| Wealthy Family
Faces Huge Estate Tax Liability
Scenario
This CB&H client is a family involved in
real estate development that has experienced significant appreciation
in the value of their holdings over the last several decades. The
family owns two shopping centers, numerous commercial and residential
rental properties and raw land. In addition, the family holds approximately
$1M in liquid investments with a total net worth that exceeds $8M.
The three elderly siblings who owned these assets were facing potential
estate taxes exceeding $2.5M.
CB&H Action Steps
By clarifying the magnitude of this potential
liability for our client, CB&H brought the family into the estate
tax planning process. After examining the various alternatives,
a decision was made to form a family limited partnership and contribute
the real estate holdings and liquid investments into the newly formed
partnership. CB&H professionals, the client’s attorney
and the CB&H Business Valuation group worked closely to form
the partnership, draft a partnership agreement that would hold up
to IRS scrutiny and contribute the assets into the partnership.
Next, all real estate holdings were appraised
by an MAI appraiser. CB&H professionals then helped the client
select a qualified real estate appraiser to perform the appraisals.
Real estate appraisers do not address or include in their reports
any discounts for lack of control or lack of marketability. Therefore,
after the property was appraised it was necessary to determine the
appropriate level of discounts to apply to the gross real estate
values.
The CB&H Business Valuation group then prepared
a limited scope report or “discount letter” to determine
the appropriate level of discounts for the situation. CB&H determined
that overall discounts totaling 41.5 percent were reasonable and
could be defended if questioned by the IRS. By applying these discounts
to the gross real estate values, the overall estate value was reduced
by approximately $3.5M.
Finally, CB&H professionals, the client’s
attorney and the CB&H Business Valuation group developed a gifting
program to transfer the assets and take advantage of the unified
credit and annual gift exclusions.
Results
Through the coordinated efforts of the client’s
attorney, CB&H professionals and the CB&H Business Valuation
group, we initially eliminated gift and estate tax for two family
members and substantially reduced the tax for another for a total
combined gift and estate tax savings of approximately $1.5M. With
enough time and future annual gifts, the gift and estate tax can
be further reduced or even eliminated.
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