to the attention of the authorities. This is especially true if you have created a family limited partnership or an LLC to legally leverage accepted accounting, valuation and tax principles.

Surprised?

I didn't think so.

No, the IRS wants to "raise" the taxable value of assets transferred into these legal entities and disallow any "discounting" of their values.

Current speculation is that new rules may come down as early as September.

As Barron’s recently reported in an article titled “IRS Considers New Tax on Wealthy Families,” changes to these common strategies could seriously jeopardize future wealth transfers. 

The article is actually a helpful primer for anyone wanting to apprehend in short order how family limited partnerships and LLCs work in theory and in practice.

Shhhhhh. Here is the skinny:

Through these legal entities, families can transfer a minority stake in various family assets to their children with little or no tax consequences. 

How?

Because minority shares in a private business are illiquid. In other words, they are unable to be easily sold or exchanged for cash without a substantial loss in value.

Basically, these shares are worth less, from a tax perspective, than their stated market value.

Consequently, this is a big help to families who want to lower the "taxable value" of their assets, and in some cases below the $5.43 million gift-tax exemption, for wealth transfer planning purposes.

It also works even if the underlying investments being transferred are themselves liquid. The discount could be as much as 20% to 25%. 

The article offers this illustration:

• Your family business is worth $25 million and is entirely owned by the family.
• You decide to pass on a 25% minority holding in the business to your daughter via a family limited partnership or an LLC.
• According to the current IRS rules, you may discount the shares up to 35%, because they are illiquid.
• This works to your benefit, since the IRS discount transforms the $6.25 million in shares into shares valued by the IRS at $4.1 million.
• Viola! At that value the wealth transfer is gift tax free because it is below the $5.43 million gift-tax exemption. 

The Treasury Department has put the estate planning community on notice that this may change and has hinted that new rules on family partnerships could be released before the fall.

These rules would restrict definitions and possibly decrease discounts for certain assets. 

Given what may be in the works, the original article recommends that you contact an estate planning attorney if you are thinking about forming a family business entity or making changes in the organization of an existing family entity.

With all of these changes in the wind, this may be a great time to get going with these discussions, as any stricter rules that are created could be made effective immediately ... with the fine details sorted out later.

I think we have seen that routine before?

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website. 

Reference: Barron’s (June 30, 2015) “IRS Considers New Tax on Wealthy Families”

Consider An FLP To Protect And Control Family Assets / Overland Park, KS

Planning for your estate and the good of your family is often a game of give and take. In additions, it can be a question of how much and when. Namely, you want to give away your assets ... but not just yet.

As is so often the case, where there is a need there is a tool.

A particularly powerful tool in this case is the Family Limited Partnership (FLP). An FLP can do double duty as a tool for asset protection as well as for estate planning.

Limited Family Partnerships have long been a useful tool for many, but Forbes recently offered a useful perspective in an article titled “How To Protect Your Assets Without Giving Up Control.”

You see, the FLP represents a way to separate control from direct ownership of assets. Those in business will understand the benefit of indirect ownership quite clearly.

Indirect ownership is the essence of forming an entity to structure a business – an LLC or a corporation, for example – which protects the owner(s) from liabilities, creditors and the like, and often vice versa.

A Family Limited Partnership is, in reality, a form of a Limited Partnership. The distinction? You just use it for family assets like a house, individual assets, and anything you’d want to control even as you protect it and slowly gift it away.

Well, how does that work?

Limited partnerships allow for different types of partnership stakes: general partnership interests are vested with all the control, while limited partnership interests just represent ownership without control. Even if the limited partnership interests outweigh the general partnership interests 99 to 1, the general interest retains control.

This arrangement has a business use, but in a family it means that the parents can own all of the general partnership interests while granting out limited interests to the Family Limited Partnership that owns all of the assets. The parents keep control, the children slowly/eventually take on ownership, and creditors or claimants have a harder time touching the assets.

As you might have guessed, there are even tax benefits when it comes to bequeathing or gifting the FLP assets in Overland Park and elsewhere.

There is a great deal of finesse required to make an FLP arrangement work. Nevertheless, in its basic form the benefits are clear. Both in determining the structure of the FLP and in actually setting it up, competent counsel can mean all of the difference between a fully balanced and solid plan, and a potential mess.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.

Reference: Forbes (March 18, 2014) “How To Protect Your Assets Without Giving Up Control”

When FLPs Flop

And now for a major estate and business planning understatement. Drum roll, please. "Family Limited Partnerships Require Good Planning and Execution."

If you're a fan of business law horror stories, then this recent article by Peter Reilly at Forbes and the case of Estate of Paul H. Liljestrand v. Commissioner should be both entertaining and instructive. The subject is the role of the Family Limited Partnership (FLP), an entity common to small business and estate law alike, and the problems that can be created when all of the i's are not dotted and all of the t's are not crossed.

While you'll want to read the story for yourself (as well as Reilly's asides), the bottomline wisdom is that an FLP, like any other business entity, exists on at least three fronts. First, what you do with the partnership itself. Second, the accounting system of money going in and coming out of the FLP. Third, and of utmost importance, the fact that an FLP is a legal entity with various requirements, of which real honesty is essential.

To my ears, it sounds like the case above is a failure on all three fronts – it's a mess – but Reilly identifies a disconnect between the accounting and the legal aspects to be the most fundamental downfall. In the end, the moral is to ensure you're doing it right, or, as Reilly concludes:

The moral of the story is that in order for the plan to work you must have coordination between the attorney who prepares the plan and the accountant who will be preparing the relevant returns. If you don’t want to trouble yourself with what entity should pay what bill or accept what deposit, etc., let that piece be handled by your professionals, also, but again in an integrated manner. There has to be somebody who cares what account is used, because that is their job.

Again, be sure to check out the full story.

Reference: Forbes (November 12, 2011) "Family Limited Partnerships Require Good Planning and Execution"