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Gregory S. DuPont Oct. 1, 2019

From Main Street to Wall Street, business owners can become so involved in the everyday operations of running a company that they may overlook developing a sound estate plan. However, without a strategy in place, you could expose your hard-earned assets to unnecessary estate taxation. Procrastination can be risky, since your family could be forced to sell your business and other assets to meet your estate tax obligations in the event of your death.

The complex issues involved in developing an effective estate plan necessitate seeking  out a  competent advisory team, including your financial, insurance, legal, and tax professionals to work together, so that your wishes will be followed.

Laying the Groundwork

The size of your estate often dictates the amount and extent of planning necessary to ensure that you minimize taxes and preserve wealth for future generations. However, every situation is unique and requires varying degrees of preparation and participation. For instance, if you are married, a properly drafted and executed will and living trust for you and your spouse can help to maximize each of your respective Federal estate tax credits. This credit would allow each spouse to shelter up to $5.43 million in 2015 (adjusted for inflaton) from estate taxes. A 40% tax rate applies to transfers over the $5.43 million threshold.

In order to take advantage of each spouse’s tax credit, however, it may be necessary to retitle assets. It is fairly common for people to be cautious regarding the retitling assets solely to their spouse or some other entity, such as a trust, due to a fear of the loss of control over assets. For this reason, it is important to determine the most tax-effective asset ownership arrangement to address your concerns about asset control.

There is an unlimited marital deduction for property transferred between a married couple during life or after the first to die. Under the Federal tax law, unlimited amounts and value of property may be transferred and neither spouse is liable to pay gift or estate tax as a result of such transfer. Upon the death of either spouse, the unlimited marital deduction applies by default to property held jointly between them. The surviving spouse would not be able to apply the current estate tax exemption of such deceased spouse to any portion of such jointly held property.

One gift few people wish to leave their heirs is a substantial estate tax bill. For those with significant estates, life insurance is one tool often used to fund the payment of estate taxes. Used in conjunction with an irrevocable life insurance trust (ILIT), life insurance can provide liquidity and help ensure your assets are passed to your family in full.

When properly drafted and executed, the proceeds of an ILIT will be payable to ILIT beneficiaries (generally, children and grandchildren). The proceeds will be excluded from your estate and will not be subject to estate tax. An ILIT can purchase a life insurance policy on your (the donor’s) life, with policy premiums funded by annual gifts you make to the ILIT. Your annual gift exclusion ($14,000 annually per donee and $28,000 for gifts made by a married couple in 2015) can be used to help minimize your gift tax exposure, when used in accordance with rules pertaining to Crummey withdrawal powers (Crummey v. Comm, 397 F.2d 82 (9th Cir. 1968)).

It’s Your Plan

Business owners who ignore the need to develop an estate plan addressing their specific concerns may face the possibility that their business may have to be sold to pay estate taxes. There are a variety of tools and techniques that can protect your business from forced liquidation, and help ensure its continued success. Working with your estate planning team can help ensure that your final wishes will be executed and your assets willbe preserved for your family.