It’s never too early to start estate planning.
A few years ago, one of our firm’s clients received the ultimate compliment from the Internal Revenue Service.
A well-known business owner, community leader and client that we had worked with for years and for whom we had done a significant amount of estate planning, died. As required by law, we filed the estate tax return.
A few months after we filed, we received the audit notice. The notice wasn’t the compliment, but the IRS reaction afterward was. In essence, the notice requested that we set up a meeting with the examining agent and that we come prepared to explain where the assets were.
At our meeting, we learned that the examining agent was surprised by how small the estate was as reported on the estate tax return. We supplied the requested documents and explanations, and a detailed audit ensued. The return was accepted as filed and the case was closed with no additional tax due.
That’s a win and the best compliment anyone might receive from the IRS.
This outcome wasn’t a lucky accident. That audit and the favorable results were the culmination of years of regular family meetings in which we discussed and properly employed numerous estate reduction strategies.
The meetings included attorneys, insurance professionals, the CPA and family members. The family consistently met every three or four months for a number of years before our client passed away. And the resulting estate tax savings were substantial.
How did we get there? Successful estate reduction strategies come down to three components:
1. Commitment to implementing a systematic plan of managing the estate. This type of planning includes strategies to transfer the estate to the next generation, such as recapitalization of the company and the transfer of stock to desired beneficiaries, implementation of estate planning trusts and annual gifting.
2. Dedicated to regularly meeting with internal and external financial advisors to review and revise the plan as needed. These meetings provide the opportunity to explore and discuss strategies for managing the estate. Financial advisors during these meetings typically take the time to explain the reasoning and the benefits of the recommended strategies to both the client and the next generation. Because all parties were involved in the implementation of the planning, on the death of the senior family member, the passing of management and control of the business is a seamless nonevent.
3. Inclusion of the younger generations in the planning process. Including the next generation in the planning process gives them an opportunity to understand the plan, which can be very complex. It also gives them the chance to prepare for their role in the new organization. It also gives the next generation an opportunity to express their hopes and aspirations about what they want their future to be or not to be. Often, the vison the senior generation has for their children is not what the kids want at all. Including the children in the planning process helps to identify and address these issues.
In addition to the significant estate tax savings this approach achieved, the process helped develop a strong sense of community within the family. Because most of the family members were involved in the planning, not just the senior generation, they had the opportunity to develop a greater depth of understanding of each other and the law.
When it comes to estate planning, particularly for those who run family businesses, putting off the planning process can be devastating to the family.
Assets intended to go to children and grandchildren must be liquidated to pay estate tax that could be minimized or even avoided with proper foresight and planning.
Another JW Advisors client with high net worth had delayed estate planning. We would bring up the idea of starting to implement a strategic plan to minimize the estate tax regularly. Each time he would decline. Finally, in his 70s, and as a result of family health problems, he said it was time.
Over the course of a few years, he was able to implement consistent planning strategies that significantly reduced the estate tax that had to be paid.
In this case our client started a systematic transfer of his estate to his beneficiaries using installment sales and Grantor Remainder Annuity Trusts. He also formed trusts for his children and grandchildren to which annual gifts were made.
As a result, his heirs received significantly more assets than they would have without the planning.
While it is never too early to start the conversation about estate planning, the day might come when it is too late. It’s not uncommon for savvy new businesses to think about their exit plan at the same time as they devise their startup plans. The message being that early planning will set into motion the strategies needed to give them or their heirs the ultimate compliment from the IRS.
Chris Wilcox is the taxation and transition partner and co-founder of JW Advisors, a Las Vegas-based consulting firm specializing in business financial consulting, litigation support and forensic accounting, assurance and tax services. Reach him at 702-304-0405.