Q:In your last column, you mentioned possible changes to the estate tax law. Have those changes happened? Are they pending? Estate tax planning can be expensive, so I hate to make rash decisions and spend money unnecessarily.
A:The changes have not happened. As of this writing, the law is still very favorable for farmers and family business owners. My last column was written to encourage action. The tax conditions we’ve experienced over the last few years will not last forever. The current administration has promised to increase taxes. And, the unabated spending at every level in our government indicates that changes may be necessary.
So, don’t just stand there; do something. If the uncertainty of a tax increase, motivates action, that’s a good thing. I encourage planning to overcome the upset that will be caused by the untimely death of an owner. Planning forces owners and their families to address many important ‘what if’ scenarios and pick a more desirable outcome.
The benefits of planning go far beyond offsetting a tax. Planning also allows an owner to:
- Pass the operation to the next generation as a going-concern under favorable circumstances.
- Provide for family, so they maintain the lifestyle they’ve worked hard to create.
- Eliminate exposure to the estate tax, possibly for generations to come.
- Protect assets from known and unknown threats.
- Avoid probate and public notification.
Most owners don’t want to see their operations fold up and cease to exist. They want their operations to continue. They want a smooth transition to the next generation. They want to know their loved ones are financially secure and capable of enjoying the lifestyle they’ve come to expect. And, they don’t want to pay any more to uncle Sam than is absolutely necessary.
Decreasing exposure to the estate tax may involve freezing, reducing, and/or removing value from an owner’s estate. Freezing values may involve techniques for separating appreciating assets from an estate. Partial interest discounts help to reduce the value of assets held in an estate and certain assets may be completely removed from the estate through the utilization trusts.
One type of trust I commonly recommend is a dynasty trust. As the name implies, a dynasty trust is designed to endow an owner’s family for multiple generations. To do so, the trust must be irrevocable. It should be designed to protect assets from unscrupulous actors, bad decisions, and divorcing spouses. And, it should have liberal provisions for beneficial use.
By placing ownership in an irrevocable trust and not outright to a child, a well-drafted dynasty trust will provide:
- Death Tax Protection– since the asset does not become part of a child’s estate and therefore is not includable in calculating their estate tax obligation at their death.
- Divorce Protection– since the asset is not technically owned by the child and therefore cannot be divided into shares and used as part of the settlement in a divorce proceeding.
- Bloodline Protection– since ownership can be restricted to the family’s bloodline, yet still provide beneficial use to a child, a spouse, and/or family without actually changing ownership.
- Lawsuit Protection– since the asset is not includable in a child’s estate and not available to be seized, attached, or sold to satisfy an award from a lawsuit and/or adverse judgment.
Used properly, a dynasty trust has incalculable value. Beyond a protection mechanism, imagine taking your land out of play and not allowing it to be included in an estate tax calculation for multiple generations. A $10 million estate today, growing at a very modest 3% per year, will be valued at well over $60 million in just three generations. Imagine the legacy you’ll create.