Independent Thinking^®

Loosening the Reins

Most high net worth families know that they are able to efficiently transfer wealth by making annual exclusion and lifetime gifts to their children that reduce the taxable value of their own estate. Many don’t realize, however, that they can also retain some control of those assets.
 
Parents who fear that their children would be burdened by a gift – that it might limit their ambitions, damage their relationships, or expose them to loss from future divorces or creditors – can manage those concerns by discussing them with their wealth advisor and other professionals. The right team can identify and establish the appropriate legal structures, and help engage and educate the next generation, while supporting the parents’ authority.
 
The recent experience of a Midwestern couple in their mid 50s is fairly typical. They had sold their business and wanted to manage their financial affairs as tax efficiently as possible, but they were not comfortable making large gifts outright to their college-age children.
 
By creating a spousal and family exemption trust, or SAFE trust, for the primary benefit of their children, the couple was able to transfer the wife’s lifetime federal gift tax exemption (which, as the chart on page 16 indicates, is now $5.43 million), using liquid assets, and reduce the value of their estate accordingly. They were able to retain the ability to access the assets, if necessary, through an independent trustee as the husband was a permitted beneficiary, while also preserving his separate $5.43 million lifetime federal gift tax exemption 2015.
 
While the premature death of the husband would eliminate any indirect benefit from these funds to the wife; if the couple lives to or near their life expectancies, this strategy will allow them to pass on a larger estate to their children with no estate tax due on the future appreciation of these assets. Also, the wife would likely inherit the assets the husband retained in his name.
 
Family business asset transfers can be especially fraught with complexity, as the owner may need to ensure the continued success of the business while developing leadership and succession plans that may coincide with ownership. Client and vendor agreements, as well as bank loans to the business, may also require the owner to maintain a level of voting control. Again, the right legal structures can satisfy these conditions and allow the business owner to reduce the taxable estate while managing both the business and long-term interests of the family.
 
A number of these issues came into play in a recent series of discussions with the owners of a successful retail business in Chicago, and their chief financial officer, estate-planning attorney and accountant. By identifying the business entity with the highest potential for future appreciation and then creating a non-voting class of stock, the parents were able to gift a stake in the business while retaining control and the ability to plan for succession in the future.
 
In this case, a generation-skipping tax, or GST, trust allowed them to leverage the use of both their gift and GST tax exemptions. The trust also provided layers of protection against divorce and the mistakes of future grandchildren by assigning fiduciary control to an experienced trustee. Finally, by structuring the trust as a defective grantor trust, the grantors were able to pay the trust’s income taxes, affording the trust the added benefit of tax-free growth.
 
The most common fear – one that is often difficult to communicate within the family – is the parents’ concern, whether rational or not, that they retain sufficient assets for themselves for their retirement lifestyle needs. Retaining the ability to access specific assets while reducing their taxable estate can help place these fears into proper perspective.
 
A widower with significant liquid wealth and commercial real estate found himself torn between his need to support himself and his desire to maximize the use of his lifetime federal gift tax exemption for his adult children ahead of any rise in the current depressed real estate values. The best solution for him was to retain his liquid assets to cover his own expenses and to gift an illiquid asset, in this case undeveloped Florida real estate, while retaining some management control of the land through a limited liability limited partnership structure.
 
His advisors were able to secure a discounted valuation of the land, reflecting current market conditions as well as its undeveloped state and the complications inherent in the shared ownership. They agreed that the land had significant appreciation potential, making it the ideal asset to remove from his estate to the greater benefit of succeeding generations.
 
While these cases are broadly representative, each family’s situation is as unique as the people and relationships involved. Determining the best approach starts with a conversation. What are the goals of each generation? What asset is the optimal one to gift? What structure should be used to retain control? What are the potential challenges ahead and the best ways to address them?
 
Evercore Wealth Management advisors have extensive experience assisting families in developing long-term gifting plans, engaging family members, and serving as a trusted fiduciary. We work closely with our clients’ other advisors and accommodate concentrated holdings to plan and invest in the best interests of our clients.