In our practice, we often come across two types of high net worth clients: Business Owners and Executives. The 40% estate tax can adversely impact each group without proper estate and succession planning.
Business Owners: Many of our clients own local businesses. As noted, the estate tax is a 40% tax on inheritance. Where there is significant estate tax exposure, the Decedent’s family will need the appropriate liquid funds to satisfy the tax liability. However, and unfortunately, many successful business owners leave estates which, while high in value, are mainly comprised of businesses ownership interests such as stock, S Corp. or LLC interests. These assets are considered “illiquid” and therefore not much help where the family needs immediate funds to pay the estate tax. Through proper planning, the estate can be structured in such a way as to avoid these pitfalls thereby ultimately saving taxes. For example, a portion of the business can be transferred by sale or gift to an irrevocable trust for the benefit of family members with the use of valuation discounting.
Executives: Similarly, we consult with high level executives which have accumulated significant wealth during their lifetime. The majority of this wealth is typically in the form of “non-probate” assets. “Non-probate” assets do not pass by one’s Last Will and Testament; rather, they pass by beneficiary designation or by right of survivorship.
To illustrate, the death benefit under any life insurance policies or qualified plan accounts (such as 401Ks and IRAs) will not pass by one’s Will, but by the beneficiary designations pertaining to each such policy or account. Moreover, one’s bank and investment accounts that are jointly owned (other than as tenants in common) will pass to the surviving co-owner when the first co-owner dies by right of survivorship. Accordingly, care must be taken to ensure that all of these designations are properly in place and equally paramount, that they are consistent with the client’s final wishes. Only when all of these matters are addressed can the estate be disposed of in a timely and tax efficient manner.
For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or firstname.lastname@example.org or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or email@example.com.