The novel coronavirus (COVID-19) pandemic is having a profound impact on people and businesses across the globe. Lives have been lost, businesses are facing the potential of mounting losses, and an uncertain economic future is roiling the global equity markets. Through this time, families must also assess the impact of the virus on their estates and the strategies they rely on to protect wealth, maintain tax efficiency and preserve future asset appreciation for generations to come.
High-net-worth families have always relied on intrafamily wealth transfers to protect assets from creditors, facilitate succession plans and reduce exposure to estate and gift tax. With the current estate tax exemption of $11.58 million ($23.16 million for married couples filing jointly), very few individuals will be subject to transfer taxes when they pass away. However, this very generous exclusion amount is scheduled to be cut in half in 2026 and may be reduced even further prior to that date depending on the results of the upcoming elections. Looking at this information through the lens of recent equity market declines and the Fed’s interest rate cut to near zero, it behooves families to take a moment and consider the many estate-planning strategies they may employ today to help reduce their future tax burdens. The specific tools selected, whether they be a trust, intrafamily loan, family limited partnership (FLP), or a combination of all these strategies, will depend on the family member’s own unique circumstances and needs.
One option is to transfer assets to an FLP and change the structure of how those assets are owned. In a family limited partnership, there are two types of partners: general partners (GPs) control all financial decisions regarding the FLP’s assets, whereas limited partners (LPs) lack the authority to liquidate underlying assets or take cash distributions. Consequently, the LP interests are worth less than the proportionate value of the partnership’s underlying assets, and a discount of up to 35 percent may apply to the fair market value of those LP interests.
This discount, in and of itself, can yield significant tax savings when senior family members gift LP interests to future generations at this lower value. This allows family matriarchs and patriarchs to remove assets and future appreciation from their taxable estates and use the enhanced exemption limit currently in effect. As an added benefit, families have the reassurance from the federal government that any tax-free gifts they make today will not be clawed back to their taxable estates in the future.
On the other hand, some taxpayers may prefer to keep the value of the assets in their estates but not future appreciation. Under these circumstances, LP interests can be sold to a grantor trust in exchange for a promissory note. This will “freeze” the value in the taxable estate and allow grantors to collect interest at the historically low Applicable Federal Rate set by the IRS each month. The lower the interest rate, the less cash grantors will collect, thereby lowering the value of their taxable estates when they die.
While we cannot control the markets, we do have the ability to respond to economic circumstances and proactively engage in wealth planning and preservation for ourselves, our children and grandchildren. Now is a good time to meet with your financial advisors to assess your current estate plan and implement strategies that can allow you to leverage current market conditions to achieve your specific goals.
About the Author: Eric P. Zeitlin is managing director of Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Eric P. Zeitlin is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/deal and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors, RJFS does not provide tax advice.