A plan to maximize a family’s financial legacy usually saves the most tax by leveraging the longterm compounding of investments outside of the taxable estate. Adopting a program of planning early, and monitoring that program, often brings the best results. But saving tax is not the only objective— clients also need to know that their financial security is assured and that the long-term stewardship of family assets will be wise.

Harmonizing these concerns is particularly critical during times like today, when a change in law speeds up the planning process. The U.S. Treasury Department recently issued proposed regulations that would virtually eliminate valuation discounts on the transfer of shares in family businesses and investment pools held in Family Limited Partnerships or Limited Liability Companies, collectively known as FLPs.

The regulations are open to public comment and subject to change, and will not be effective before December at the earliest. Still, the possible elimination of the discounts in just a few months highlights the need for families with substantial assets to revisit their estate plans now.

Of course this is not the first time that a change in the law has spurred action. We undertook productive planning in 2012 when it appeared that gift and estate tax exemptions were about to shrink. Many trusts funded that year have grown outside of the grantor’s estate by 35% or more. During times like today, when looming deadlines accelerate the pace of decision-making, the fundamentals of prudent planning still apply:

Emphasize the key facts for the client’s consideration. Multi-generational planning can involve technical transactions that bear little resemblance to a client’s “real-world” experience. Explaining the technicalities is often only a modest help to clients. They need a practical understanding of what the proposed strategy will mean to them, and that varies from one client to the next.

As previously mentioned, gifts of interests in FLPs are a timely example. These entities provide centralized control and management of a pool of family assets. Many clients who have FLPs will soon be considering larger-than-usual gifts of FLP interests to take advantage of valuation discounts while they are still available.

To move forward, one client may need to understand her ability to borrow from the FLP if necessary. Another client may be interested in how the FLP can be used to engage her adult children in family finances. A client making gifts of a family business may be focused on the impact of succession planning. In each instance the planning process needs to emphasize the aspects of the transaction that are critical to the client. The same basic process and considerations apply to other irrevocable components of a multi-generational plan.

Build the plan over time. The best results are achieved with a long-term, persistent approach. This iterative process allows clients to build on past planning successes each year and take larger steps as their circumstances permit. Sometimes the best way to start is with annual cash gifts that are tax-free up to a current limit of $14,000 per individual. By making those gifts to trusts, and/or by transferring a share to a family entity like an FLP, clients can keep control or devise a plan for stewardship that meets their approval. FLPs can also be particularly helpful early in the construction of a multi-generational plan. Interests in these entities can be transferred in many ways without disrupting the management of portfolios or control of the FLP. This ability to regularly transfer assets can enhance the long-term estate planning process even if valuation discounts go away.

We collaborate with our clients and their outside advisors to generate and assess planning ideas. Our ongoing investment dialogue with clients gives us insight into many aspects of their lives, including their business assets, cash flow needs and family dynamics. By listening to clients, we seek to marry our understanding of their goals with our knowledge of strategies that best fit their needs.

A recent conclusion of an estate tax audit marked the end of a 30-year planning process for a family we will call the Smiths. An FLP funded with $30 million in 2002 was a key element of their long-term planning process. Given low liquidity needs and a long time horizon, the assets were invested for long-term growth.

By the end of 2013, when the surviving spouse died, the value of the FLP had expanded 2.6 times to $78 million and was largely owned by trusts that were outside of the estate. By the end of 2015, the partnership value had risen to $90 million, or three times its original amount. The entire partnership—along with its future growth—is now permanently sheltered from estate and gift tax in long-term trusts. A total of $10.5 million in gift and estate taxes was paid in connection with this planning. Absent the planning, $39.2 million of federal and state estate taxes would have been due at the surviving spouse’s death.

The savings for the Smiths illustrate the dramatic benefits that can be achieved through a thoughtful approach that avoids transactions made in haste and aligns closely with a family’s goals for governance of their assets over the long term.



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