Category: Generation-Skipping Transfer (“GST”) Tax

Estate Planning for the Business Owner Series, Part 5: Estate Planning and the M&A Process

Post author By Blank Rome LLP
Post date May 16, 2024

Once the business owner is ready to sell the business, there will be considerable time and energy focused on that goal. The client may engage an investment banker or business broker to assist in the sale, along with dedicated legal counsel specializing in mergers and acquisitions (“M&A”) for the transaction. The business’ accountant will play an important role as will the personal financial advisers. It is possible that these roles may change from the individuals currently serving in these roles given the complexity and dollars involved, which is a natural progression during a business sale.

Tags acquisition, business transfer, M&A, mergers and acquisitions, sale transaction

Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 4: Document the Transfer

Post author By Blank Rome LLP
Post date May 9, 2024

Andrew J. Haas —

Once a business owner has an understanding of the value of the business and the tax and cash flow impacts of the transfer, the next step is to document the transfer. This may be done by the client’s separate business legal counsel or, if there isn’t one, the estate planner can usually handle the appropriate documentation. It is important to remember that if the client’s goal is to sell to a third party, all of these documents will be reviewed and scrutinized during due diligence, so it is best practice to have them all complete and organized so there is no question about the ownership of the business and the effectiveness of any transfer.

First, all of the existing documents will need to be reviewed. For example, there may be transfer restrictions in old bylaws that will need to be amended, or there may be an existing operating agreement or shareholder agreement requiring that certain consents be obtained from the manager or board in order to transfer equity. If there are lenders or other third-party agreements in place, those should also be reviewed to ensure there are no other separate consents that need to be obtained. Those agreements may also give guidance as to how the transfer must be structured. For example, a gift to a trust for the benefit of a spouse or family members of a current equity owner may be allowed, but only if the Trustee is an individual that is qualified under the bylaws or operating agreement. The existing agreements may provide guidance as to the ultimate structure of the transfer depending on the relationship between the parties.

Tags business transfer, document review, documentation, formula valuation clause, Wandry formula

Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 3: Examples of Business Transfers and Valuations

Post author By Blank Rome LLP
Post date May 2, 2024

Andrew J. Haas —

The purpose of this post, part three of our “Estate Planning for the Business Owner” series, is to provide a sample using real numbers showing the impact and benefit of using closely held business interests in lifetime gifting. Assume a new business-owner client comes in and says that he or she has never had his or her business valued, but based on the earnings and the industry he or she is in, he or she is confident that a third party would buy 100 percent of the business for $100 million. Let’s further assume that the effective income tax rate on the sale of the business is 30 percent, and the client has $13 million of gift/estate tax exemption available.

Option 1: No planning

Assuming the client is able to sell the business for $100 million, and keeps the net sale proceeds at a constant value until death.

Tags business transfer, business valuation, grantor trust, valuation

Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 2: Valuing the Business

Post author By Blank Rome LLP
Post date April 25, 2024

Andrew J. Haas —

The value of an asset at the time of a transfer is the key component to the United States’ transfer tax system. Gratuitous transfers during lifetime are considered gifts, while transfers as a result of the death of the owner are included in the value of the decedent’s estate. Some assets are easy to value: marketable securities have a value based on the mean of the high and low on the public exchange on the applicable date where they are listed, while the value of cash is equal to the total amount transferred. Valuing an interest in a closely held business is much more complex. When an estate planner has initial discussions with a client and invariably asks how much their business is worth, the client may give you a number based entirely on speculation, or perhaps they are using “book value,” a multiple of the business’ EBITDA (i.e., earnings before interest, taxes, depreciation, and amortization), a value used in a recent loan application, or even the value used for equity as compensation (a “409A” value). None of these values are “adequate” for purposes of determining the value of the business at the time of a transfer for estate planning purposes, and none of these “values” can be used to substantiate the value of a transfer on a Federal Gift or Estate Tax Return.

Tags business owners, business valuation, transfer tax, valuation reports

Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner, Part 1: The Business Owner as a New Client

Post author By Blank Rome LLP
Post date April 18, 2024

Andrew J. Haas —

For most business owners, the business is the most valuable item on their balance sheet. From an estate planning perspective, the equity in the business is also often the best asset to use for lifetime transfers to pass value (and future appreciation) out of the taxable estate. Before an estate planner can effectively provide guidance on the planning opportunities for the business, he or she will need some background information about the business. This data gathering does not need to be all-encompassing, but a good estate planner will want to know as much information about the business as possible since it is often closely intertwined with the client. Some information can be gathered through the business owner’s other professionals, such as separate business legal counsel, internal executives, accountants, and financial advisers, and it is important to have an open communication among the estate planner and these professionals as early on in the process as possible.

