Xposure Legal Expert

Over the last few weeks, I’ve received questions from clients that I feel would be beneficial to small business owners. Below are the questions and my ideas for solving these problems.

 

Question:

How can I equalize my assets to my three children but still give my business, which represents the majority of my estate, to my son who is active in the business?

 

Idea:

 

If your business represents the majority of your estate, consider creating additional liquid assets in your estate at the time of your death which can be used to equalize the assets of the two children who are outside the business with the assets your son will inherit. This strategy is accomplished through the use of life insurance held in an Irrevocable Life Insurance Trust.

The life insurance proceeds are first used to equalize the assets to the three children. Additional funds can pay death settlement costs, estate taxes (if you insist on paying them), or other expenses. The Irrevocable Life Insurance Trust holds the insurance death benefits outside of the estate (free of estate tax). This trust is also often referred to as a Wealth Replacement Trust or a Wealth Preservation Trust.

This strategy avoids family conflicts, which often occur when business assets must be divided among children or must be sold to equalize their inheritance. Either could dilute the ownership of your son to the point where he could not function adequately as the majority leader of the business.

Since most businesses are not liquid and not easily marketed, a forced sale can be financially disastrous and foil your goal of having your son continue the business. The additional influx of liquidity from your Wealth Preservation Trust, at the exact time it will be needed, can accomplish your objectives.

 

Question:

How does a person reduce his or her estate taxes and provide liquidity for the payment of those taxes if he or she is unable to purchase life insurance?

 

Idea:

 

When the purchase of life insurance is not an option for the payment of estate taxes, an individual can establish an irrevocable trust and begin to fund it with cash or other assets for the benefit of the ultimate beneficiaries. If the funding is done on a lump sum basis, it is often limited to a person’s $2,000,000 exemption equivalent amount. In addition, a taxpayer is eligible to make a $12,000 annual contribution for each beneficiary of an irrevocable trust under the federal gift tax annual exclusion exception.

A person can also establish a family limited partnership or limited liability company. By funding these entities with assets, it is possible to make gifts of partnership or limited liability company interests. Through the use of minority and lack of marketability discounts, which can range up to 80 percent or more and are commonly in the 35 to 40 percent range, significant gifts can be made at a low gift tax cost.

 

Other techniques such as qualified Personal Residence Trusts and Grantor Retained Income Trusts can also be used to make gifts.

 

 

Todd Hudgins, J.D., C.P.A., M.T., LL.M.