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Family LLC Planning and the Estate Tax Sunset

By Sean Condon, CFP^®

The Federal Estate Tax is about to impact many more US households than before.  Currently, the estate and gift tax exemption is about $14 million per person, or $28 million per couple.  Family estates under this amount do not pay the 40% federal estate tax upon death.   Unless congress acts this year, however, the exemption will drop back down to the pre-Tax Cuts and Jobs Act (TCJA) level of about $7 million per person and $14 million per couple.

Any estate over $7 million per person or $14 million per couple will be liable for estate tax of 40% starting in 2025 (the rate increases to 45% in 2026).  Keep in mind, you do not need to have a current estate of $14 million to be concerned about future estate taxes.  The exemption is based on your net worth at your passing; any net worth expected to grow towards $14 million over the coming decades could be subject.

These law changes offer unique planning opportunities for high-net-worth families who may be newly subjected to estate taxes.  Proactive estate planning before the 2025 exemption sunset may reduce future estate and gift taxes.

Why You Should Act Now

The IRS has issued final regulations stating that an individual will not be taxed for qualified gifts completed before 2025. This creates a rare opportunity: households can utilize their high $14 million exemption now and “lock in” that amount even after the exemption falls to $7 million next year.  Stated differently, if you use all or a portion of your current exemption before 2025 it cannot be taken away from you later.

The potential estate tax savings of utilizing the exemption now can be significant.  For example, at the most extreme level, if you can afford to gift $7 million to your heirs before 2025 that gift is forever out of your estate.  Even with zero growth on those assets, a 45% future tax liability on $7 million is $3.15 million.  If you were to wait until 2026 or after, you would lose the ability to gift those assets out of your estate, creating a future $3.15 million tax liability.  If you begin to place even moderate growth rate expectations on these assets the liability grows much higher.

Next Step: Family LLC?

A Family LLC can be one of the most effective ways of planning for the upcoming estate tax exemption sunset.  Gifting substantial assets requires cohesive and comprehensive planning. All of this can be done under a Family LLC structure.

A family LLC is established by members of the same family who are related by blood, marriage, or adoption. It is typically started by the older family member who owns a business or assets they wish to safeguard. You control the LLC, and your younger family members receive non-managing shares of it.

While a family LLC is a powerful tool for estate planning, it also offers protection for your assets—but only if your operating agreement is in place and up to the scrutiny of the IRS. The agreement should:

• Spell out the ownership rights of each LLC member
• Show a succession plan for the business
• Outline how decisions will be made
• Lay out the day-to-day business operations

You can put almost any asset of value in a family LLC. It can hold personal property, cash, or real property. Once they are in the LLC, these assets are converted into units of value. Your tax advantages come when you give those assets in the LLC to your children or grandchildren. The assets can receive a valuation discount of up to 40 percent.  This means that a $10 million asset inside a Family LLC could be reduced by $4 million, saving $1.6 million in estate taxes.

If you are planning to take advantage of the higher estate tax exemption before the 2025 sunset, a popular strategy is to utilize the higher exemption to gift assets into a Family LLC.  You can gift appreciated stock or shares of a closely held business into the Family LLC, effectively transferring wealth to the next generation while still maintaining a level of control.  As previously outlined, there is a limited opportunity to gift more into a Family LLC before 2025 than there will likely be in the future once the law sunsets.

Let a Financial Professional Guide You

Setting up a family LLC and using it for estate planning is no simple matter, even for savvy investors or business owners. Enlisting the help of a wealth advisor like Windgate Wealth Management can guide you in establishing your family business to preserve your assets and pass along legacy wealth.

Questions to consider include:

• How much liquidity will you need during your lifetime versus how much you desire to give away?
• If you own a business, how much is your company worth, and what might it be expected to grow to?
• What actions can be taken now to help reduce taxes both now and in the future?

The next step is to determine financial goals and the type of legacy you want to leave for your chosen beneficiaries. This can help you decide what assets and how much can be gifted in the best manner that helps preserve wealth for your family.

You can reach us by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You can also book an appointment online here.

Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
All investments carry some level of risk, including the potential loss of principal invested.

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