Summer 2016

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TEXAS LAND / Market Reading through their current estate documents, all assets went first to one another then equally to their children. Our first concern was that none of the assets were passing in Trust, giving up the protection from creditors, lawsuits or claims of divorcing spouses. Another common mistake we see in estate documents is the outright distribution of assets at certain predetermined ages. While you may feel your child will be ready to receive the assets at 35, these documents fail to take into consideration future issues that may arise with the child such as substance abuse. Another issue that needed to be addressed were the estate taxes that would be due on the second death. At present, the estate tax is spoken of in terms of permanency. The definition of permanent in this scenario simply means there is no sunset provision currently on the horizon when exemption amounts and tax rates will revert to previous amounts. In <strong>2016</strong>, individuals can pass $5.45 million ($10.9 million per couple) estate tax free. Any amount over the exemption is taxed at a 40% rate. William and Cassie’s children would owe approximately $2,180,000 in estate taxes at the second death. While there were plenty of liquid assets to pay the taxes, they did not realize it was that high and were concerned that estate taxes would be the heir to 13% of their estate. BILL MORGAN JESSE ESTATE TAXES RESIDENCE $166,667 $166,667 $166,667 $0 LAND $2,666,667 $2,666,667 $2,666,667 $0 LIVESTOCK $83,333 $83,333 $83,333 $0 EQUIPMENT $33,333 $33,333 $33,333 $0 STOCKS/INVESTMENTS $1,023,333 $1,023,333 $1,023,333 $1,930,000 SAVINGS $0 $0 $0 $250,000 After some soul searching and discussion, William and Cassie decided they would be comfortable with Bill inheriting all of the business if Morgan and Jesse received assets equal to the value. If possible, they wanted a provision included that Morgan would continue keeping the books for the operation in exchange for compensation. Most important was ensuring the surviving spouse was able to live on the property until death. We had our marching orders; reduce estate taxes, equalize and protect the surviving spouse. To reduce estate taxes, we implemented an entity gifting strategy. The land, livestock and equipment was placed into an LLC. The LLC contained both voting and non-voting shares. An appraisal was completed for the fair market value of the LLC assets. The appraised value was $8,520,000 ($85,200 voting shares and $8,434,800 non-voting shares). If gifted at full value, the gift would erode a large portion of the $10,900,000 lifetime exemption amount. Therefore, a partial interest valuation was completed by an appraiser that specializes in discounted values for family gifting. The valuation discounts the shares based on two factors: lack of marketability and lack of control. A lack of marketability discount applies when there is no market for the shares of the LLC. Any member would be hard pressed to find a buyer for a percentage of non-voting shares. A lack of control discount is applied to shares that have no control to act without agreement of other shareholders or no vote in operations. The discounted given the non-voting shares of the LLC was 35%. Thus instead of using $8,434,800 of the $10,900,000 exemption, William and Cassie only used $5,482,620. Once the land, livestock and equipment value was removed from their estate, they fell below the exemption amount effectively erasing any estate taxes due. Non-voting shares were gifted via transfer assignments to Bill (80%), Jesse (10%) and Morgan (10%). Jesse and Morgan were given shares to maintain the partial valuation discounts. The strategy solved the issue of the estate taxes due at death but what it created was an even wider chasm of inequality between heirs. Bill’s value of the LLC, should he inherit all voting shares in addition to the non-voting shares he received via gifts would total $4,471,296. The value Morgan and Jesse received would be $548,262 each or $3,923,034 less. Excluding assets now in the LLC, the balance of William and Cassie’s assets was $5,750,000. This was insufficient to equalize dollar for dollar. If there were sufficient assets outside the LLC, William and Cassie’s estate documents would have been amended to pass $3,923,034 each to Morgan and Jesse before remaining assets were divided equally. The most effective strategy available to William and Cassie was leveraging remaining assets with the use of life insurance. A policy was issued with William and Cassie as joint insureds. The policy was owned by and payable to a Trust. At the second death, the policy would distribute $8,000,000 to Jesse and Morgan income tax-free. The premiums were gifted to the Trust annually by William and Cassie from income on investments. At the end of the process, William and Cassie’s estate tax liability had been reduced, under current law, to $0 and each of the children received equitable dollar amounts. These were William and Cassie’s objectives. Each family we have worked with has a different set of assets to work with and different goals for those assets. It is important to work with an advisor that takes the time to get to know you and your goals above (and before) all else. 82
CONGRATULATIONS TO George M. “Mitch” West FOR 2015 SALES OVER $21 MILLION AND MEMBERSHIP IN THE SUPERSTAR CIRCLE. George M. “Mitch” West BROKER ASSOCIATE 6061 BROADWAY SAN ANTONIO, TEXAS 78209 D (210) 829-2564 C (210) 213-5402 GMWEST@PHYLLISBROWNING.COM WWW.PHYLLISBROWNINGLANDANDRANCH.COM
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SUMMER 2016 LANDMAGAZINES.COM
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TEXAS LAND / Contents 32 80 36 28 1
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Page 89 and 90: CONGRATULATIONS TO Hunt H. Hellums
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Texas Big Game Awards Statewide Cel
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Summer 2016

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