One of the benefits of the The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The Act), to wealth managers and their clients, is that it provides opportunities to combine sophisticated estate planning techniques with the new, temporary gift and estate tax laws that are in place for the next two years. While it may seem odd to take the long-term view when the tax window is relatively short, estate tax and gift planning requires just that, arranging assets according to short-term tax laws, with a long-term view.
Of course, the fact that the estate and gift provisions are temporary makes it urgent to advise clients about how to take full advantage of higher exclusions and lower tax rates for estate planning and gift transfers, and provides wealth managers with great reasons to discuss these options with clients as soon as possible. As this is an area of wealth management that calls for specialized expertise, wealth managers often refer clients to in-house or best-of-breed outside counsel for estate planning. And the advantages strategic planning for transferring wealth are not limited to ultra-high-net-worth (UHNW) clients—estate planning and gift strategies are important for high-net-worth (HNW) clients, too.
A Two Year Timeframe to Arrange Estate and Gift Assets
"Before 2011, the estate tax was gradually reduced from a rate of 55% in 2001 to 0% in 2010," Benjamin Ledyard, Silver Bridge Advisors' Director of Wealth Strategies, told AdvisorOne.com via e-mail. The new law "reinstates the estate tax at a flat rate of 35% on assets above $5 million for individuals and $10 million for married couples. The Act also 'reunifies' the gift tax rate and exclusion amount with the estate tax, which was earlier decoupled by the Bush-era tax cuts and limited to a $1 million lifetime gift credit and a $3.5 million estate tax exclusion. However, the Act will only last for two years and this whole debate will be re-opened."
Here are three areas that clients will need to know about now, according to Ledyard:
- "Focus on maximizing the historic rise in the lifetime gift exclusion going from $1 million to $5 million—gift planning over estate planning."
- "In making any transfers, either during life or at death, take advantage of existing planning strategies to help minimize the tax due on transfer by reducing the overall valuation of the asset being transferred." In the example below, Ledyard demonstrates the power of a "double discount—one at the asset level and a second at the entity level."
- "In lieu of limiting the $5 million gift exclusion to simply $5 million, combine the transfer of discounted 'Family LLC' units with a Grantor Retained Annuity Trust (GRAT), structured such that the grantor is able to pass up to $100 million in underlying asset value over a 10-year period without triggering a significant transfer tax, which could be as high as $30 million," or more.
Greatly Reduced Tax Liability
In this hypothetical example, Ledyard describes how taking a long-term view and maximizing the current tax law could greatly reduce the tax owed on transfer of a family business:
The Case
"A family with a successful multi-generational family business, an LLC with a gross value of $202 million, is currently owned 100% by the mother and father. The parents would like to transfer 49% of the equity in the company to the next generation during their lifetime while minimizing any transfer taxes," Ledyard notes. "Without any planning, the transfer tax on the $100 million transferred, even at today's lower rates, would be $100 million minus the $10 million exclusion at 35%, or a tax of $31.5 million."
