• Management and Equity Succession and the Confiscatory Estate Tax
  
• Valuation Discount Planning
• The Family Investment Partnership
  • Discount Partnership
  • Freeze Partnership
  • Family Partnership Plan
• Family Strategic Planning

Management and Equity Succession and the Confiscatory Estate Tax

Decades of real appreciation as well as inflationary increases in family wealth have placed many families in danger of losing 50% or more in total equity value of family-owned assets in the form of the Federal Estate Tax. Regardless of various timing, liquidity, wealth continuity and control considerations, the estate tax liability accrues upon the estate owner's death. While basic planning, in the case of a married couple, can delay the estate tax burden until death of the surviving spouse, often this only increases the ultimate share of the estate that must be liquidated to pay estate tax. For successful families involved in business and investment enterprises, the $600,00 per estate owner ($1.2 million for a married couple) estate tax-free asset value is woefully deficient as a shelter from taxation.

Today, the combination of a lingering national economic recession and the August 10, 1993, enactment of the Omnibus Budget Reconciliation Act of 1993 requires development of a new or updated family strategic plan for families serious about mutli-generational wealth preservation. The significant tax increases, especially in rates, included in OBRA '93 have alerted substantial estate owners to the importance of review, update and improvement in family estate plans.

Other than to allow installment payments of estate tax in certain family-owned active business situations (mostly at adjustable interest rates, with interest compounded daily) the wishes of the family to avoid forced sales, adverse economic conditions, or a desire to pass on the family business or real estate holdings to heirs, generally are irrelevant under the Federal Transfer Tax System -- the estate tax is due 9 months after the decedent's death. Therefore, the confiscatory nature of the Federal estate tax (55% top rate for net asset value over $3 million with likelihood of 1993 return to pre-1993 55% top rate -- or worse) greatly increases the difficulty of dealing successfully with already complicated problems of equity and management succession within the family. We have found that clients, assuming a commitment to planning, will focus on multi-generational estate tax avoidance strategies guided by their team of advisors.

Even where senior family members have a high degree of liquidity, such as in the form of cash and cash equivalents or marketable securities, appropriate limiting (reducing) the Government's eventual share of the estate is a typical goal of those who have built substantial estates. In these uncertain economic times, asset protection also is a valid family goal. Elements of planning relating to certainty, valuation, and liquidity favor inter-vivos gift programs over allowing assets to pass through estates, even after taking into account the current law income tax basis step-up at death for appreciated value assets.

Most estate owners are well aware of the advantages and costs of using life insurance to prefund at discounted dollar values, the estate tax and other estate settlement costs.

Also, many have heard of the advantages, in some situations, or charitable trust planning, also often involving life insurance purchases. However these techniques of wealth preservation can be costly, do not apply to all situations, and involve parties outside the family. At a minimum, a truly complete and integrated approach to Family Wealth Planning should include careful analysis of valuation discount planning structures, especially using the vehicle know as the family partnership entity envelope. What is best is to adopt the process we refer to as Family Wealth Planning. This process, once the Contingency Planning for disability or death is accomplished, involves Wealth Preservation via an integrated, practical group of techniques effectively using valuation discount planing, life insurance and charitable giving. The balance of this alert memorandum focuses on the valuation strategic plan.