Tools to Minimize Estate and Gift Tax Consequences

The key to transferring large amounts of wealth was discussed 2000 years ago by the patron saint of estate planning attorneys, Archimedes. Regarding leverage he observed, “Give me a place to stand and I will move the earth.” Using leverage to move the earth (or to move your wealth) is the key to achieving noteworthy results. As we have discussed in this ongoing blog series, each U.S. resident can give away, during their lifetime, $5 million as well as the current annual gift exclusion. 

Our fictional business owner, George Delveccio consulted with his CPA (who is also a Credentialed Business Appraiser) who valued George’s business at $12 million, a conservative but supportable valuation. The company’s stock was recapitalized into voting and non-voting stock. Based on current Tax Court case law, CPA could justify discounting the value of non-voting stock (or a gift of a minority interest of the voting stock). In her opinion, the minority discount was 35 percent of the full fair market value of the stock. Thus, she reduced the “size of the earth” by 35 percent, and was well on her way to leveraging the use of the Delveccio’s lifetime exemption amount. 

Even with the 35 percent discount, however, a gift of 50 percent of the company (now reduced to approximately $4 million in value) would cause gift tax consequences if George and his wife also made gifts of equivalent value to each of the other two kids. 

Like every other business owner, George was not particularly keen on paying taxes. So he didn’t. 
And he still gave away 50 percent of the company to his son Chad. He did so by using one of the biggest levers in Archimedes’ arsenal - one of the biggest levers in the “Wealth Preservation Transfer Game”: 
“GRAT” - a Grantor Retained Annuity Trust. 

A GRAT is but one of many tools that a lot of clever minds – legal, tax and insurance professionals - have created to produce or eliminate estate tax. When these estate planning concepts and tools are combined with lifetime exit planning concepts and tools they work to achieve an owner’s lifetime and estate planning objectives. 

The keys to success are:

1) Intelligent use of gift and estate tax reduction concepts;
2) Time (because many of these tools work more effectively over time); and 
3) Capable and coordinated advisors working in your interest. 

In our next blog, you’ll learn more about how GRAT’s work.