Clients want the best of all worlds: aggressive tax planning that yields optimum tax advantages but with assurance that their plan will not be the topic of discussion within the Internal Review Service or wind up on the docket of the United States Tax Court.
Estate planning clients are often torn between the desire to remove assets from their estates to avoid or minimize estate tax exposure, yet extremely reluctant to release control over assets. There is further reticence to place readily available funds in the hands of the younger generation who are perceived to be ill-equipped to handle substantial wealth, especially in the face of high divorce rates and a very litigious society. These seemingly contradictory goals were the concern a client with 5 daughters, none of whom were suitable candidates to take over his business.
We created a Family Limited Partnership (FLP) for this client to facilitate a substantial transfer of wealth. Utilizing valuation techniques that allowed discounting in valuations to leverage annual exclusions and lifetime exemptions for gift and estate tax purposes, the client, over 10 years, was able to shift more than 80% of the value of the assets to his daughters. However, the FLP allowed the client to continue to control assets for investment purposes and control the distribution of funds to his daughters before they had the tools and resources to deal with increased wealth. The FLP was the perfect vehicle to allow the client’s investment assets to build up over time and enabled his daughters to gain experience in handling such assets. The FLP not only allowed for a smooth transition of wealth with minimal transfer tax costs, but provided asset protection for his daughters and virtually eliminated any concern that a subsequent divorce could upset his planning.
As a wise man once said, “luck is the residue of design.” Successful planning is neither reckless nor spur of the moment. Rather it is the consequence of careful long term planning and implementation.