What Everyone Should Know About Deferral and Minimization of Estate Taxes

This is a follow up to my previous article on an Overview of Important Estate Trusts. As stated previously it is imperative that you work with your estate planner and other advisers when creating your estate plan to minimize estate taxes.

3 Step Process:

1. Understand lifetime gifting strategies. By taking advantage of annual exclusion limits during life it can help an estate qualify for advantageous deferral and/or minimization of estate taxes.

2. Gifting non-business assets over business assets. This will raise the percentage of assets eligible for advantageous estate tax treatment (Special Use, Section 303, Section 6166 - explained more below) for those whose estates are eligible for this treatment.

3. Work with your professional team of advisers to create a plan, and update often.

For Those Whose Estates That Might Qualify:

• Special Use Valuation (Section 2032A) - Reduced valuation based on the basis of the current actual use rather than its highest and best use. For example, use of a family farm instead of commercial real estate. Election is made on Form 706.

• Deferred Payment of Estate Tax (Section 6166) - Election is available to owners of farms and closely held businesses. The executor may choose to defer any estate taxes due for up to 5 years for a closely held business. Estate tax can be paid in 10 annual payments after the 5 year period. Interest is paid during the deferral period. Please see notice filing 2007-90 linked.

• Stock Redemption (Section 303) - Permits the estate of a decedent to redeem shares with a step-up in basis and capital gains treatment versus dividend (Ordinary Income).

• Family Limited Partnership (FLP) - created to transfer assets to a younger generation at a reduced gift tax valuation and cost. Typically a senior family member will transfer assets (like a business) into a partnership where they hold 1% general partnership interest and 99% limited partnership interest. The senior family member makes gifts over time of the limited partnership interest to junior family members. The transfer constitutes a gift and is eligible for annual exclusion. Does require attorney fees, appraisal fees in some cases, and business must be capital-intensive. FLPs are not appropriate for personal service entities. See Link above for Stock Redemption (Section 303)

• Installment Sales - buyer will pay the purchase price over a certain period of time through an installment note. If the seller dies before the note is paid off, the remaining unpaid balance plus interest on the date of death is included in the gross estate.

• Self-Canceling Installment Notes (SCINs) - an installment note that cancels upon death. Generally used when the seller is in ill health relative to their actual life expectancy. If they live longer than the SCIN term then the buyer may pay more than fair market value for the property.

• Private Annuities - The sale of an asset (usually to a related party) in exchange for an unsecured promise to pay a lifetime annuity to the seller. Also, should only be used if seller is not expected to outlive the term stated. If the seller does outlive the term the buyer may pay more than FMV, and the seller’s gross estate must include all annuity payments received during life. Used only between loved ones and parties cannot be in the business of selling annuities (cannot be a life insurance company).

• Also See: Recapitalization

Always Be Updating!

I cannot stress this enough. Rules are always changing and you must understand a good plan is a dynamic one.

Consult with your team of experts to understand what they will be doing on an ongoing basis to insure your planning is always up to date and most importantly will achieve your wishes for your hard earned wealth!

Thank you for your time,

IMPORTANT: You should meet with your team of financial planners, estate planners, and CPAs before making any decisions or drafting documents.