Estate tax strategies

There has been a great deal of discussion about estate taxes recently because there is no federal estate tax upon death during 2010 (at least for now). We do not know for certain whether Congress will retroactively enact the estate tax in some fashion for 2010 but what is highly likely is that there will be an estate tax in the future. Therefore, taking advantage of certain wealth transfer techniques now may pay big dividends for your heirs.

The economy has taken a toll on valuations in general. For example, if you own a business, investments or real estate it is likely that the value of your assets is less now than they may be in the future. These reduced values present a great opportunity to make lemonade out of lemons by taking advantage of gifting.

It is important to note that even though there is currently no estate tax, the amount of eligible lifetime gifts remains at $1 million ($2 million for married couples). Additionally, you can make an annual gift of up to $13,000 per person ($26,000 if you are married) to as many people as you want in 2010 without impairing your lifetime amount. There are exceptions for medical and education costs that allow for a greater gift under certain circumstances. For families that have significant assets and want to maximize gifts there are many planning opportunities available.

One strategy involves transferring business interests to family members utilizing a family limited liability company (FLLC). Parents can transfer to their children "discounted" units in a FLLC without giving up control of the business or real estate interest. Real estate is an ideal asset to use when utilizing FLLCs. For example, if a married couple owns real estate they can transfer the asset to a FLLC in exchange for membership units. The couple can then gift to their children (or other family members) units at a discounted value. Discounts for lack of marketability and minority interests reduce the value of the units transferred. These units may be "non-voting" which gives the parents all voting rights and further reduces the value of the units gifted to the children. This strategy can result in significant benefits to the family in terms of the transfer of wealth as well as saving estate taxes.

Let's assume that the only asset in a FLLC owned by a husband and wife is real estate with a value of $3 million. The parents want to gift one third of the interest in the FLLC to their children. Using a combined discount rate of 30 percent (minority, non-voting and lack of marketability) the value of the gift would be approximately $700,000. Without the discounts the value of the gift would have been $1 million. In this example, the couple preserved $300,000 of their life time exclusion. If your children are too young to own the LLC units outright you may want to consider trusts.