We’ve moved! We didn’t go far and look forward to seeing you in our new space located at 1255 Crescent Green Drive, Suite 200, Cary, NC 27518

Estate Tax Planning for High Net Worth “Limbo” Families

Estate tax planning got much more straight forward over the last decade since the federal estate tax exemptions increased so significantly that most families won’t ever have an estate tax planning need. The focus shifted more towards streamlining succession or creating asset protecting plans for the support of beneficiaries who may need it.

But there’s a segment of the population who was left in a gray zone with the passage of the most recent tax reform – doubling the current exemptions amounts to $11.4M and $22.8M respectively (for 2019). One thing we know for sure is that those exemption amounts will “sunset” (or expire) at the end of 2025, reverting to the pre-reform rates (adjusted for inflation). So, what if your family is caught somewhere in the middle: Had estate tax issue before tax reform, but don’t currently under the new exemptions? There’s a few options, but none is perfect for everyone. By way of example, we’ll use a family with a combined net worth of $15M, $2M of which is term life insurance death proceeds.

Gifting The Full Exemption Now

One strategy some estate planning professionals are using is to take advantage of the high exemptions while we have them. The estate and gift tax exemptions are unified, meaning you can pass on at death or gift during your life up to the current exemption amount without much different in tax impact. So, now that the exemption is so high, and since we know it will expire at the end of 2025, gifting all or most of the individual exemption before 2025 can be advantageous for some families. This would generally be done through a transfer to an irrevocable trust of some sort. However, it may not be the best option for families with significant wealth in closely held businesses.

Using an Irrevocable Life Insurance Trust

Irrevocable Life Insurance Trusts (or ILITs for short – lawyers love acronyms), are irrevocable trusts that are used to either assign existing life insurance policies into or to purchase new policies in a manner that will reduce or not include the policies in the owner’s taxable estate. There is a 3-year assignment look-back, meaning that if the person dies without 3 years of the assignment, the death proceeds would be included in their taxable estate. If done appropriately the ILIT provides 2 significant benefits:

  1. Removing the $2M in life insurance proceed value (as per our example) from the owner’s gross taxable estate, thus reducing their potential liability by $800,000.
  2. Providing a separate source of liquidity to pay any remaining estate tax balance that may still exist at the death of the surviving spouse.

When the bulk of the wealth is held in closely held companies or real estate, the only other option is usually to sell the asset(s) to create liquidity to pay the estate tax liability. By maintaining the $2M in the ILIT, the life insurance would pay as cash to the ILIT and the ILIT would be used to pay the liability that remains and disburse the remaining proceeds to the family according to the terms of their estate plan.

Planned Gifting

Giving small gifts over time can be a great long-term strategy for married couples. The strategy here would be to give the full annual gift exemption amount to as many people as possible each year, which would allow for lifetime transfers of wealth without reducing the lifetime tax exemption. Currently the annual gift exemption is $15,000 per person and $30,000 per married couple, meaning each married couple can gift up to $30,000 per year to as many people as they’d like. Cash gifts to their own children, 529 contributions to their grandchildren, etc. With a large enough family and over several years hundreds of thousands if not millions of dollars can be gifted without reducing the lifetime exemption of either spouse.

Valuation Discounts

For owners of closely held companies, the IRS allows “minority owner” valuation discounts for owners of a minority interest (less than 50%) of a closely held company (not publicly traded). Families will commonly divide ownership of holding companies or operating companies between 3 or more relatives in order to create minority ownership in all family member owners. These discounts can sometimes reach as much as a 35% reduction for the purpose of calculating gross taxable estate value. Again, not a perfect strategy for everyone.

Estate Tax Planning is incredible difficult to accomplish alone and should not be attempted without experienced help. If you’re interested in discussing your options, fill out the form below and we’ll be in touch soon.

Author Bio

Paul Yokabitus

Paul Yokabitus is the CEO and Managing Partner of Cary Estate Planning, a Cary, NC, estate planning law firm. With years of experience in estate and elder law, he has zealously represented clients in various legal matters, including estate planning, guardianship, Medicaid planning, estate administration, and other cases.

Paul received his Juris Doctor from the Campbell University School of Law and is a North Carolina Bar Association member. He has received numerous accolades for his work, including being named among the “Best Attorney in Cary” in 2016 and 2017 by Cary News and Rising Star in 2020-2023 by Super Lawyers.

LinkedIn | State Bar Association | Avvo | Google