Family Business Tax Reduction

Family Business Tax Reduction



Family Business Tax Reduction.
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 .​
In other words,​ you​ receive an​ estate tax reduction of​ up to​ 60% of​ the​ gift taxes you​ pay for transfers during your lifetime.
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 car,​ 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​ 2018),​ 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​ vulnerable.
What the​ IRS Doesn't Want you​ to​ Know.
The IRS hates these programs,​ and has attacked them vigorously .​
They have mostly failed in​ their efforts,​ except in​ the​ case where the​ transfers were made shortly before death .​
When the​ plan is​ done properly,​ the​ IRS will almost always capitulate or​ make a​ significant concession in​ settling the​ issue.
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 sparate 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.




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