Tags business as an asset, business owners, new clients

Estate Planning Estate Tax Exemption Capture Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax

Don’t Wait until Next Year to Make Your Gift!

Post author By Blank Rome LLP
Post date April 1, 2024

Sean R. Weissbart —

Any estate planning attorney will tell you that certain years stick out in their professional lives more than others. Here are some recent examples:

2010: The year that estates of billionaires—including, most famously, New York Yankees owner George Steinbrenner—were administered without paying a penny of federal estate tax.
2012: The year the affluent made gifts to capture gift tax exemptions—then, at $5.12 million—before a scheduled reduction to $1 million.
2020: An election year where wealthy individuals feared record-high exemptions scheduled to remain in effect for five more years might abruptly be slashed with little notice.

In the final months of these years, scores of individuals emerged hoping to take advantage of tax benefits before it became too late. To accommodate, members of the trusts and estate community worked around the clock to finalize trust agreements, engage valuation companies, and draft documents transferring stock in closely held companies to irrevocable trusts. But many clients were frustrated when they learned that optimizing these tax benefits usually requires more than writing a check and signing a trust agreement, and can take well more than a month to craft and effectuate.

We expect 2025 to be another year for the estate planning record books. Absent legislative action, the federal estate, gift, and generation-skipping transfer (“GST”) tax exemptions—currently at $13,610,000 per individual—will be reduced by approximately one-half. Undoubtedly, scores of individuals sitting on the sidelines waiting to see if the tax laws will actually change this time, will emerge in the waning months of 2025 asking trusts and estates practitioners to help them capture these tax benefits.

Tags cost basis, gifting, GST tax, tax benefits

Estate Planning Estate Tax Exemption Capture Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax

Take Note: Significant 2024 Gift/Estate Tax Exemption Inflation Increases

Post author By Blank Rome LLP
Post date January 16, 2024

Kyle G. Durante —

The New Year brought inflation adjustments to the federal and some states’ gift/estate tax exemption amounts, thereby increasing the amount individuals can gift during life and at death free of federal and state gift and estate tax. Given the significant 2024 inflation adjustments, particularly with respect to the federal gift/estate and generation-skipping transfer (“GST”) tax exemption amounts, the New Year presents a prime estate planning opportunity not only for those individuals who have not previously engaged in significant gifting, but also for those individuals who previously made gifts to capture their exemptions and who now have additional exemption available.

The Federal Gift, Estate, and GST Tax Exemption Amounts

Under current federal law, the federal gift/estate tax exemption amount (i.e., the basic exclusion amount) is an amount equal to $10,000,000, adjusted for inflation since 2017. In 2023, the federal gift/estate tax exemption amount was $12,920,000, which increased to $13,610,000 with the 2024 inflation adjustment (a $690,000 increase).

In addition, the federal generation-skipping transfer (“GST”) tax exemption amount is an amount that mirrors the basic exclusion amount. Accordingly, the federal GST tax exemption amount also increased from $12,920,000 to $13,610,000 as of January 1, 2024.

These amounts will continue to increase for inflation each year until December 31, 2025. Under current federal law, the increase in the federal basic exclusion amount is scheduled to automatically sunset on December 31, 2025, from $10,000,000 plus an inflation adjustment, to $5,000,000 plus an inflation adjustment. As such, on January 1, 2026, the exemption amounts are scheduled to be automatically slashed by approximately one-half.

Tags exemption amounts, inflation, inflation adjustments

Estate Planning Exemption Capture Planning Generation-Skipping Transfer (“GST”) Tax

Proposed Resurrection of the Common Law Rule against Perpetuities—At Least for GST Tax Purposes

Post author By Blank Rome LLP
Post date June 8, 2023

Kyle G. Durante —

There is one common law rule that haunts most law students, and many legal practitioners: “no interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” This rule, known as the rule against perpetuities, has many applications, but, most importantly, it limits the duration that an irrevocable trust may remain in existence. This rule was initially adopted in an effort to limit dead-hand control over property by requiring property to vest in a beneficiary within a certain period of time.

Generally, at common law, an irrevocable trust could remain in existence for a period of time not exceeding 21 years after the death of all members of a particular class of persons who were alive at the time the perpetuities period began. For an irrevocable trust, generally, the perpetuities period will begin on the date the trust was created. While some states, such as New York,[1] continue to follow the common law rule, a number of states, such as New Jersey, Pennsylvania, Delaware, and South Dakota,[2] have completely abrogated the rule, while others have extended the period of time that an irrevocable trust may remain in existence, such as Connecticut (which applies an 800 year period in gross) and Florida (which applies a 1,000 year period in gross).

Tags Department of the Treasury, irrevocable trust, Treasury Department