Use the Exemption, But Don’t Lose the Store
I didn’t mean to burst a friend’s bubble when he proudly told me he had been asked to usher at a wedding but wouldn’t take part with the bridal party on the podium during the ceremony. I suggested his role was equivalent to trying out for the neighborhood softball team and being assigned the role of scorekeeper. I suppose I should have let him down with a bit more ease.
Kinder terms might have included sinecure, or minister-without-portfolio that describe a cushy job that has pay but requires little responsibility and has no authority. We tend to look down on such positions as they are usually doled out as political or social favors simply because the recipient is owed a favor or knows someone in the back.
All that being said, a more important concern are your high-net-worth clients who would seriously consider giving away large amounts of property under the current high gift and estate tax lifetime exemptions, but don’t want to lose control over the assets. It might be helpful to quickly review the ins-and-outs of the current exemptions at Time, Tide, and TAXES Wait for No One and High-Lifetime-Exemption Gifting – Playing It Safe!
Two useful planning concepts that may put concern over loss-of-control to rest and result in significant tax savings are the Family Limited Liability Company (FLLC) and the lowly regarded sinecure!
A limited Liability company is simply a separate tax entity usually established to function as an active ongoing business. It can be taxed as a C-Corp, an S-Corp, or a partnership. A Family Limited Liability Company is a plain-ole LLC except all the owners (members) are related. The FLLC can be used by a taxpayer to bundle assets under one roof where they are maintained and managed, even if not for traditional business purposes.
Consider how an FLLC can take advantage of the high exemption (assume $12,000,000 and a taxpayer with children) and still keep control without the gift being included in the taxable estate (all with the assistance and approval of legal and tax advisors, of course):
- The taxpayer chooses the $12,000,000 in assets to gift, creates an LLC, then contributes the assets to the LLC.
- The LLC is formed with two classes of ownership interest – assume 1% of the interest has voting rights, and the other 99% is non-voting interest.
- The taxpayer can now gift the 99% non-voting interest to heirs, usually to an irrevocable grantor trust for their benefit, without giving up any control or responsibility (sounds like a sinecure to me!).
- Even though the book value of the gift is $11,880,000 (99% of $12,000,000) the transfer is protected from tax by the exemption, but even better, the taxpayer still runs the show by retaining all the voting membership. The allocation between the membership classes does not have to be 1%-99%, rather whatever best suits the planning situation.
- Even better, advisors may suggest the book value can be reasonably discounted for gift tax purposes because of lack of control over and marketability of the FLLC interest. If so, even a 25% discount would allow for the transfer of non-voting membership with a book value of up to $16,000,000 that would still be protected by a $12,000,000 exemption.
It all reminds me of the time I auditioned for the church choir and ended up being made the music librarian. Didn’t make the baritone section, but the vote was darn close! Contact me about these or any planning issues with your CPS casework at 706-614-3796 or tom@cpsadvancedmarkets.com!